Commercial Vehicle Group Inc (CVGI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Commercial Vehicle Group Q4 2015 earnings conference call.

At this time, all participants are in a listen-only mode.

(Operator Instructions).

As a reminder, today's conference is being recorded.

I would now like introduce your host for today's conference, Mr. Terry Hammett, Vice President of Investor Relations.

Sir, please go ahead.

Thank you, Liz, and welcome, everyone, to the conference call.

Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group, will provide a brief Company update.

And Tim Trenary, our Chief Financial Officer, will provide commentary regarding our fourth-quarter and full-year 2015 financial results.

Following the financial update, we will open the call for questions.

We would like to remind you that this conference call is being webcast.

It may contain forward-looking statements including, but not limited to, expectations for future periods regarding market trends, cost-saving initiatives and new product initiatives among others.

Actual results may differ from anticipated results because of certain risks and uncertainties.

These risks and uncertainties may include, but are not limited to, the economic conditions in markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is the supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

I will now turn the call over to Pat Miller.

Thank you, Terry.

Good morning, and welcome to our call, everyone.

In regards to our consolidated results for 2015, revenues were down for the full year 2015 as compared to 2014 by 2%.

Our global truck and bus segment revenues were up 6% versus prior year, while our global construction and agricultural segment revenues were down 14%.

2015 North American heavy-duty production levels were near record high, around 323,000 Class 8 units.

However, consolidated results were negatively impacted by difficult market conditions for our global construction and ag segment, and by the strength of the US dollar and, therefore, unfavorable foreign currency translation.

Net income for 2015 was $7.1 million, down slightly compared to 2014, primarily as a result of an increase in the 2015 income tax provision compared to the prior year.

Full-year earnings per share as adjusted for special items was $0.29 in 2015, as compared to $0.30 in 2014.

We are pleased with our cost discipline and, therefore, operating income pull-through in 2015.

As adjusted for special items, our operating income margin for 2015 was 4.9%, up from 4.3% in 2014.

That is an improvement of 60 basis points on lower year-over-year consolidated sales.

Although our year-over-year top-line performance was significantly down for our global construction and agriculture segment, we were pleased with the improved operating income year over year for GCA, primarily driven by focused cost reduction and operational improvement efforts.

We started last year a focused effort to improve profitability and reverse losses in our operations in China and the UK.

These operations required increased support targeted to improve quality, productivity and cost discipline.

The changes started with bringing Joseph Saoud as the President of our GCA segment, and have been bolstered by improved clarity of responsibility and short-term goals.

We are seeing positive trends for both operations, and these efforts will likely continue throughout 2016.

2015 was an eventful year for CVG.

We completed the buildout of our product line manager infrastructure, an organizational structure important to the development of the new and innovative products we intend to bring to market.

The PLM organization has been developing and landing next-gen programs on existing platforms and also positioning us in new regions and with new customers to improve the top line.

Additionally, we put in place a global procurement and logistics function.

We are seeing benefits from optimizing our buy across regions and improving the discipline of driving down -- driving costs down in the supply chain, with a focus on total landing costs.

Lastly, we continue the rollout of our lean manufacturing initiative, which we call operational excellence.

Operational excellence is becoming embedded in our facilities, and we now have 28 trained black belt and green belt employees deploying projects and developing local workforce skills in various locations.

We realized savings in the first year that more than offset the initial development costs of the program, and we expect to double the number of graduates in 2016.

We are seeing the benefits of these new organizational changes in our margins, and indications are that we are early in the learning curve, reflecting more upside potential.

Looking to 2016 and the global truck and bus segment, first of all, we have new leadership.

Shortly after the CEO transition, our intent was to name a new President of Global Truck and Bus soon, a position I previously held.

We have decided that in lieu of naming a President, we can manage the segment more efficiently by separating GTB's management into two pieces.

Accordingly, recently we named Greg Boese as Senior Vice President and Managing Director for GTB Seats, and Dale McKillop as Senior Vice President and Managing Director for GTB Trim and Structures.

This flattens our senior organizational structure and should increase the responsiveness and flexibility in management of those businesses.

Greg and Dale are capable, proven leaders at CVG, with over 50 years of combined experience, who understand the business, and we look forward to including them in future earnings calls.

The North American market for heavy-duty trucks in 2016 is going to come off the near historic high of 323,000 units in 2015.

Market forecasters such as ACT and FTR are projecting a normalization of heavy-duty truck build in North America.

Class 8 truck build could be down 20% to 25% in 2016, compared to the near-record build in 2015.

More specifically, ACT, for example, is projecting North American Class 8 truck build on the order of 250,000 in 2016, a level at or near the generally accepted annual replacement level.

Additionally, North American medium-duty production was up moderately in 2015 compared to 2014.

ACT forecasts the Class 5 through 7 truck build in North America to be flat in 2016, at about 233,000 units.

Our expanding India business has been growing by launching products designed and sourced locally, and should benefit from expected market growth, as the Indian economy is generally expected to improve.

Turning to our global construction and agriculture segment, we sized the decline in the North American construction market in 2015 at about 15%, due in part to sharp reductions in capital spending related to the energy industry.

We anticipate this downward pressure to continue in 2016, although our agriculture equipment, seat and wire harness businesses represent only about 3% of the revenues of our GCA segment, revenues improved by 9%, primarily due to increased market penetration of our wire harness business.

We continue to believe that sales of seats and wire harnesses to makers of agriculture equipment is a potential opportunity for CVG globally.

The markets we serve in Europe were generally flat in 2015, but we believe European construction equipment market is positioned for modest growth in 2016.

Demand in Asia-Pacific was down significantly year over year, with the exception of India.

We sized the decline in the construction equipment market in China at about 35% in 2015 year over year, but believe that production is near the trough.

Although we expect continued relative softness in Chinese economy in 2016 in the near term, we continue to view Asia-Pacific as a key market for us over the long term.

We have a new development in our wire harness business we announced recently.

We just broke ground on a new 140,000-square-foot facility in Agua Prieta, Mexico.

It will be adjacent to our existing operations in Agua Prieta, and we expect to complete it by the end of the year.

This facility will allow us to further enhance and expand our capabilities in building wire harnesses competitively.

We've had some business wins of late across multiple product lines, including wire harnesses, wiper systems, and thermoform headliners and roof canopies in our trim business.

These wins represent $10 million to $12 million of incremental business annually when fully implemented.

We look forward to sharing more details regarding new business wins in the coming months.

As regards our restructuring and cost reduction actions announced this past November, you will recall that these actions are being undertaken in anticipation of a reduced truck build in North America, continued softness in the construction and agriculture equipment markets we serve, and a desire to more efficiently match our manufacturing footprint to our customers' needs.

These actions began in the fourth quarter of 2015 with the executive realignment and the announcement of the closure of our Edgewood, Iowa, facility.

In short, the actions are proceeding as planned and meeting our expectations, including our expectation that $8 million to $12 million annually will come out of our cost structure.

We now believe we will be able to accomplish these undertakings at considerably less cost to CVG.

We initially sized the cost of our restructuring and cost-reduction actions at $12 million to $19 million when fully implemented in late 2017.

We now size the cost at $10 million to $14 million.

The majority of the decrease results in fewer non-cash charges for asset impairments.

We will have more news on this front as the year progresses.

Organic growth is the foundation of our long-term strategy, which guides our resource allocation by product, geographic region and end-market.

It also established some of our published expectations with respect to the top-line growth.

It was, of course, developed from a set of assumptions at the time regarding our competitive position and right to win, the global economies, and access to capital and other resources.

Among other considerations, macroeconomic conditions have changed markedly over this past year or so.

Accordingly, we intend to revisit our long-term strategy later in the year, and refinements will likely arise from that process.

However, throughout the restructuring we have an undertaking, we have been diligent in maintaining resources and investments to continue the product programs that are underlying our original thoughts to increase our penetration in targeted segments and regions.

Growth in innovation is still critical to our future, and we are working to ensure we balance our long-term plans with our near-term need to realign our business to the current market dynamics.

Before I turn the call over to Tim for his remarks regarding our financial performance, please know that I am confident in our ability to manage our cost structure down in response to near-term market declines, even as we invest in the development of new and innovative products for our customers.

As evidenced by the facility restructuring and other cost-reduction actions we have taken, and will continue to take, we are committed over the longer term to further streamlining our cost structure to improve our competitive position.

These actions, when taken together, should protect our margins in the near term to the extent practicable.

Over the long-term, they should improve our ability to capitalize on the growth opportunities available to us and to leverage our cost structure for higher earnings when the market cycle turns favorable.

Tim?

Good morning.

As Pat mentioned, 2015 heavy-duty truck production in North America was at near-record levels.

North American medium-duty truck production was also good, improving about 5% from the prior year.

Our fiscal-year 2015 financial results benefited from this.

However, the North American heavy-duty truck OEMs in the fourth quarter adjusted production schedules down to reflect softening orders and outsized inventory levels.

Our businesses serving the global construction and agriculture end markets were adversely affected in 2015 by the generally soft demand in these markets, as well as foreign currency translation.

Consolidated fourth-quarter 2015 revenues were $184.7 million, compared to $211.9 million in the prior period, a decrease of 12.8% primarily resulting from the aforementioned market conditions in the quarter.

Operating income in the fourth quarter was $5.3 million, compared to operating income of $9.5 million in the prior-year period.

This decrease in operating income reflects the decreased sales from the prior-year period, offset somewhat by an improvement in our gross profit margin from 12.6% to 13.2%.

SG&A for the fourth quarter was $18.7 million, compared to $16.9 million in the prior-year period.

We initiated in the fourth quarter restructuring and cost reduction actions to more closely align our business with the changing demand.

As a consequence of these actions, we expect SG&A to decline in the first quarter of 2016 to $16 million to $17 million.

Net loss was $2.3 million in the fourth quarter, or $0.08 per diluted share, compared to net income of $4.2 million, or $0.15 per diluted share, in the prior-year period.

Net loss in the fourth quarter reflects an income tax provision of $1.7 million, notwithstanding the pretax loss for the quarter.

Our tax provisioning, and therefore our earnings in the fourth quarter, were adversely affected by pretax losses in certain foreign affiliates, where deferred tax assets are subject to valuation allowances.

Conversely, in the fourth quarter of the prior year, we implemented tax planning that gave rise to a tax benefit for the quarter.

The comparability, therefore, of our period-over-period earnings was adversely affected by extraordinary tax circumstances in each of 2014 and 2015.

Shifting now to full-year 2015 consolidated financial results, revenues for fiscal year 2015 were $825.3 million, compared to $839.7 million for the prior year.

This represents a decrease of $14.4 million, or 1.7%.

Foreign currency translation negatively impacted 2015 revenues by $18.3 million, or by 2.2%.

Before giving effect to foreign currency translation, 2015 revenues increased by $3.9 million.

Period-over-period revenue growth in our global truck and bus segment was largely offset with a revenue decline in our global construction and agriculture segment, thereby reflecting my aforementioned comments regarding the state of our global truck and bus and construction and agriculture end markets.

Operating income for the full year was $38 million, compared to operating income of $33.7 million in the prior year.

That's an increase of $4.3 million.

This improvement in 2015 operating income on fewer sales reflects an improvement in gross profit margin to 13.4% in 2015 from 12.8% in 2014.

And also, less SG&A; about $1 million less SG&A in 2015 than in 2014.

Net income was $7.1 million for 2015, or $0.24 per diluted share, compared to net income of $7.6 million, or $0.26 per diluted share, in 2014.

On an adjusted basis, adjusted earnings per share were $0.29 in 2015 and $0.30 in 2014.

An income tax provision of $9.8 million was recorded for 2015, compared to an income tax provision of $5.1 million in 2014.

The effective tax rate in 2015 was therefore 58%.

We model an effective tax rate of 45% to 55% in 2016.

Depreciation expense for 2015 was $16.4 million; amortization expense, $1.3 million; and capital expenditures were $15.6 million.

Our business plan contemplates capital expenditures of $15 million to $18 million next year.

In 2016, we do anticipate being cash-accretive, even as we incur cash charges for our restructuring and cost reduction initiatives, an increase investment in our facilities, equipment and technology for sales growth, operational excellence and other activities.

We were pleased with our cash build during the year.

Net cash provided by operating activities in fiscal year 2015 was $55.3 million.

We finished the year with $92.2 million of cash, and that is $22.1 million more than a year ago.

This cash build allowed us to redeem $15 million of our senior secured notes in the fourth quarter of 2015, thereby deleveraging our balance sheet.

We had $37.5 million of availability from our ABL at year-end, and therefore liquidity of almost $130 million at year-end.

As regards our segment financial results, revenues for the global truck and bus segment for the fourth quarter of 2015 were $127.1 million, compared to $140.1 million for the prior-year period, a decrease of 9.3%, primarily resulting from a decline in fourth-quarter heavy-duty truck production in North America compared to the fourth quarter of 2014.

Operating income for the fourth quarter was $13.7 million, compared to operating income of $16.2 million for the prior-year period.

This decrease in operating income period over period resulted from the decrease in sales.

Fiscal year 2015 revenues for the GTB segment were $565.3 million, compared to $534.1 million in the prior year, an increase of 5.8%, primarily resulting from the higher truck production in North America in 2015 than in 2014.

Operating income was $59.3 million, compared to operating income of $51.2 million in the prior year.

This increase in operating income primarily resulted from the increase in sales.

Operating income in 2015 and 2014 was also impacted by restructuring charges of $1.8 million and $2.1 million respectively.

Shifting now to the global construction and agriculture segment, revenues in the fourth quarter of 2015 were $60.4 million, compared to $74.8 million in the prior year, a decrease of 19.3%, primarily reflecting the challenging marketplace in these end-markets and foreign currency translation.

Operating income in the fourth quarter was $0.7 million, compared to an operating loss of $1.6 million for the prior-year period.

We were pleased to swing to operating income in 2015 in our GCA segment on lower sales from an operating loss in the prior-year period.

This improvement in operating income reflects the improvement in gross profit margin in the segment.

Facility restructuring costs in the fourth quarter of 2015 were $0.5 million.

Fiscal-year 2015 revenues for the GCA segment were $271.6 million, compared to $317.2 million in the prior year, a decrease of 14.4%, primarily reflecting the aforementioned challenging marketplace in these end-markets and foreign currency translation.

Foreign currency translation negatively impacted 2015 revenue by $15.8 million, or by 5%.

Operating income was $8 million, compared to operating income of $7.5 million in the prior year.

This increase in operating income resulted primarily from the improvement in gross profit margin.

Fiscal-year 2015 results included restructuring costs totaling $0.5 million.

That concludes my comments on our fourth-quarter and full-year 2015 financial results.

Liz, we will now turn the call over to you for questions.

(Operator Instructions) Mike Shlisky, Seaport Global.

I'm going to start off with a quick one about your top line.

It sounds like what you're saying on the truck side (technical difficulty) we could be somewhere down in the vicinity of 20% this year, maybe a little bit worse in North America, a little bit better elsewhere, [in fact 5% to 7%].

I guess first, is that fair?

And then on the construction and ag side, it could also be down.

But you do have some interesting-looking, brand-new programs.

I was curious if you could give us maybe -- could that be down less than 10% in [2016], given some of the new stuff you have won?

Yes, I don't -- so we are looking at the top line for the year.

I think the market forces in the various areas are probably going to overshadow some of the growth activities that we have.

So we have not come out publicly, I think, with any direction on that on a specific nature.

But what we are seeing is, as we launch these new programs, many of them are ramping up in 2016, and then get to their full potential by 2017.

Okay.

Can you at least discuss some of your comments you made about protecting growth or protecting margins?

You said that (technical difficulty) also in your comments today.

Do you still anticipate on the downside here -- you have had a great performance, and it was down by a couple percent last few quarters, and, on the last decent upswing, getting some good operating leverage.

On the downside here, do you think you can keep the operating leverage, the downside, to perhaps about 25% in 2015 just on your process, or might it get a little bit more dramatic, given some of the dramatic declines in some of the end markets?

Thanks.

Mike, it's Tim.

Let me answer your question in part by using 2015 as some context within which to maybe think about 2016.

First of all, with respect to the truck and bus segment, if you look back historically, at least over the period of time that I have been here, that group has done an exemplary job of leveraging the cost structure on the way up and maintaining that band, frankly staying at the upper end of that band, and on the way down, leveraging and staying within the band, and generally at the lower end of that band.

And as a result, regards the construction and agriculture (technical difficulty).

And to my comments a few moments ago in my prepared comments, notwithstanding the reduced sales in construction and agriculture year over year in 2015 compared to 2014, Joseph and the team were actually able to deliver operating income, an improvement in operating income, and swung to an operating income compared to an operating loss in the fourth quarter of 2015 compared to 2014.

And, taken together, if you think of truck and bus and con ag for 2015 compared to 2014, we had lower sales -- somewhat lower sales in 2015 and delivered about $4 million extra operating income.

So, I think that that sort of behavior in 2015 compared to 2014, and our ability to flex the cost structure in response to the (technical difficulty) patient of what one might expect for 2016.

Let me, if I may, go one step further and add to that that the fact that we now have in place our centrally led global procurement and logistics organization, our lean manufacturing, which we refer to as operational excellence, is now up and running.

We are starting to see the fruits of those labors, and I think that is reflected in our margins last year.

That will enhance our ability to reflect the changing marketplaces.

But also, the restructuring that Pat mentioned and that we announced this past November, the facility restructuring and the executive realignment, also I think should facilitate the Company's ability to react to the marketplace as it changes in 2016.

So, from my perspective, the Company has a demonstrated ability and the history -- and history in the past to adjust to the changing marketplace, adjust its cost structure, flex within this band.

And so I think that you and the others might use that as guidance as what you might expect in 2016.

That's great color.

Thank you.

Maybe early, just want to confirm, you mentioned you will be cash-accretive in 2016.

I wanted to confirm with you that that would be not the result of saying there's no borrowing.

And then also, can you maybe just give us an overview of your covenants again?

It sounds like you don't have any covenants on -- if you don't have anything borrowed on your revolver.

If you could just give everybody a flavor as to how you plan to be from a net debt perspective as you exit 2016.

Thank you.

We -- to my comments, we do in fact intend to be -- project cash accretion in 2016.

It is solely from operations, so no -- as we sit here today, we don't intend to borrow any additional sums.

As regards our capital structure and, more specifically, our covenants, Terry -- who as you know, Terry Hammett is our investor relations director, but he's also our treasurer.

Terry, could you give some color as to the covenants?

Sure, absolutely, Mike.

As you have noted, we currently don't have any borrowings under any of our credit or debt facilities.

So, although we have some reporting requirements, there aren't any specific financial covenants that we are required to report on currently.

Great.

Thanks, guys.

I appreciate it.

I will hop back in queue.

(Operator Instructions) I'm not showing any further questions in queue at this time.

I would like to turn the call back to Patrick Miller, Chief Executive Officer, for closing remarks.

Well, I think I just want to thank everybody for joining us on the call, our investors and other affiliates.

I think I would also like to reiterate that CVG has demonstrated capability of being able to manage our cost structure and line appropriate when we have got market changes and market swings.

We are doing that.

I think we have demonstrated with the results that we've announced and the results we plan to achieve that we will continue to be proactive in how we manage ourselves in the near term.

And as I mentioned earlier, our intention is to still continue to keep our focus on our long-term targets and goals, which include growing our top line and developing innovative products, and driving into new markets and new segments.

So, we are excited to be able to talk about more those things in the future, and we look forward to the next time we get a chance to talk.

With that, I think I will thank you very much for your time.

Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program, and you may now disconnect.

Everyone, have a great weekend.