Commercial Vehicle Group Inc (CVGI) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Commercial Vehicle Group, Inc. Q3 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference Mr. Terry Hammett, Vice President of Investor Relations. Mr. Hammett, you may begin.

Thank you, Carrie, 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 third-quarter 2016 financial results. We will then open the call up for questions.

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 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.

Now Pat Miller will provide a brief Company update.

Thank you, Terry. Good morning and welcome everybody.

First I would like to comment briefly on the market dynamics as we understand them today. The heavy-duty truck market in North America continues to be soft as the OEMs are managing production rates tightly to reduce inventory levels and match order rates. Backlogs have fallen again but are expected to bottom out soon.

Some freight indicators are reflecting leveling out and projected to turn positive over the next few months. Truck order rates and capacity utilization both are showing tighter conditions and indicate some improved pricing for fleets. Our expectation is that the larger fleets will place regular orders for their 2017 replacement cycles while the smaller fleets may be more conservative.

Two areas we are monitoring are economic growth and also the regulatory environment. If the GDP continues on the current growth trends it should reflect in a more positive freight environment. The regulatory change for electronic logging could impact fleet efficiencies and some freight capacity constraints in 2017 and fuel efficiency changes could drive a potential pre-buy in the longer term.

On the construction side of the business, North America has been down versus 2015 and is the main driver behind our GCA segment sales reductions. For the rest of the world construction sales for CVG seem to have leveled out and been somewhat flat or slightly up.

The regions we mostly participate outside of North America are in Asia and Europe. India is a bright spot for us as their economy continues to grow. Our global construction customers are indicating they expect a mostly flat environment for 2017.

In spite of the difficult sales environment we continue to effectively manage through these conditions. As discussed previously in late 2015 we started activities to better position the Company to be profitable through the cycle. The immediate objective was to better align the Company's cost structure with the changing market dynamics as well as to reduce our fixed cost structure.

Our plan included not only preparing for the expected decline in North American truck and the soft construction equipment build but also our longer-term business objectives: improve the core while positioning for long-term profitable growth. Initiatives to address the immediate objective were developed and actioned.

Most of the large impact actions have been announced. Some are in progress and some are complete. We are pleased with the contribution these changes are making to our financial results.

Third-quarter adjusted operating margin was 3.9% despite 24% less sales in the prior-year period. And there is more to come as we wrap up a productive 2016 and move into 2017.

Our immediate objective accomplished, we turn to our longer-term objective of improving the core and building for long-term profitable growth. As a key supplier to major commercial vehicle OEMs around the world, it's imperative that we deliver the lowest landed cost to our customers. Through the first three quarters of this year we've made significant progress in the adjustment of our manufacturing footprint in North America and associated rationalization of manufacturing capacity, the lowering of SG&A as well as the realignment of the executive structure.

I also want to emphasize the importance of the positive progress in our Lean Six Sigma programs which we call Operational Excellence. Jack Feng, who is our OpEx leader, along with other key operational leaders, is helping to institutionalize the lean competencies throughout our Company. We are exceeding our goal this year for the number of belts awarded and expect to have 540 awards of yellow, green and black belts by year-end including 100 awards to individuals at some of our suppliers who recognize the value of our program and have joined Jack's training event.

This isn't really about the number of belts. Operational Excellence is about delivering cost savings, augmented talent, improving process efficiency and significantly upgrading our capabilities for the long term.

Importantly, some of the savings being realized from our efforts are being redirected in the form of resources to expand our product and process portfolio. For example, we have been investing in our interior trim business to enable growth in both the hard trim area, which is an expanding segment, as well as in new composite technology for headliners and interior panels.

The global truck and bus team is fully engaged in numerous launches in North America and Asia. We are involved in a historic high number of new North American truck platforms launching over the next 12 months.

For CVG these launches include interior trim, seats, wiper systems and cab structures. Our agreements with our OEM customers preclude us from commenting on specific wins and it can take several quarters for these sales to show up in the revenue and earnings. But the programs are in place, we are well-positioned as a partner with our customers and look forward to the expected contribution these programs will make to future financial results.

Next I would like to switch gears and talk about the global construction and ag team. The GCA team is achieving excellent financial results which are reflected in the segment numbers that Tim will go over in detail next. I'm proud to say they our generating improved margins on lesser sales which validate the targeted efforts being made.

The improvements also are evident in the operational performance reflected in the key performance indicators that we and our customers measure. Our Liberec, Czech Republic facility was recently recognized by Caterpillar with an award of platinum status in their supplier quality program and the Agua Prieta, Mexico plant was awarded bronze status by Caterpillar. Congratulations to those two locations.

Lastly, GCA is concentrating on developing new product lines and expanding our available markets. We are unveiling our new generation off-road seat product lines targeted for the construction and agricultural segments this month. We will demonstrate our construction lineup at the BAUMA show in China and the agricultural products will be shown at the EIMA Exhibition in Italy.

Medium- and heavy-duty construction equipment is the traditional space where we have competed. However, our new products will open up the agriculture seat market and the light-duty construction segment. Both represent areas that we have limited participation in today.

In addition to seating, GCA's wire harness business continues to grow and we are landing new programs with approximately [$27] million in annual sales won so far this year. We are continuing to find more opportunities beyond construction and wire harnesses including agriculture, truck powertrain, material handling and power generation. We intend to continue to grow this business, focusing our expansion on the segments that need customer service focused wire harness support.

We are on schedule to launch our newest facility in Mexico in the first half of 2017. With cost effective processes in place we can handle a greater mix a product and higher volume.

Regarding emerging markets, India has been a growth area for us and we are beginning to see interest in suspension driver seats that have increased content. Our locally designed and produced product offering is allowing us to support the domestic truck, bus and construction OEMs. We intend to continue to invest selectively in emerging markets where we participate.

Although we have a large addressable market and, therefore, much opportunity to realize long-term organic growth, we think there are potentially very select acquisitions that could add value for us by improving our strategic positioning. Some of the pertinent criteria being considered include being able to expand our product portfolio in complementary ways, deepening our penetration of certain geographies to create diversification and long-term opportunities for profitable growth within our targeted segments. Unfortunately, today valuations have been challenging and we are reluctant to pursue deals that would not be advantageous for the short and long term.

To sum it up, we are pleased with the progress we have made to date. Our 2016 initiatives are at varying stages of completion. Overall we are on track with our plan and look to generate the full breadth of anticipated savings by the end of 2017.

We have made great progress and remain excited about the future. Our ongoing objective is to continuously improve our competitive position and to outperform with our distinct advantages. We know we can do it and we look forward to providing you with updates on the progress being made across our global enterprise.

Tim will now cover the quarter's financial results.

Good morning. Sales were down considerably period over period, but the operating income margin is holding up because of the proactive cost reduction and restructuring actions taken to date.

And the balance sheet continues to improve. Debt less cash was just under $100 million at September 30.

As regards CVG's financial results for the quarter, consolidated third-quarter 2016 revenues were $153.6 million compared to $202.7 million in the prior-year period. That's a decrease of 24%, primarily as a consequence of the 35% decline in heavy-duty truck production period over period in North America.

The strength of the US dollar is still a burden on the top line but not so much as in the recent past. Foreign currency translation negatively impacted third-quarter revenues by $2.3 million.

The benefits of the various cost-reduction actions and the ongoing facility construction restructured in North America are reflected in the financial results. Gross profit margin is relatively unchanged period over period, notwithstanding the decline in sales.

Selling, general and administrative expense in the third quarter was $14.1 million compared to $17.6 million in the prior-year period, 19% less than a year ago. A handful of items came together this quarter to provide a bit of a tailwind in SG&A but in any event, core SG&A spend is down significantly year over year.

Before giving effect to the special items arising from the facility restructuring, adjusted operating income in the third quarter was $6 million compared to $10.3 million in the prior-year period, about $4 million less on almost $50 million less sales. And that's a good conversion on net change in sales.

Adjusted operating income margin was, therefore, 3.9% compared to 5% in the prior-year period. As adjusted for the special items net income was $2 million in the third quarter, or $0.07 per diluted share compared to $2.8 million or $0.10 per diluted share in the prior-year period. Net income in the third quarter includes $1.5 million of tax benefit primarily as a consequence of the geographic profile of the pre-tax income, more specifically a shift of pre-tax income away from the US. We expect this profile to continue for the remainder of the year and the Company therefore to experience little or no tax provision in 2016.

Depreciation expense for the third-quarter 2016 was $3.8 million, amortization $0.3 million and capital expenditures were $2.5 million. We now expect capital spending on the order of $11 million to $13 million for the year, lower than we had anticipated largely as a consequence of a handful of programs launching a bit later than planned.

Turning now to our segment financial results, global truck and bus revenues in the third quarter of 2016 were $96 million compared to $142.9 million in the prior-year period, a decrease of 33% mirroring the decline in North American heavy-duty truck production year over year. Operating income for the third quarter was $5.1 million compared to operating income of $16.4 million for the prior-year period, a decline consistent with the conversion on sales that we generally expect. Operating income in the third quarter of 2016 and 2015 was impacted by charges associated with the facility restructuring of $1.3 million and $0.3 million respectively.

As for the global construction and agriculture segment, revenues in the third quarter of 2016 were $59.4 million compared to $62.5 million in the prior year, a decrease of 5%. Foreign currency translation adversely impacted third-quarter revenues by $2.4 million or by 3.8%.

Operating income was $3.9 million in the third quarter of 2016 compared to $0.8 million for the prior-year period. This $3 million increase in operating income on lower sales reflects significant operational improvements achieved by the con ag team via their Lean Six Sigma efforts, some early benefit from the consolidation of wire harness production in North America into the Agua Prieta facility and other cost-reduction actions. Third-quarter 2016 results include $0.2 million of charges associated with the restructuring actions.

As for the Company's balance sheet, cash continues to build in part due to a focus on managing down working capital employed in the business consistent with the contraction of the top line. Cash flow from operations for the nine months ended September 30, 2016 was $50 million and cash on the balance sheet at quarter-end was $137 million, up $45 million from year-end 2015. About half of this $45 million in cash build is from the reduction in operating working capital receivables and inventory net of payables employed in the business.

As I mentioned earlier, debt less cash is not just under $100 million. This puts the Company's leverage debt less cash at just over two times trailing 12 months adjusted EBITDA of $48 million.

The Company has $175 million of liquidity, $137 million of cash and $38 million of availability from the ABL facility. Consistent with our capital allocation strategy, we continue to consider M&A opportunities and/or bringing in the senior secured notes. The redemption premium on the notes steps down to zero next April.

To wrap up, CVG associates have made a number of adjustments to the Company's cost structure to date. The North America facility restructuring is still underway and is expected to further improve the Company's cost structure. This when taken together with the improved balance sheet bodes well for value creation at CVG when sales improve.

That concludes our prepared remarks. Thank you for joining us this morning and we'd be happy to take any questions you may have. Carrie?

(Operator Instructions) Mike Shlisky, Seaport Global.

Good morning guys. A couple of questions here.

I'm going to start off I know you didn't put out a 2017 outlook per se, but I'm sure you've been hearing and we've been hearing what some of your major OEMs have been talking about both in on-highway and off-. It seems like most people are thinking it's going to be a down year in 2017 in most areas of the world, perhaps nowhere near as down as we've been seeing here in 2016.

So I guess I was wondering if you agree with that and maybe a Class 8 outlook of down call it mid single digits and maybe on an off-highway flat to down slightly, as well. I guess do you agree with that, one? And, secondly, based on what the various major OEMs have been saying and your own mix do you feel like, without giving any individual customers away, but do you feel like in your mix you might actually do a little bit better or a little bit worse than what a broad index would be telling us right now?

So I just want to clarify, Mike, was the second part of the question still about the North American truck market or was that in reference to construction?

Actually I think both questions are for everything, both trucks, both on-highway and off-.

Okay. Well, I would tell you we've not come out with our position on 2017 truck build, reserving judgment until we see how the orders are going here in the fourth quarter which as you know tends to be the high order season. They just released, I just saw the order numbers for October yesterday and I think the net orders were 13,800, something in that range.

But there was some, the actual orders as I understand it were around 21,000 and there was some cleanup by one of the OEMs at least as it was reported to me. So 21,000 is actually a pretty good month compared to where we have been and if we see a few more of those I think it could change what 2017 looks like compared to what some of the people have said based on the last few months of orders.

So I don't think we are ready to commit to what 2017 looks like. What we are currently planning for is we are looking at where the build rates are in Q3 and Q4 which is slightly down from Q1 and Q2 of 2016 and we are looking at those rates as probably carrying into at least mid-2017.

So that's how we are planning right now. We will probably come out with some numbers in the near future on where we think the 2017 total build will be.

As far as our mix goes, specifically I think the mix has more to do with the construction side of the business than it does the truck side. We continue to see pretty decent numbers outside of the rest of the world in the form of at least being flat for us for next year, 2017.

And some of the construction customers that we're talking to are saying the same thing for their business in aggregate. So don't expect any big negative surprises in 2017. As long as some of the new business that we are bringing on ramps up according to the customers' plans it should be an okay year for us on the construction side.

Is it fair to say it sounds like, Pat, some of your comments at the start of the call here you have a lot of new things that you are ramping, new products and new programs in 2017. Is it fair to say that there will be a pretty decent amount that would be material that would start to impact your top line in 2017, just brand-new business that you didn't have in the past? Could it be a driver of a few percent or more growth in 2017?

Yes, I think a lot of the new launches that I referred to are predominantly replacement business for current product lines and as one ramps the other will ramp down. So I don't know that there will be a big hit to the top line at least in reference to those new launches.

Now there are top-line improvements in regard to some of the wire harness launches that I mentioned. We are going to see some content increases, so there should be some slight pickup. And I think on the bottom line we will also see some beneficial results.

Okay. Tim, you also mentioned SG&A was down significantly but there was a convergence of positive variances in this quarter. Can you give us some color as to what those variances were and give us a sense as to what you think the more normalized SG&A run rate is going forward?

Mike, it's Tim. Listen, as you can appreciate while we do our best at the end of every month to make sure our balance sheet is in order we especially do that at the end of every quarter.

And it just so happened this month, and they were small amounts and if you gathered them all up various accruals and prepaid accounts and reserves, etc., and you put all of those small adjustments together it provided a little bit of benefit which allowed our SG&A to be a little bit lower than it would otherwise have been. I would put our run rate core SG&A absent those small items I just mentioned at about $15 million is where we are sitting at today which is call it $2 million, $2.5 million less than I guess it was a year or so ago.

Sure, that's great stuff. And it sounds like you also got some of your restructuring and cost reduction benefits that have still yet to lap and so you've got some more benefits in your plan that are brand-new to your books, at least for the first part of 2017. Is that a fair statement?

I think that's fair. The numbers through September reflect a little bit of benefit from Edgewood, certainly year over year we closed the Oregon facility last year. But the lion's share, I think I can use that word realistically, the lion's share of the benefits from the remaining restructuring have yet to really be realized in the financial results.

Okay, that's good to hear, as well. I also just want to touch on two more things. One, from a balance sheet perspective you did mention that the premium to retire debt goes down to zero in April.

Is the basic thought here, look, keep on thinking about trying to find some M&A deal at a decent price until April and if nothing comes up that's totally fine, you will just pay down the debt at that point? I guess is the key here you are just rang to wait until day one of a free buyback on the debt or are you going to be holding off until you find the appropriate deal for your excess cash?

We're going to continue to manage the balance sheet in a fashion which we have in the past which, obviously, includes paying attention to our operating working capital. And so we would hope to maintain the cash position that we have today. More specific to your question, as you mentioned the redemption premium steps down in April and if you do the arithmetic on that, call it a three-month cash payback on any sort of a triggering event of any redemption prior to April.

So I think that I think that you characterized it fairly. Given there is a three-month cash payback, as we sit here today we think that there's some benefit, if you will, let me say it this way, there might be an opportunity cost to triggering redemption if we were to do one sooner rather than later vis-a-vis the possibility of doing some M&A transaction.

Are you just talking about when you say a few month cash payback, is that as of today or do you mean if you were to do it April 1 or April 15 the payback is on the fees that you might have to incur just the bankers fees and so forth?

The payback on the redemption fee.

Okay, got it. So last one for me, there is a new public company I think as of this week that does auto seating, a pretty big one out there. Presumably they are going to be in organic growth mode going forward now that they are free of their larger operation that they were part out.

I'm sure you know a little bit about them. I don't know if they do too much in trucks, but I was wondering if you could go over for all of us here what you feel the barriers to entry are in the current global truck seating market and how you would feel about, I don't know about this big company but perhaps if there were another company that wanted to come here and try to elbow its way in with other truck platforms trying to enter the US as well.

Let me just play back your question to you. You're saying what are the barriers to entry to come into the truck seat market in North America.

Exactly.

So first of all most of the contracts for the foreseeable future are awarded and locked up, so in a large-scale way it would be difficult for anybody new to drive any significant revenues or share change. In the short term you can possibly get a fleet in North America, we have pull-through capability, but I would tell you that anybody trying to do pull-through with the fleets has to have some partnership or handshake with the OEMs as well as fleet codes and there is some complexity just to make pull-through happen.

And if you didn't have any experience doing that it would be at least be some period of time before you would be able to overcome those hurdles. So if you are not already in here in some significant way I think it's a pretty tough stretch, at least for the foreseeable future.

Just as a follow-up to that, is there any advantage for an auto seat maker who intends to go into truck seats or are the volumes just too low? I presume it's a better margin business, I'm not really sure, but do you get the sense that it's not even worth them trying at this point?

So if you are referring to --

I'm sorry, Pat, I meant is it not worth them to try to buy their way in as opposed to organically grow their way in? Sorry, go ahead.

Well, you know, I don't believe buying your way into anywhere does much good in the long run. It tends to destroy value in the marketplace. But typically what we find is if a company is predominantly a light vehicle supplier, seat supplier, they have very different processes, very different approach to manufacturing, their systems are set up differently.

They tend to be higher volume, more automated, less complexity. It's really a very different proposition. We build to order.

We have tens of thousands of SKUs that the customer orders at any given time. And we deliver those in sequence, and consequently we have to be set up in a flexible manufacturing mode that's quite a bit different than what some of the light vehicle players have to do in order to compete in that segment.

As a result of that, we rarely see much crossover around the globe. There are a few very minor exceptions to that rule, but for the most part we don't really compete that much with the light vehicle seat guys.

Okay. Well said, Pat. I appreciate it and thanks again, guys.

(Operator Instructions) I am not showing any further questions at this time. I would now like to turn the call over to Mr. Pat Miller, CEO, for any further remarks.

Okay, well, I'd just like to reiterate once again that our CVG is managing our way effectively through this cycle and we will be positioned well going forward. I want to thank you for your time today and have a good afternoon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.