Commercial Vehicle Group Inc (CVGI) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Commercial Vehicle Group Earnings Conference Call.

(Operator Instructions) And as a reminder, this conference call is being recorded.

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

Sir, you may begin.

Thank you, Sandra, 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 2018 financial results.

We will then open up the call 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.

And now Pat Miller with a brief company update.

Thank you, Terry.

Good morning, and welcome, everyone.

Thank you for joining us today as we discuss the strength in our end markets and our second quarter 2018 results.

We are pleased to report that our second quarter 2018 revenues improved by $38.3 million, or about 20% over the prior-year period.

Operating income was $21.1 million in the second quarter 2018, a significant increase over the $7.6 million of operating income in the second quarter 2017.

We are capitalizing on our opportunities and are delivering profitable growth.

Tim will provide further detail on our financial performance in a moment.

As we progressed through the second quarter of this year, we saw demand continue to ramp-up in our 2 major market segment, North American heavy-duty truck and global construction.

North American medium-and heavy-duty truck order rates were strong, with the heavy-duty orders in June more than doubling as compared to the same month last year.

Preliminary numbers for July appear to have set an all-time record with approximately 52,000 trucks orders being placed, beating the previous best month in March 2006.

This comes in what is normally a seasonal-down month for orders.

CVG's top OEM customers showed strong year-over-year sales increases in Q2, and as of June, industry backlogs were up over 100% year-over-year, the highest level seen in over a decade.

Supply chain constraints have caused some forecasters like ACT and FTR to temper their forecasts for 2018.

This, coupled with the order strength, is driving up backlogs, resulting in forecasters projecting peak builds to occur in 2019 for trucks in North America.

ACT is currently forecasting 316,000 units for 2018 and 334,000 units in 2019.

Accordingly, for 2018, we are maintaining our 2018 Class 8 truck production forecast of 300,000 to 325,000 units.

For the Construction and Agriculture segment of our business, market conditions in 2018 continued to be favorable.

Rising commodity prices are supporting the mining industry, a market in which we also participate.

CVG's Construction and Agriculture revenues in Europe for the second quarter of 2018 are up 26% as compared to the same period last year, with revenues in Asia-Pacific up 19% period-over-period.

We're encouraged by the improved performance resulting from our sales efforts in these regions for CVG.

Our China- and India-based teams are having success in their respective markets, winning new seat business in both the Truck and Construction segments with customers such as Eicher, Dion and Hitachi.

Additionally, our global electrical team is capitalizing on new incremental business wins, with Dusan, JLG, MAN, Caterpillar Europe and Sullair, a member of the Hitachi Group.

These new programs are expected to launch in 2018 and will ramp through 2019.

We estimate these new business wins, the seating wins in Asia and the global electrical wins represent about $25 million to $30 million per year in new sales for CVG.

We will continue to make investments in these growth areas in resources and product development.

Both business segments contribute to our improved consolidated performance in the second quarter 2018, with our Global Truck and Bus segment revenues up almost 24%, and our Global Construction and Agriculture segment revenues up 13% as compared to the same period last year.

In addition to the higher revenues, we are also seeing higher operating income.

We are seeing the results of our restructuring completed late last year.

Year-over-year, our operating income margin improved from 9.2% to 11.6% in our GTB segment, and from 2.5% to 10.2% in our GCA segment.

Sequentially, from the first quarter of this year, our GTB and GCA segments' operating margins increased by 130 basis points and 120 basis points, respectively.

Margins continue to improve in part as a result of increasing capacity and efficiency in our North American wire harness operations.

We have a positive momentum in that business, as we have moved beyond the previous year issues by implementing investments in technology, lean improvements and organizational development.

We continue to evaluate the addition of more production capacity in both North America and Europe as we plan for additional growth in our wire harness business.

Also contributing to our higher margins is a great deal of effort across the corporation to adjust pricing in our commercial agreements in order to achieve raw material cost recovery.

There are additional actions still in progress that we expect to have in place during the second half of this year.

Lastly, before I turn it over to Tim to review the numbers, there's been a significant amount of information in the news regarding several rounds of proposed and enacted U.S. tariffs.

We are monitoring and tracking the tariffs and NAFTA negotiations on a daily basis.

Based on the enacted tariffs to date, the direct impact to our company on an annual basis is minimal so far.

However, there is an indirect impact in that U.S. hot-rolled steel prices have risen about 40% in the first half of 2018.

Another consideration is the still materializing impact to our extended supply chain.

As most businesses appear to be doing, we are paying close attention to the changes and working to reasonably manage them as they become clear.

Additionally, we support larger manufacturing industry organizations, like the National Association of Manufacturing and the Heavy Duty Manufacturers Association who are working diligently to advocate for policies that favor our business community.

We look forward to providing you with future updates on the progress being made across our global enterprise.

Tim will now cover the quarter's financial results.

Tim?

Good morning.

The company did $21 million of operating income on $233 million of sales this quarter, an operating income margin of 9%.

This margin is almost 300 basis points higher than in the first and second quarters 3 years ago, a point in time when the sales were comparable but before we initiated the recently completed facility restructuring and cost reduction actions.

Moreover, the actions the company has employed to reduce the impact on our business of the difficult labor markets and the impact of commodity and other raw material inflationary pressures are bearing fruit.

Conversion of incremental sales into operating income or pull-through this quarter compared to the same quarter last year was 35%.

This pull-through benefits from the resolution of the labor issues in our North American wire harness business.

Setting this aside, pull-through for the quarter was 27%.

As for the company's consolidated financial results for the second quarter 2018, revenues were $233.4 million compared to $195.1 million in the prior-year period, an increase of 20%.

This improvement in the top line reflects the heavy-duty truck production in North America and higher global construction equipment production levels in the markets we serve.

Foreign currency translations favorably impacted second quarter revenues by $4.3 million or 2.2% as compared to the same period last year.

Selling, general and administrative expense of $14.4 million for the quarter was comparable to the prior-year period, notwithstanding the significant increase in sales.

Operating income in the second quarter was $21.1 million, a margin of 9.1% compared to $7.6 million in the prior-year period.

This almost threefold improvement in operating income reflects the higher sales, the success of actions taken to improve CVG's cost structure and ongoing efforts to protect margins from inflationary and other cost pressures.

Net income in the second quarter 2018 was $13.2 million or $0.43 per diluted share as compared to $0.1 million or no earnings per share in the prior-year period.

The effective tax rate in the second quarter was 25.4%.

We continue to model a 25% to 30% effective tax rate for the year.

Depreciation expense in the second quarter 2018 was $3.6 million, amortization $0.3 million and capital expenditures were $3.4 million.

Although capital spending has been less than expected in the first half of the year, we continue to size 2018 capital spending in the range of $15 million to $18 million.

Turning now to our segment financial results.

Global Truck and Bus revenues in the second quarter 2018 were $148.7 million compared to $119.9 million in the prior-year period.

That's an increase of 24%.

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

Operating income in the quarter was $17.2 million compared to operating income of $11.1 million for the prior-year period.

This increase in operating income reflects the increase in sales volume, cost control and cost recovery initiatives, including pricing adjustments and the completion of a facility restructuring in late 2017.

As for the Global Construction and Agriculture segment, revenues in the second quarter of 2018 were $88.7 million compared to $78.2 million in the prior year, an increase of 13% due primarily to higher global construction equipment build in the markets we serve.

Foreign currency translations favorably impacted first quarter revenues by $4.3 million, or by 5.5% as compared to the second quarter of 2017.

Operating income was $9.1 million in the quarter compared to $1.9 million for the prior-year period.

These improved results reflect the increase in sales volume, significant improvements in the performance of our North American wire harness business and cost control and cost recovery initiatives including pricing adjustments.

The company repaid the amount outstanding on the revolving credit facility at the beginning of the quarter and, therefore, had no borrowings on the facility at quarter end.

Liquidity was $108 million at quarter end, $45 million of cash and $63 million of availability from the asset-based revolver.

To wrap up, we're pleased with the company's financial performance as evidenced by pull-through of second quarter operating income on the incremental sales.

Cost control and cost recovery initiatives, including pricing adjustments, reduced impact on gross profit of commodity and other raw material inflationary pressures and the difficult labor markets.

Margins are almost 300 basis points higher today than they might otherwise be on comparable sales, a reflection of the success of the company's facility restructuring and cost reduction actions.

We believe CVG is well-positioned to continue to benefit from the growing global economies in which we do business.

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.

Sandra?

(Operator Instructions) And our first question comes from the line of Mike Shlisky with Seaport Global.

So first on operating margins, 9.1%, and I think that was the best we've seen in like 10 or 12 years if I'm not mistaken, and 11.6% in Truck and Bus, very strong there.

But if you look at the Class 8 build forecast out there, Class 8 build is going to stay at or above what we saw in Q2 for the next say, 4 or 5 quarters.

So in the past, you've talked about operating pull-through but just looking at the basic raw margins themselves, is there any reason to believe that your margins can't stay this high in Truck and Bus for as long as the Class 8 build rates stay the same?

Well, I -- the best way for me to answer that, Mike, is to tell you to the extent there is any fluctuation in the sales, it would come from the truck build, whatever small amount that might be.

You would expect -- or I would expect, I should say, the fluctuation in the margins of that range that we generally consider, the 20% to 25%.

So again, any fluctuation in build and the (inaudible) sales, think about the pull-through in that 20% to 25%.

Having said that, and where you might be going with this question, is that we are managing through a number of inflationary pressures, we've done -- we've had considerable success, I would say, in doing so especially, in the second quarter here as evidenced by the conversion.

But there are those risks and uncertainties, and Pat spoke about the tariffs on the horizon.

But setting those uncertainties aside, and absent any big aberration in our cost structure associated with those uncertainties I would expect our conversions to stay within that range.

Okay.

Great.

And I also want to ask just about some of those new platforms you have mentioned.

I think you said was $25 million to $35 million of annualized sales.

On a full company-wide basis, do you think that CVGI is, besides those new wins, hanging in there as far as the number of platforms that you're on globally?

Or have you lost some other platforms that might offset some of these more recent gains here?

Well, I don't think I have a precise answer to your question.

But I think what I would say is, as we've stated, we have done a pretty good job protecting our territory and our turf on the core business through this latest round of next-gen activities, but as you know, it's a dynamic condition that's always going on.

So we believe this is -- these are incremental wins.

So they are incremental to where we are today.

Okay.

And then I also wanted to ask about -- I keep hearing about supplier constraints in both the truck and construction market from some of the OEMs out there.

This might be a sense of -- how should I put it -- could you just maybe confirm, possibly tell us whether CVGI is among the culprits out there at the current time?

And if it's not you -- I have to ask the question, Pat -- and then, if it's not you, or other people's issues impacting your deliveries in any way?

Or have those issues maybe declined a bit in Q2?

Just confirming again.

Yes.

So we are experiencing some supply-chain constraints on directed sourcing.

I think we've talked about that openly in the first quarter on our electrical business.

We have some components that are specifically engineered and direct sourced from the customer, and there is a global constraint on those components.

So I would say we're not necessarily the culprit but that segment does have some constraint on the magnitude that they can produce in a given period of time.

And unfortunately, some of those components go across the broad range of customers.

So it's not just 1 customer.

There's some commonality that everybody uses.

On the other side, I -- on the truck side of the business, in particular, there are definitely constraints.

The customers are very good at working their way out of those constraints.

They have a myriad of activities going on to do that.

It's hard for us to be able to tell exactly who and how much they are.

It's not anything that I'm aware of that we are causing directly.

But we know the customers have issues that they are in the process of managing, and frequently, they'll still build the trucks and put them in the off-line until those components show up so they don't close build slots.

And then the build numbers show up a little bit inflated later, but we've already sold those products.

So there's a little bit of lag, sometimes, between the customers reporting completed vehicles and our already shipped components to go on those vehicles.

Got it.

That's good color.

And then on the balance sheet, I did note that inventories are now down for 2 straight quarters even though the sales environment remains quite robust.

Can you guys just kind of go through the whole story there?

Were there bottlenecks in Q4 or Q1 or other reasons to have more inventory back then?

And have you kind of worked that down here in Q2 to a normalized level?

Or could you give us a sense as to just how healthy you think your inventories are today?

Yes, it's a good question.

I'm going to give a little bit of color, then Tim is going to chime in on this one too.

So we have been actively working to drive our inventories down to levels that we feel are better performance levels.

And that started at the beginning of the year and has continued and you're seeing that in the numbers.

Mostly, that relates to more efficient material management, a better working process and also improved delivery schedules and whatnot with various supply-chain situations.

Some of that was related to some launches, where we bring in more material at the beginning of launches initially, and sometimes there are some delays in how fast those launches may proceed versus original plans at the customer.

So some of those things have all contributed, but it definitely has been an intentional effort.

And from a health standpoint, I don't have concerns about where we are, and I frankly think we still have opportunities there, and we continue to push the group to enact those opportunities.

Tim, do you want to chime in with...

The only thing I -- just to supplement Pat's comments, Mike, on the numbers.

They're solid.

I mean, for reasons Pat described, the inventory levels were a little higher than we would normally expect at year end.

We managed them down.

The days on hand in the second quarter of '18 are very comparable to the second quarter of '17.

So we are sitting today at what we would consider to be reasonable inventory levels.

Okay.

Fair enough.

And then just one last one from me on your comments about potentially looking to expand the capacity.

I wasn't -- I don't know if you were 100% clear.

I just wanted to make sure, is that a possible effort to expand the square footage under the roof line?

Or do you think you can use some of your CVG digital initiatives to kind of get more out of your current footprint?

Yes, so that's a great lead-in.

It's -- all of the options are open to us today.

So we are expanding and improving throughput using some of the investments we're making in, especially in the wire harness arena with the digital assembly activities.

But -- and that also frees up floor space.

So that helps us with the capacity and the throughput.

But I think we're looking ahead at future programs and we still have probably a need for more capacity in the form of new operations in both Europe and in North America.

So we're evaluating that on a regular basis.

Obviously, we have to balance that with the market uptick, and some of the constraints which we already discussed might dictate some of the timing of that.

Let me say one other thing, Mike.

The reality is, is the amount of electrical content in vehicles continues to expand exponentially.

And most of those things are connected to some sort of wire harness.

And so we feel like -- and that's not just in our core industries but that's in every industry.

So things that weren't electronic before are becoming electronic.

And so when we look at that business and the future of that business, we continue to see opportunities to grow our business if we have the right capacity and resources allocated.

So I think we see it as both a short-term and a longer-term view.

That sounds like a lot more than just about EVs.

But if you could just kind of tell us if there is -- if there are trucks being made that are electric in the future, is that a higher wire harness content than a diesel version, or similar or lower?

Well, I think from a standpoint of what I was referring had more to do with all the various electronic devices in the vehicle.

And I think, that's only going to continue to grow regardless of what kind of powertrain we have on it.

So we support harnesses in both today in the traditional diesel engines and powertrains as well as some new applications that aren't quite out yet on the EV front.

I don't know the exact content comparison.

But I think, with the growth that we see in the number of things that are connected and the number of things that are generating or transmitting data inside the vehicle architecture, it's exciting.

And it's not just vehicles, right?

I mean, it's everything.

I mean, your vacuum cleaner can talk to your phone now, right?

(Operator Instructions) And our next question comes from the line of Douglas Dethy with D.C. Capital.

Can you comment a little bit just on the receivables?

You know it -- obviously, the sales are up, receivables are up.

Is this kind of a new level you think?

And is it kind of equilibrium on receivables versus sales or kind of what we could see from here?

And then, just in terms of the operations, are there any constraints on your business right now on the inputs?

You mentioned a little bit -- nothing really from tariffs right now but anything constraining that side of thing?

Doug, it's Tim.

I'll let Pat take the second part of that question and I'll supplement where he might ask me to do so.

With respect to the first part of your question on the receivables, the receivables -- the days sales outstanding at the end of the second quarter are very comparable to where we were a year ago in Q2 '17.

Just as I mentioned in Mike's question with respect to the inventory, the days on hand were very comparable.

What transpired here, in the first half of the year, as compared to the year-end, was we just had a circumstance where, fortunately at that time, we had a series of payments that happened to come in, rather large payments before year-end.

And so the receivables at year-end were sort of abnormally low.

So the receivables were low -- the receivables level now is more normalized.

Douglas, this is Pat.

On the constraints, I think I mentioned a little bit about a global constraint on some of the components that go into the electrical part of our business.

They're continuing for the foreseeable future.

And I think part of that is related to some of the discussion I just had around the growth in that industry.

So more and more things are connected and interconnected, and that is putting pressure on those suppliers that supply those types of components.

They are adding capacity rapidly, but it's -- it does somewhat constrain the volumes.

We could produce more if the demand is there, if we were able to do that.

So that is one of the constraints that I would point to.

I think I would be remiss if I didn't mention that manning and labor, globally, is still a challenge.

I think it's going to continue to be a challenge.

And we're doing lots of things internally to try to maintain and improve that situation.

We do -- we've got a variety of employee-engagement activities, environmental improvements and infrastructure consistencies as well as some automation in places where we haven't been automated before.

But I think that's -- that area hasn't necessarily held us back but it definitely has made it more challenging, and as things continue to -- and the economies, if they continue to go the direction that they are projected, I think that situation could continue to have an impact on us.

So those are really probably the only major items I would point to.

If I may ask one supplemental and it is on the wire harness business.

I guess there are certainly good secular trends there.

Talk a little bit Pat, if you would, just to your strategy there.

Where you really see yourself adding competitive advantage if indeed it's an important part of your future?

Even more important, I guess I would say.

So there's a lot of wire harness companies.

And what we see is there is -- they are stratified.

And there are some very large, global multinational companies that operate; a lot of them are in the automotive space, there are some in some of the other market segments.

We tend to not be in direct competition with most of those.

We tend to operate in a what I would say the lower-volume, high-proliferation, high-complexity wire-assembly world.

And in that arena, we provide a lot of service and capability, from on-site engineering and development and things that some of the smaller players in the industry don't have the wherewithal to do.

So it's kind of an interesting position that we can maintain.

Our customers need rapid -- an ability for rapid change management, and we help them accomplish that.

These are usually large multi-faceted products that have lots of SKUs and lots of units per SKU.

So it's a different business model.

And we think, within that range -- we do obviously have some competition, but within that range, we think we can continue to supply the service side of that business, which is what differentiates us from competition.

So when you look at other industries, what we continue to find -- and I'll give you some examples I've talked about in the past that continue to grow for us.

We look in, for example, powertrain and engine harnesses and power generation, which is an industrial application, we continue to -- I mentioned Sullair.

That's what they do, we tend to be able to provide them some of the capability in service for the types of volumes and complexity that they need.

So that's really what we think gives us an advantage, and what we believe that there's going to be more and more people and customers in various market segments that need that type of service.

And our next question comes from the line of [Scott Pope] with [Lucid Capital].

Sort of a continuation of our wire harness conversation.

Every day, we see more information on autonomous vehicles, EVs, et cetera.

Are you innovating in any capacity to serve those markets?

Well, that's a broad question.

And certainly, as I mentioned earlier, we have been engaged with several of our customers who I think are in that forefront.

The definition of what's an autonomous vehicle is up for debate.

So I think I would say assisted -- driver-assisted vehicles is more near-term.

And certainly, there are things going on as far as what they need.

And we've had activities ongoing with various customers as far as what things are going to change and how we might help them satisfy those needs.

I think the answer is, yes.

But it's not something that we're prepared to get into details on today.

(Operator Instructions) And I'm showing no further question at this time, and I'd like to return the call to Mr. Patrick Miller for any closing remarks.

Yes, sure, thank you very much.

I just wanted to tell everybody that this is a pretty strong quarter for us, and so we're very pleased with how our team has responded to the higher volumes.

And when you look at the dynamics and the parameters in our core markets, they seem to be showing favorable conditions on through end of 2019.

And so we're going to continue our efforts going forward to manage the unforeseen issues but also capitalize on what is a -- looking like an unprecedented swing for us in our core businesses.

So thanks for joining, appreciate it, and I look forward to speaking in the future.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.