Commercial Vehicle Group Inc (CVGI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Commercial Vehicle Group Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce Mr. Terry Hammett, VP of Investor Relations.

Please go ahead.

Thank you, Andrew, 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 third quarter 2017 financial results.

We will then open up the call up for questions.

This conference call is being webcast and may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiative, new-product initiative 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 to which CVG is a supplier; financial covenant compliance and liquidity; risks associated with conducting business in foreign countries and currencies; and other risks detailed in our SEC filings.

And now Pat Miller with the brief Company update.

Thank you, Terry.

Good morning, and welcome.

Our two major market segments North American heavy-duty truck and Global Construction continued to ramp up demand as we progressed through the year.

Our top OEM customers are showing strong year-over-year sales increases in quarter 3. There are signs indicating that these growth trends could continue at least deep into 2018.

The average Class 8 daily truck build rate in North America has increased approximately 46% from this past January to October.

The freight tonnage index looks strong and freight capacity will likely tighten further as the electronic logging device or the ELD mandates take effect at the end of the year.

The Class 8 vehicle orders corroborates strong market demand with October orders reflecting the highest monthly total since 2014.

These order levels are good predictors that 2018 is likely to be a stronger build year than 2017 as some of the data services are currently projecting.

ACT and FTR are currently forecasting 300,000 units or above for 2018.

Additionally, we have increased our estimates for the 2017 North American Class 8 build to be in the 235,000 to 255,000 unit range from our earlier guidance of 220,000 to 240,000.

On the construction side, we have a similar story and that the market conditions are very favorable year-over-year.

Most of the global regions that we support are seeing elevated construction growth, including Asia, Europe and North America.

The China market is showing a [larger] percentage growth trend due to increased government support for infrastructure and residential investment.

The North American fundamentals for construction are also in good shape with higher backlogs and channel inventories leveling out.

The North American market has seen growth over 30% in the third quarter when compared to the same period last year, with excavators approaching 40% improvement in production year-over-year.

The European market, driven primarily by heavy-duty, medium-duty construction machinery demand is up 17% year-over-year in the third quarter.

European excavator production posted about 30% year-over-year growth in third quarter, while wheel loaders and other large machines were up close to 15% year-over-year.

Our construction sales and products tend to be more heavily influenced by the medium-duty, heavy-duty part of the market space.

We are encouraged by the trends we see in these markets that we participate in, and we look forward to the continued growth projected for these markets as we move into 2018.

As a result, CVG's third quarter 2017 results reflect consolidated revenues approaching $200 million for the quarter and have increased about 29% as compared to the same period last year, and up slightly from the second quarter 2017.

Both segments within our business contributed to this strong performance, with our Global Truck and Bus segment sales up 27% and our Global Construction and Agriculture segment sales up 34% as compared to the same period last year.

In addition to the higher sales, we're also seen higher operating income.

Year-over-year our operating income percentage is almost twice as much as 2016.

We have more work to do in order to get back to our normal expected rate to conversion, but we are improving in comparison to the second quarter.

Commodity increases as well as some production expenses in our truck group continue to impact us.

Commodity increases are mostly in steel, copper and chemical-based components.

Some of this expense results from the lag inherent in the agreements we hold with larger customers, allowing pass-through of raw material.

We expect to reduce this impact over time.

Secondly, our Truck and Bus team has been faced with reacting quickly to satisfying the [customer] sharp volume increases, which came much earlier than we or the market anticipated and right in the middle of new platform launches.

Consequently, we've accelerated launch activities on new programs, rebalanced capacity and assets, as well as incurred overtime and additional labor costs for training and hiring to meet the demand.

We expect many of these near-term costs to dissipate as we align our capacity and operations to the new running rates.

In regards to the Mexico operational challenges, we've previously discussed, we are seeing positive results from the many actions and improvements that have been inactive.

Some of the more impactful improvements began showing results near the latter part of Q3.

One of the key changes enacted was increasing the capability and capacity in our new facility in [Escada], Mexico and they're doing a great job for us.

We've transferred business into the Iowa facility also and are in production today with more transfers ramping up through the end of the year.

Additionally, we've reached commercial and capacity agreements with our major customers, allowing us to be in a better position to meet their needs effectively.

We are still working on productivity improvements, additional asset deployments and expanding our footprint to allow more capacity flexibility.

All of these changes contributing -- contributed to reducing the impact in Q3 by 50% in comparison to Q2 and trending down.

We expect to achieve the lower part of the previously discussed forecasted range of expenses for the second half of $3 million to $6 million.

We are still targeting to have the majority of material extraordinary expenses under control by year-end.

Switching gears.

We are progressing towards completion of our restructuring plans previously announced in 2015 with the finalization of closure and sale of our assets in Shadyside, Ohio.

The sale closed last week and resulted in a cash benefit to CVG.

This was the last major remaining part of our plan and while we still have a few small items to wrap up, we are on track to be complete with the effort by year-end.

Before I turn it over to Tim to review the numbers, I want to mention some exciting marketing and product news.

In October, we participated in the inaugural North America Commercial Vehicle Show in Atlanta.

We unveiled our new North American truck seat architecture, which was also featured on some of the new truck platforms our customers were displaying.

This new seat platform will allow us to maintain our leadership position in the heavy-duty truck seating market in North America.

Also in October, we demonstrated our new light-duty off-road seat in Louisville at the Green Industry and Equipment Expo, which is the largest trade show for outdoor power equipment, lawn and garden and light construction in North America.

This product line allows us to bring our seat design capability into new segments for us; light-duty construction as well as commercial turf care.

Lastly, our Asian team is in [Lungong], China displaying our seat lineups targeted at the domestic Asian market at the largest truck and bus expo in China, the China Commercial Vehicle Show.

We are proud of the hard work of our global, commercial and technical teams, bringing new technology and products to market to help meet our customer needs.

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.

Tim?

Good morning.

Sales were up 29% this quarter compared to the prior-year period, adjusted operating income almost doubled and the associated margin rose to 5.6%.

That said, conversion of the higher sales into operating income, or pull through, was 11% below CVG's past experience.

Interest expense on the company's borrowings was almost 30% lower than the prior period or $1.3 million less.

As for the company's consolidated financial results for the third quarter 2017, revenues were $198.3 million compared to $153.6 million in the prior-year period.

This improvement in sales is primarily attributable to the heavy-duty truck market in North America and the Global Construction equipment end markets we serve.

Heavy-duty truck orders continued to climb in the third quarter rising sequentially in each of the 3 months to 22,600 orders in September at the seasonally adjusted annualized rate of a little over 300,000 units, which is generally consistent with the 2018 build forecast at outside parties.

The fundamentals in our second largest end market, the Global Construction equipment market have improved year-over-year and continue to be encouraging.

Foreign currency translation favorably impacted third quarter revenues by $1.7 million as compared to the third quarter of 2016.

Notwithstanding the significant improvement in sales, we've maintained our cost discipline.

Selling, general and administrative expense for the quarter was flat year-over-year at $14.1 million.

There were a number of small items that, when taken together, helped keep SG&A down this quarter, in any event the company is spending judiciously.

Before [giving effect to the] special items arising from the facility restructuring, adjusted operating income in the third quarter was $11.1 million compared to $6 million in the prior-year period.

While we're pleased that operating income almost doubled, pull through of 11% is below our target.

The cost associated with the production challenges at a North American wire harness business approximated $2 million in the quarter and are coming down as compared to the first half of the year.

We now expect the impact on the second half of the year to be at the low end of the previously disclosed range of $3 million to $6 million.

The company is experiencing headwinds from rising global commodity prices and some increase in production expenses arising primarily from the new product launches and from the acceleration in heavy-duty truck build in North America.

That said, adjusted operating income margin improved 170 basis points to 5.6% for the quarter, compared to 3.9% in the prior-year period.

Net income in the third quarter 2017 was $4.8 million, or $0.16 per diluted share, as compared to $1.1 million or $0.04 per diluted share, in the prior-year period.

The company's effective tax rate is sensitive to the geographic profile of our pretax income.

More specifically, as domestic taxable income increases, vis a vis forward taxable income, the effective tax rate generally increases because of the higher corporate tax rate in the U.S. The effective tax rate in the third quarter increased to 34% largely as a consequence of this dynamic but we continue to model a 30% to 40% effective tax rate for the year.

As you may recall, in the second quarter of 2017, the company refinanced the then outstanding $235 million of senior secured notes with a $175 million institutional term loan and cash on hand.

Accordingly, interest expense this quarter on the lower borrowings is almost 30%, or $1.3 million less than the prior-year period.

The company's management of working capital is partly responsible for these lower borrowings.

Accounts receivable and inventory, net of accounts payable, is up only 10% from the year-ago period on the almost 30% increase in sales.

Depreciation expense in the third quarter of 2017 was $3.3 million, amortization $0.3 million and capital expenditures were $2.8 million.

Capital spending for the first 9 months of the year was $11 million.

We've kicked off a few comparatively large projects and expect capital spending to increase in the fourth quarter and to therefore, be in the range of $14 million to $16 million for the year.

Now to our segment financial results.

Global Truck and Bus revenues in the third quarter of 2017 were $122 million compared to $96 million in the prior-year period, an increase of 27.1%.

This increase is primarily attributable to higher North American heavy-duty truck production.

Operating income for the third quarter was $11.4 million compared to operating income of $5.1 million for the prior-year period.

Pull through on the higher sales was within the range we've historically achieved, in part because of the facility restructuring.

This benefit was offset by rising global commodity prices and some increase in production expenses in the quarter.

Third quarter 2017 and 2016 results include $0.4 million and $1.3 million, respectively, a cost associated with the restructuring initiatives.

As for the Global Construction and Agriculture segment, revenues in the third quarter of 2017 were $79.6 million compared to $59.4 million in the prior year, an increase of 34% due primarily to higher Global Construction equipment build.

Foreign currency translation favorably impacted third quarter revenues by $1.4 million, or by 2.3%, as compared to the third quarter 2016.

Operating income was $4.1 million in the third quarter of 2017 compared to $3.9 million for the prior-year period.

Pull-through on the higher sales was adversely affected by the rising global commodity prices and the production challenges in our North American wire harness operations.

GCA operating income in the third quarter of 2016, includes $0.2 million of charges associated with our ongoing restructuring actions.

As of the end of the third quarter, the company had $113 million of liquidity, that's $50 million of cash and $63 million of availability from the ABL facility.

That concludes our prepared remarks.

Thank you, for joining us this morning.

It's a pleasure to be with you and we'd be happy to take any questions you may have.

Andrew?

(Operator Instructions) And we have a question from the line of Mike Shlisky with Seaport Global.

So I want to start on the heavy-duty truck outlook here.

It looks like as of yesterday, we're looking at a Class 8 growth in 2018 of roughly 25% or more.

I guess, I kind of wanted to get first your assessment of that kind of outlook, presuming that could be the direction in which your business is going in 2018, without asking for guidance.

And I also wanted to get a sense for some of these operating costs and costs you had to incur in the third quarter that -- to catch up with some rapidly increasing demand.

Kind of how you feel about maybe having those under control by the end of the fourth quarter in advance of what looks like could be a very strong year next year?

Okay, so like you, we saw some of the changes just yesterday.

So I don't know that we've done a full analysis, but what we kind of see is the a lot of the build rate increases, at least for the Class 8 part of the market, have been put in place on a daily build rate.

So when you look at the daily build rates, we're close to those running rates now.

So I think as far as dramatic increases -- I think what you'll see is that if you were to run in those build rates and extrapolate it out, you get to some of those higher forecasted numbers.

And I think Tim mentioned that earlier.

Understand?

Yes.

When the comment about the some of the headwinds and some of the costs that we are incurring, certainly some of these are a little bit growing pains.

When we talk about headwinds, we kind of -- we've been discussing items like the labor cost related to hiring and training, some labor inflation, overtime related to the higher volumes, commodity prices, capacity realignments.

So as the volumes come up, we have to move some things around in order to put the capacity in the right places and achieve the levels that the customers in that region are selling, new product launch expedites and what is interesting about all those, if you think about it, those are really characteristics or traits of a really strong global economy.

So while they're headwinds to us and we're working really hard to mitigate and to get back to normal running rates, we're also pretty excited to be dealing with those kind of problems, because what it says is that the economy is very strong and you can see that not only in our sales but also in all of the markets in which we participate.

So that's exciting things.

As it pertains to 2018, I think some of these items were already showing some reduction and you can see that in some of the Q3 numbers and we'll expect to continue to drive those costs and mitigate and manage those costs away.

In particular, related to the product launch and the capacity alignment and those types of things.

In regards to whether it will all be gone by the end of the year, I don't -- that certainly would be our goal, but I think it's more likely that some of them would bleed into 2018, some of the commodity pieces.

Commodities is a dynamic -- it's a dynamic cost for us and it moves up and down monthly and so as we manage those things with our customer arrangements, it tends to move around quite a bit.

So I think commodities is one area and wage inflation could also be an issue going forward.

So we're seeing in lots of regions around the world that as there is more and more demand across various industries, there is less people available to fill that demand.

Got it.

But it does sound like mid-to high teens is within reach regarding the third quarter and you've got improvements from here, that would be a good number at least to start out for the go forward period, without asking for individual quarter guidance, would that be a fair statement?

When you say mid to the high teens of what?

Oh I'm sorry.

Of operating pull-through, in the Truck and Bus segment by the way.

Yes.

So Mike, it's Tim.

As we've said, many times before, we manage to this 20% to 25% conversion or pull-through.

That's our target.

And Pat has described some of the challenges which, by the way, as you pointed out, are actually good challenges to have to manage through, they are affecting that right now.

And to the extent we can manage those away by year-end, we will.

As he said, I do expect some of that to bleed over into '18 but notwithstanding all that, we're -- we'll do our best to manage to -- the convergent rate that we target.

I can't promise you that we'll achieve it, but that's our objective.

Okay, fair enough.

Just trying to get a sense also within the current market growth scenario, your market share and how things have kind of trended recently and how things might trend next year?

Have you made any kind of capture winds that would be ramping up into 2018?

Or do you think you basically you've just going to be on a broader level in Class 8 maintaining your share into next year?

Yes.

So it's a general question.

We don't typically get into specific market shares but we feel like we have been defending our territory in North American Truck and I think we've done a pretty good job at that end, so going forward, I would imagine we will be -- there's puts and takes but I think we'll be relatively neutral to where we would expect to be in Class 8 truck in North America.

We are seeing growth -- incremental growth in Europe in some of the wire harness business and we're also seeing expansion in China.

Got it.

I also wanted to just ask on your comment on some of these sort of lawn and gardening, very light-duty products.

It is an area I look at as well, are those very high-volume product lines you're looking at being on and are there any challenges and having the capacity to meet that kind of number of unit demand and what could be a more commoditized product?

Well since you follow us and I think you've paid pretty close attention to some of our previous discussions and on strategic actions.

One of the things we've been working on some of the new products that would be farther down the line in the construction lineup, which also puts us into some of that recreation in lawn and garden turf care arena.

We don't want to go all the way down to where the low content products are, but we feel like we have some good opportunities in the midrange on the light-duty construction side as well as the turf care.

The question about volumes and capacities, most of those kind of [wins] will necessitate investment on our part, which we're prepared to do and while we've got designs and things we would put assets in specifically targeted to cater to those segments as we win the business.

Got it.

Can you update us also on the ag, on your progress trying to get some more penetration into the ag market in [that] 2018?

Is there anything bigger there we should be aware of, while modeling next year's numbers?

Yes, we're not prepared to announce anything about that at this point, Mike.

And I'm showing no further questions.

So with that, I'd like to turn the conference back over to Patrick Miller, CEO, for closing remarks.

Well, I would just like to thank everybody for joining us today and appreciate your attention as we work through what's a pretty exciting time in our respective industry segments.

So we look forward to speaking with you in the near future.

Take care.

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

This does conclude the program and you may all disconnect.

Everyone, have a wonderful day.