Commercial Vehicle Group Inc (CVGI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Commercial Vehicle Group, Inc. second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Terry Hammett, Vice President of Investor Relations. Please go ahead.

Thank you, Jonathan and welcome 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 second-quarter 2016 financial results. We will then open the call up 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, 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 the markets in which CVG operates; fluctuations in the production volumes of vehicles for which CVG is a supplier; financial covenant compliance and liquidity; risks associated with conducting business in foreign countries and currencies and other risks as detailed in our SEC filings. I will now turn the call over to Pat Miller.

Thank you, Terry. Good afternoon and welcome, everybody. The second quarter was an effective operating quarter for us, especially in regards to managing our costs and protecting the margins. We are focused on the aspects of the business that we can control as our top line continues to be pressured by lower Class 8 truck production in North America, as well as further softness in the global construction market.

We announced a restructuring plan in November 2015 and we continue to execute that plan to optimize our capacity utilization and manufacturing footprint. These efforts are targeted at improving our operating leverage and competitive cost position. The recently announced closure of three facilities in North America represents another stage in the restructuring plan. These are difficult decisions as they impact employees, their families and their communities and our restructuring plan does include transition support for these employees. However, we remain committed to improving the Company's performance and stability through the market cycles while remaining thoughtful about our competitive position in the future.

With the construction of an additional wire harness assembly plant in Mexico progressing as planned, we intend to transfer wire harness production currently located in Monona, Iowa to our new facility in Agua Prieta, Mexico by the first quarter of 2017. This allows us to consolidate our wire harness production in North America, reduce overhead costs and provide better service and a lower landing cost to our existing and future customers. We have enabled this change by implementing more flexible cost-effective processes in our operation that can handle a higher variety of product and volume mix.

Additionally, our Shadyside, Ohio stamping facility will close in mid-2017 with assembly and stamping work to be distributed to other CVG locations and local suppliers.

Lastly, we are consolidating the sales, engineering and administrative office in Wixon, Michigan into our New Albany, Ohio headquarters. We are on track so far with timing, investment and expenses to complete the planned changes by the end of 2017.

You may recall in November 2015 we had estimated pre-tax costs in the range of $12 million to $19 million, which we recently lowered to $10 million to $14 million, including capital expenditures associated with the overall plan. Operating cost-reduction estimates associated with these actions remain at $8 million to $12 million annually when fully implemented.

Turning now to our results for the second quarter of 2016, consolidated sales revenues were down by about 18% for the quarter as compared to the same period last year. Net income for the second quarter of 2016 was $2.7 million as compared to $3.2 million in the prior-year period. This difference is primarily a result of lower sales volume partially offset by better-than-anticipated pull-through on the decremental sales.

We are continuing to see positive impacts from actions taken to improve productivity and cost performance in our operations. Our line personnel are diligently aligning the variable costs in spending with the fluctuations in the top line. Furthermore, our operational excellence program team celebrated the graduation of another 31 lean Six Sigma Green Belts last week in our China operation, including representatives from our supply chain partners. We are increasing the number of trained lean experts working to drive improvements to our bottom line.

Earnings per share as suggested for special items were $0.10 in the second quarter 2016 as compared to $0.12 for the same period in 2015. As adjusted for special items, our operating income margin for the second quarter of 2016 was 5% as compared to adjusted operating income margin of 5.5% in the prior-year period in spite of the top-line pressure. Similar to our first quarter, we are pleased that second-quarter results reflect the benefits of actions taken with better-than-expected margins on lower sales, but we also understand there is still much work to do.

Moving to the business segments, our global construction and agriculture group had a very strong performance in the second quarter. The Q2 revenues were generally down about 3% compared to the prior-year period affected by the construction headwinds in our GCA end markets. However, our focused efforts to improve margins and profitably in this segment have shown good progress in the second quarter. On slightly lower sales period over period, GCA's operating income almost doubled for the quarter in comparison to the prior-year period. This is the result of numerous initiatives, including operational effectiveness, commercial adjustments, reduced SG&A expenses, supply chain improvements and the restructuring actions.

The global construction industry remains in a trough with a more pronounced slowdown in North America. Asia-Pacific and European demand while low seemed to have stabilized. With the changes and improvements the GCA group has implemented with respect to cost competitiveness, they are well-positioned to capitalize when the market trends start to improve.

GCA continues to invest in new product development and incremental new sales generation. We are seeing positive momentum in wire harness growth in both North America and Europe. We continue to win harness business in new segments like agriculture, heavy-duty/medium-duty powertrain, truck and power generation.

In regards to off-road seating, we are in the process of rolling out new construction in agriculture seat lineups. Some of these new designs have helped us earn next-gen awards with multiple customers and we look forward to announcing specific awards in due time.

Switching over to our global bus and truck segment, our GTB second-quarter revenues were down about 25% period over period reflecting the decline in the North American Class 8 truck OEM build levels, which were down 30% as compared to the same period last year. GTB was able to beat our normal decremental expectations of 20% to 25% through the cost improvement actions that I mentioned earlier. These restructuring actions are still in process and will be more impactful going into 2017.

The GTB team continues to deploy resources and focus attention on launching next-gen programs across our product portfolio for the majority of large truck OEMs in North America. We are honored by the close customer partnerships that we have and are working hard to ensure that we effectively support the heightened new platform activity over the next 12 to 24 months. Additionally, we are further expanding the capabilities of our GTB Mexico plant in Saltillo, which provides competitive landing cost advantages to our Mexican customer operations.

We have revised our estimate for the 2016 North America Class 8 build to be in the 215,000 to 235,000 unit range based on market forecasts and our internal forecast models. Market forecasters, ACT and FTR, have been adjusting the 2016 full-year build rate throughout the year and are now projecting the heavy-duty truck production in North America at levels around 232,000 units with production levels in the first half of 2016 exceeding those expected in the second half. Some of the large truck OEMs recently announced that their dealer inventory levels are returning to more manageable levels and should be less of an impact going forward.

Regarding the North American medium-duty market, there has been some recent pressure in building of inventories, but this market appears to be generally steady as longer-term fundamentals look healthy, which helps to somewhat mitigate the Class 8 volatility.

On a different note, India's truck and bus market is vibrant and growing, which is benefiting our business there. The Indian government continues to drive business climate improvements and recent reports show expectations for GDP growth of about 8% in India over the next two years.

I want to close by saying the changes that we have made were necessary to maintain existing business while growing and expanding our addressable global markets. These changes, whether in process or completed, ensure that we can offer the best-valued product, or the right solution at the right price in each of the local end markets we serve. Our intent as we move forward is to build upon our core customer relationships, expand our reach and develop new relationships to drive profitable growth over the long term.

The second-quarter 2016 results provided further evidence that our efforts to date are having a positive financial impact on our competitiveness. Even in our challenging markets today, we need to maintain our current efforts to support and drive top-line growth in existing markets, as well as adjacent segments and regions. Furthermore, we are focused on managing our operating working capital to strengthen our balance sheet. I'm now going to turn the call over to Tim for a further discussion of the financial details. Tim.

Good afternoon. As Pat mentioned, our margins, gross profit margin and operating income margin, continue to respond well to our various cost-reduction actions and ongoing facility restructuring. Cash continues to build on the balance sheet in part due to our focus on reducing working capital employed in the business, and accordingly, our net debt is coming down. Consolidated second-quarter 2016 revenues were $178.3 million compared to $217.6 million in the prior-year period. That's a decrease of 18% primarily resulting from the aforementioned market conditions.

The strength of the US dollar remains a burden on our sales, but when compared on a period-over-period basis, this burden has diminished. Foreign currency translation negatively impacted second-quarter revenues by $1.5 million. Gross profit continues to benefit from actions we are taking to lower cost of sales thereby enhancing gross profit margin. Here are some examples. The institutionalization of our lean manufacturing and Six Sigma initiatives, centrally led global procurement and logistics and of course, the ongoing facility restructuring. In part, and as a consequence of these and other actions, gross profit margin was flat period over period notwithstanding the lower sales.

As to operating income margin, lower period-over-period selling, general and administrative expenses are contributing. SG&A in the second quarter was $15.6 million compared to $17.6 million in the prior-year period. That's an 11% decline that contributed about 100 basis points to operating income margin in the quarter. Although a portion of this decline in SG&A is attributable to the flattening of the executive organization late last year, much of the decline reflects adjustments to a broad range of SG&A throughout the Company, including in our corporate office, the global business units and our manufacturing facilities.

Before giving effect to the special items resulting from our ongoing facility restructuring, adjusted operating income in the second quarter was $8.9 million compared to $12.1 million in the prior-year period. Second-quarter adjusted operating income margin was 5%, 50 basis points less than the prior-year period. That's good operating income performance on 18% less sales and better than the 20% to 25% operating income change we generally expect on sales change.

As adjusted for the special items, net income was $3 million in the second quarter, or $0.10 per diluted share, compared to $3.5 million, or $0.12 per diluted share in the prior-year period. Net income in the second quarter benefited from a lower effective tax rate period over period.

Depreciation expense for the second quarter of 2016 was $3.7 million; amortization, $0.3 million; and capital expenditures were $3 million. We made fewer capital expenditures in 2016 than we had originally planned and we now project capital spending on the order of $14 million to $16 million. Some of this reduction in spend from plan reflects more efficient acquisition of capital goods, but some of the reduction is an expected carryover into 2017 of capital spending planned for 2016.

Turning now to our segment financial results and more specifically our global truck and bus segment. Revenues in the second quarter of 2016 were $112.1 million compared to $149.3 million in the prior-year period. That's a decrease of 25% primarily resulting from the retreat of North American heavy-duty truck production from a near historical high last year. Operating income for the second quarter was $8.5 million compared to operating income of $15.1 million in the prior-year period. This decrease in operating income period over period resulted from the decrease in revenues somewhat offset by operational improvements and the benefit of facility restructuring and other cost-reduction actions.

Operating income in the second quarter of 2016 and 2015 was impacted by restructuring charges of $0.3 million and $0.5 million respectively.

Shifting to the global construction and agriculture segment, revenues in the second quarter of 2016 were $68.5 million compared to $70.7 million in the prior year, a decrease of 3%. The global construction and agriculture end markets for which we manufacture products continued to be soft. Foreign currency translation adversely impacted second-quarter revenues by $1.5 million or by 2%. Operating income was $5.5 million in the second quarter of 2016 compared to $2.8 million for the prior-year period. This $2.7 million increase in operating income period over period on slightly fewer sales and the associated operating income margin improvement reflects operational improvements and the benefit of facility restructuring and other cost-reduction actions. Second-quarter 2016 results include $0.2 million of charges associated with restructuring actions.

As to the Company's balance sheet, CVG has had good cash build so far this year. Cash flow from operations for the six months ended June 30, 2016 was $37 million and cash on the balance sheet at quarter-end, $124 million. That's up $32 million from year-end 2015. About half of this $32 million in cash build is from a reduction in operating working capital, receivables and inventory net of payables employed in the business. The operating working capital reduction reflects the decline in sales, but also some improvement in metrics. We finished the quarter with $162 million of liquidity, $124 million of cash and $38 million of availability from our ABL facility.

That concludes my comments today regarding our second-quarter financial results. All things considered, we are pleased with our performance. Jonathan, we will now open the call for questions.

(Operator Instructions). Mike Shlisky, Seaport Global.

So I guess let's first start with the balance sheet here. I didn't think I'd be asking this question this year but I will ask it. What are you going to do with all this cash? It's a pretty high balance versus last year at this time. Do you have to hold onto any cash in case the markets come back and you need to invest in some more working capital down the road? Are you looking at M&A, or anything else we should be aware of in the near term?

Mike, thanks for your question. To your point, the Company has done a fine job, especially over the last six to nine months of driving operational cash flow and building this cash on the balance sheet in part because of the way the guys who are running the business are managing the operating working capital. We've managed it down in this environment and actually improved the metrics somewhat. So as a consequence of that, we have this $124 million of cash on the balance sheet and $162 million of liquidity.

As I think I've mentioned before, we are in the process of assessing how best the Company might deploy this capital. Is it best deployed for M&A, continuing to monitor the opportunities that present themselves to us, which we haven't had an opportunity at a reasonable valuation to date, but one might appear? Should we deleverage the balance sheet? We started a little bit of that last year, but should we continue to do that, or finally, as you know, in our capital allocation waterfall, the last is returning capital to shareholders. So for the moment, we continue this assessment focused on whether we should maintain the cash for M&A opportunities or to further deleverage the balance sheet. So we are just not prepared to make that decision just yet.

Okay. Fair enough. Let me get a sense for your thoughts on the market. I don't want to get to guidance here, but for 2017, in your assessment of what you've heard from the OEMs, do you think the Class 8 market has stopped the double-digit bleeding here this year? It's been a down year to more normalized levels. Might be down next year, but we are not looking at an order of 25%. I just want to make sure you guys agree with that.

And then the second, we had asked the same question on the construction business. Some companies are still taking down their estimates on 2016. Do you think we could be down double digits in 2017 for the overall broad markets?

So my first answer is we are not really giving 2017 information at this time. I don't think we are prepared to do that formally. I would say that we think that, from what we see, we can see some visibility into the first part of 2017 and we think it's more along the lines of flat to what we are going to see in the second half of 2016. The question that we have at this point is there's some optimism starting to creep up about what happens in the back half of 2017. And I don't think we are prepared to give a firm stance on that yet. We are still evaluating what that looks like.

Okay. Was that a truck comment or was that a --?

(inaudible). That's North American Class 8 truck.

Okay, okay. And then I also just want to make sure I also got your calendarization for the back half of the year here. Your comments that the back half will be lower than the first half for the industry in the truck world, normal seasonality I would imagine with Christmas and summer shutdowns. Is that supposed to be the same for you, or will it be more pronounced this year given the crazy inventory and build schedules that we've had over the last 12 months?

Yes, so I don't know that you can truly say it's normal. There are less build days due to the holidays, but the practical reality is there's been a few years in the recent past where the third and fourth quarter were strong. Sometimes the third, sometimes the fourth, sometimes both. But what we see so far is that there are some build rate corrections, which are going to be happening in the second half of the year, coupled with the less build days and the second half will be slightly lower than the first half. And so we are in this range. We've lowered our range to 215,000 to 235,000.

235,000, yes. Okay. I'm sure you guys heard the news the last couple days about the truck orders in July being a little bit on the weak side nearing 10,000 units. Have you had any feedback from the OEMs about -- I guess was your commentary today based on what we heard about July orders, or is it based on what you knew about June orders at the time? (inaudible) worse from the OEM build schedules the last couple of weeks is the question.

Yes. First of all, the summer orders in general, it tends to be a slowdown period just in general. There is some seasonality on that side of things and the fall tends to be the higher order period for the larger fleet. So that's not abnormal for the summer to have a dip. But our numbers include the most recent information on the order patterns.

Okay. I will just throw two more out there for you. First, could you give us a sense of whether CVGI is gaining share at the current time, both truck and on the ag construction site, or will that maybe happen over the next 18 months or so? I'm trying to get a sense as to whether your Company might perform better or worse than the broader market outlook in the near term.

Yes, so I don't think we are prepared to give a blanket statement on marketshare. Our business is relatively diverse and we look at it at I think smaller pockets and so I don't know that I'm prepared to give a blanket statement on that, Mike, but I can understand why you want to know that.

Yes, okay. All right. And maybe the last one. Maybe this is for Tim on the tax rate. A little more color on what happened this quarter. It's a lot lower than you've been saying in the past, so I wanted to see what your rest of the year outlook was and what's behind it.

So the short answer to your question, Mike, is this. As the heavy-duty truck business here in North America has retreated this year from these highs of last year -- a rather dramatic retreat -- the pre-tax income in the Company has shifted from the United States to offshore and that, coupled with the improvement in the construction and agriculture business year-over-year, which, as you can see in the margins is rather dramatic, has caused a shift in pre-tax income from onshore to offshore.

Two things happening there. The tax rates, as I know you know, are lower, corporate tax rates, offshore than they are here in the United States and we have some tax assets and some valuation allowances in certain affiliates offshore where we now have pre-tax income. We are able to shelter that income [WIP].

So as a consequence of that, the tax rate is around 30%, 40% a year as opposed to the 50% or 60% I think it's run in the last couple years. As to the Company's ability to maintain that sort of a tax rate, accepting, of course, the vagaries quarter to quarter that can result in computation of tax provision and benefit and understanding that, because of the size of our Company, that the calculation of that tax rate is somewhat sensitive to the size of the denominator, small denominator. I would say that for the remainder of the year, I would expect that, during the course of that year, it would be lower this year than it has been in the last couple years.

Okay. That should be enough to get me by. I appreciate it, and thanks for all the answers, guys.

(Operator Instructions). Mike Shlisky, Seaport Global.

One other one for you. As far as the Class 8 outlook goes, you get the sense that some of the OEMs are asking you to deliver lower content seating products this year versus last given some pricing competition among the OEMs for the orders that are out there today, or do you find yourself with the same mix of seats you've had in prior years?

I want to make sure I understand the question you are asking. Are they decontenting some of the vehicles that they are making?

No, I was just asking if you are getting any kind of pressure either for pricing drops or just for simpler seats, or cheaper seats given that the pricing environment for a full truck is a bit under pressure right now.

Yes, so I would answer it like this. First of all, there's always price pressure from the OEMs. They are very good at managing their supply chain. They always will try to use competitive situations to keep their costs down, but I think right now our mix is not much different than what we've seen in the past. And I would say in the future and going forward what we are seeing is content increases on seating in particular as customers are adding better and more featured interiors for their new products. And so that would be how I would answer that.

All right. I also want to touch on some of the complexities regarding your plant closures and upcoming cost structure changes. Do you feel like what's ahead for you is a little bit more complex than what you've cut before at this point, or do you feel like you've got a good plan in place step-by-step to take more costs out the rest of this year into I guess it sounds like the end of 2017? Trying to get a sense here as to how much more meat you've got to cut here, maybe keep looking at potentially your decrementals being a little bit better than that 20% range you've had or you've been targeting in the past?

I'm just trying to understand. Are you trying to get at the amount of work that's left to do or the complexity and risk of the rest of the actions that we are taking or are you wanting to know about the impact timing?

Well, it's a little bit of both. I'm trying to figure out first -- is what's ahead of you harder than what's behind you and also your confidence level that you can at least get to that 20% decremental and potentially keep on staying better than that the next couple of quarters here?

Mike, let me start and I'm sure -- Pat, I might let you speak to the difficulty piece of it.

Yes.

As regards where we are in the restructuring program, the announcements that we have made to date, the most recent of which I think were a week or two ago, reflect those restructuring actions that we've identified to date. So to date, what we've announced, that's what we've contemplated this past November and that's where we are at today.

Having said that, as you know, our Company always evaluates its manufacturing capacity utilization and its footprint, so that's a never-ending chore. But what we've announced so far is what we have in our immediate plans. I would say that as regards timing and the costs associated with the actions that we've announced and also the benefits that will flow from that, we are in the very early stages. The costs will start to manifest themselves in a much greater rate beginning in the third quarter here and then we will move through 2017 and the benefits associated with those, those expenditures will follow shortly thereafter. So the restructuring charges are going to start to ramp up and the benefits associated with those activities will start to be seen greater here in the second half of the year, but especially into 2017. I'm trying to remember the rest of your question, but I think it was as to --.

I guess just more about how hard it is to get these things closed without redundancies, without losing some institutional knowledge, etc.?

Yes, I would offer this. I think some of the greatest risks or obstacles or fears that we had of potential issues were with some of the things that we've already completed and overcome and they've gone very smoothly so far. And so I don't have any great fears of the actions that we've announced being completed on time and to the cost, we have a pretty good plan and certainly our teams that are enacting those plans are experienced and seasoned at what it takes to do these consolidations. So I feel like we are in pretty good shape just from the standpoint of what we've declared publicly we would do on the cost side and the benefits side and I think we tried to lay that out a little bit in our script about tracking to the plan.

Okay. That's just the color I was looking for. Thank you very much for the answers, guys.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pat Miller, CEO, for any further remarks.

Yes, I just want to thank everybody for joining us this afternoon and reiterate that we are doing the right things at CVG. We have reduced our fixed cost position and our breakeven position, especially in light of some of the market headwinds that we are facing, and I think at the same time we are working hard to invest our time and energy into growing the top line as things progress further. So more to come on that. Thanks again for joining us this afternoon. Everybody have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.