Commercial Vehicle Group Inc (CVGI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Commercial Vehicle Group, Inc.

Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Terry Hammett, Head of Investor Relations.

Sir, you may begin.

Thank you, Chelsea, and welcome to our 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 2018 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.

And now Pat Miller with a brief company update.

Thank you, Terry.

Good morning, and welcome, everybody.

CVG continues to capitalize on the robust markets we serve.

We've effectively increased production to deliver what we believe will be our strongest top line performance since the peak market in 2006.

Furthermore, based on market indicators and our growth actions, 2019 is poised to deliver higher sales than 2018.

Our third quarter 2018 revenues improved by $26.7 million or by 13% over the same period last year.

Operating income was $16.5 million in the third quarter of 2018, a significant increase over the $10.7 million of operating income in the third quarter of 2017.

Tim will discuss this in more detail shortly.

When we step back and look at the numbers year-to-date, we are delivering more than double the operating income on about 19% more in sales.

We're very proud of the success the team is having in managing the numerous challenges facing us, including rising commodity costs, labor availability, supply chain volatility and trade-related complexities, all while effectively responding to the increased production needs of the customers.

Switching gears briefly to discuss markets.

The North American heavy-duty truck orders continue at historically high levels.

Economic indicators reflect the continued solid freight environment and high truck utilization deep into 2019.

These dynamics are conducive for the fleets to continue positive pricing actions, which influences their equipment-buying behavior.

September's heavy-duty truck orders came in at 40,000 units, making the third quarter 2018 an all-time record number of orders.

This contributed to further extension of the truck backlog, which now stands at just under 10 months, which is also an all-time record.

Some of our OEM customers are indicating that 2019 order slots are mostly full already, providing high confidence that total builds in 2019 should be higher than 2018.

The supply chain constraints that have caused disruptions in 2018 are improving.

Based on our perspective, we are increasing our projected range for 2018 to 315,000 units to 325,000 units.

Our range for 2019 is currently estimated at 330,000 to 350,000 units.

FTR, a third-party forecaster, came out this past week and increased their forecast for 2018 and 2019 to 325,000 and 350,000, respectively.

This year, there have been some unplanned lost build slots and plant down days at the OEMs due to both supply chain issues as well as for new product ramps early in the year.

The OEM production output has been trending up as they resolve issues, and we expect that to continue at the higher rate, thus allowing a greater total -- year output in 2019 supported by the order demand.

Our increased penetration in the last few years of medium-duty trucks is also contributing to our higher sales volume.

The medium-duty market has been trending up rather steadily the last several years, averaging about 4% growth per year and is up approximately 17% from 2014.

CVG's medium-duty truck business today is approximately 10% of our total sales, considerably more than it was just a short time ago and reflects our successful efforts to diversify the North America truck revenues.

Moving to the construction and agriculture segment of our business.

Market conditions in 2018 continue to be favorable as the medium and heavy-duty off-road equipment markets show strength in the products we serve.

Generally, we are seeing elevated demand projections for 2019 in the markets we serve.

In total, our Global Construction and Agriculture segment has experienced growth in 2018 of about 14%.

Early indicators are that pent-up demand, strong economic indicators and new business wins will continue to drive increases in 2019 in this business unit.

To that point, we are pleased to announce our growth activities are resulting in new footprint and capacity changes that are underway.

As we have discussed previously, our wire harness business is positioned to grow as we align with the larger vehicle trends of increasing electronic architecture connectivity and electric powertrains.

These trends inherently drive more harness content and opportunities for growth into related electronic components.

To that end, we are launching a new facility in the Northeast region of Mexico targeted to be in production in the first half of 2019.

This facility will allow us additional capacity in North America and also increase our flexibility to respond to customer demand fluctuations.

Additionally, we kicked off an investment to expand our Ukraine operation in support of new European booked wire harness business that is ramping up in 2019 through 2020.

Lastly, we launched the new Thailand facility producing truck seats in October.

The last few years, our China team has been supplying our multinational customers in Thailand as the customers penetrate the domestic and other ASEAN markets.

Recently, the trending growth necessitated that we launch a facility in country, which is producing and shipping product today.

In third quarter 2018, both business segments once again contributed to our improved consolidated performance with our truck -- with our Global Truck and Bus segment revenues up almost 20% as compared to the same period last year.

When we review these segments year-to-date through Q3 in comparison to last year, global truck is up 23%, and global construction is up 14%.

Importantly, we are seeing higher operating income from both segments.

Year-over-year, our GTB segment operating income margin improved from 9.3% in the third quarter of 2017 to 10.2% in the third quarter of 2018 and from 5.2% to 9.1% in our GCA segment.

This significant improvement for our construction and agriculture group illustrates the success achieved in mitigating the headwinds experienced last year.

Both segments have also done tremendous work ensuring our commercial arrangements allowed us to offset inflationary pressures most manufacturers are experiencing in raw material, labor and trade-related items.

As it relates to tariffs, there continues to be a significant amount of information in the news regarding proposed and enacted U.S. tariffs.

Monitoring the actual and potential impact of these tariffs is an ongoing priority for our company.

We are working to react appropriately to minimize or offset the impact to the company as well as our supply chain.

To date, we've been able to keep the effect on our margins to a minimal level and we will continue to work in this direction, either passing along costs or modifying supply chain structure where possible.

Additionally, as we've mentioned before, 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.

Lastly, before I turn it over to Tim to review the numbers, we had the opportunity recently to participate in a 2-day experiential learning event with high school students in connection with the Columbus Council on World Affairs' Global Scholars Diploma program.

200 students recently visited the CVG world headquarters and the Research & Development facility in New Albany, Ohio as part of their Global Scholars curriculum, which is designed to foster innovative and interactive partnerships with the global community.

The students participated in a lean manufacturing simulation and interactive tour of Research & Development facility and a panel discussion with CVG leaders of diverse backgrounds.

Participating in events like this provides positive exposure to a manufacturing environment and educational opportunity and prepares these young people to gain new perspectives that may foster interest in technology, engineering and manufacturing careers in the future.

We are proud to be a participant in events that can help shape the future of young adults and, at the same time, introduce CVG as a future career opportunity to this next-gen talent.

Lastly, we look forward to providing you with future updates on the progress being made across our global business enterprise.

We are pleased with the progress realized so far in 2018, and we look forward to closing 2018 strong.

Tim will now cover the quarter's financial results.

Good morning.

Here's the third quarter in brief.

Operating income of $16.5 million is over 50% higher, and operating income margin is almost 200 basis points higher than the same period last year.

Net income of $12.6 million has more than doubled compared to last year.

Free cash flow has improved, and net leverage is now down to 1.4x trailing 12 months EBITDA, about half as much as a year ago.

More specifically, as for the company's consolidated financial results for the third quarter 2018, revenues were $225 million compared to $198.3 million in the prior year period, an increase of 13%.

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

Foreign currency translation adversely impacted third quarter revenues by $1 million or by 0.5% as compared to the same period last year.

Selling, general and administrative expense of $15.7 million for the quarter was somewhat higher than last year on the 13% increase in revenues but in line with what we expect on a run-rate basis.

Operating income in the third quarter was $16.5 million compared to $10.7 million in the prior year period.

This over 50% improvement in operating income reflects the higher sales, the completion of facility restructuring in late 2017 and improved results in our North American wire harness business.

Net income in the third quarter 2018 more than doubled to $12.6 million or $0.41 per diluted share as compared to $4.8 million or $0.16 per diluted share in the prior year period.

This improvement in net income is a reflection of our improved operating results and an unusually low tax provision in the quarter, which includes $2.9 million of tax benefit to adjust the provisional tax expense arising from the Tax Cuts and Jobs Act of 2017.

At this time, we project an effective tax rate for the year at the low end of the range of 20% to 25%.

Depreciation expense in the third quarter 2018 was $3.7 million; amortization, $0.3 million; and capital expenditures were $4.7 million.

We now size 2018 capital spending in the range of $13 million to $16 million.

Turning now to our segment financial results.

Global Truck and Bus revenues in the third quarter of 2018 were $146.4 million compared to $122 million in the prior year period, an increase of 20%.

Foreign currency translation adversely impacted third quarter revenues by $0.3 million as compared to the third quarter of 2017.

The increase in revenues is primarily attributable to higher North American heavy-duty truck production.

Operating income in the quarter was $14.9 million compared to operating income of $11.4 million for the prior year period and reflects the increase in sales volume and the completion of facility restructuring in late 2017.

As for the Global Construction and Agriculture segment, revenues in the third quarter of 2018 were $82.8 million compared to $79.6 million in the prior year.

That's an increase of 4%.

Foreign currency translation adversely impacted third quarter revenues by $0.7 million as compared to the third quarter of 2017.

Operating income was $7.6 million in the quarter compared to $4.1 million for the prior year period.

These results reflect significant improvement in the performance of our North American wire harness business.

The company's free cash flow has improved because of these financial results and moderating investment in working capital.

The company's cash position at the quarter end increased to $58 million.

This cash position, when taken together with the $63 million of availability from our asset-based revolver, results in liquidity of $121 million at quarter end.

We continue to delever the balance sheet.

Net leverage at quarter end was 1.4x trailing 12 months EBITDA, about half as much as a year ago.

We are especially pleased with these financial results in light of efforts to manage through certain headwinds, more specifically commodity and other material inflationary pressures, tight supply chains and difficult labor markets.

Our global procurement, commercial and operating personnel have done an admirable job of cost control and of developing and implementing cost recovery initiatives.

If it were not for these and other efforts, these financial results would not have been achieved.

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.

Chelsea?

(Operator Instructions) And our first question comes from the line of Mike Shlisky, a private investor.

Just a few very quick ones for you, a kind of a broader view here.

You mentioned a very, very strong truck and bus market, but I'm kind of curious if you can give us some additional color on the construction and ag market, maybe separating the 2 out.

I mean, if you're confident that you'll see a pretty good year next year in trucks, do you think you'll see some decent growth next year in some directional form in the ag and construction spaces?

Yes.

So it's a little harder to pin down construction and ag.

Now we would call that off-road equipment because there's other -- there are other industries also that seem to be driving some of the positive growth in that part of the group for us.

That includes mining and some of these specialty off-road applications.

The indications that we see so far are that the markets will be up in 2019.

The orders look strong from what we can see in the first 6 months.

It's hard to see farther than that for us.

So that's part of the reason we don't -- we're not so explicit with the numbers.

But we are currently increasing capacity in anticipation of 2019.

I say increasing capacity -- increasing capability and production throughput for next year.

Okay.

And then secondly, I kind of want to ask about the margin performance.

Obviously, pretty strong in the quarter here and that's with a lot of headwinds that you were facing, so very strong execution here.

I guess my big question is for 2019, do you think any of the challenges that you're facing might intensify?

Or do you think most of what you're seeing is under control and so you should see some good volume leverage next year?

Yes.

It's a good question.

We are -- we have -- I think we've effectively put in a lot of mechanisms to help us manage raw materials and some of those cost issues.

The trade piece has some inherent potential increase related to the China part of the tariffs that have gone into place.

As you may know, they were started at 10%.

And if they're still in effect January 1, they increased to 25%.

That will affect us somewhat.

We have been working on methods to mitigate that, as I mentioned in the opener, related to either passing those along down our supply chain or in mitigating those by changing the structure of our supply chain.

So there's opportunities to do both.

So those -- that will still be a challenge if it continues, but I think that's also a big if, right?

So I think we've got the bulk of these things to -- into mechanisms that should be able -- there will always be a lag for us when costs go up that -- on the raw materials side.

And so I think we will still have challenges, but a lot of the issues that -- things we needed to get in place commercially have been done.

And perhaps just one more from me.

Speaking of China, can you give us some thoughts about the kind of market outlook there for the next couple of quarters as well as your own company outlook there?

Is it kind of the same?

Or do you have new programs ramping up in Asia right now?

Yes.

So we're experiencing growth in Asia and it's coming from -- our Asia touches multiple countries there.

We're based predominantly in China and India.

We have a new operation just launched in Thailand, supporting some customers there.

But our -- we've seen growth in the construction side in the region.

We support Japan and Korea as well.

So we've seen growth in that area on the construction side, double digits.

And we are seeing the biggest opportunity for us in domestic China and India for that matter along the truck and bus side for seating.

And while I've seen some of the decline projections for the truck industry in that area from some of the prognosticators, for us, a lot of that's new market share, and we've won some new business.

It's ramping up through 2019.

And so from our growth trajectory, we expect 2019 in Asia to be a good one for us in comparison.

(Operator Instructions) Our next question comes from the line of [Jay Kumar] with [Medsal Fund].

I've got 2 questions.

One is, what's the year-on-year backlog growth?

Do you have any figure for that?

Are we talking about the truck?

The...

Yes.

We usually talk about backlog in regards to the North American Class 8 OEM orders, and I don't know if I have the exact number for 2017.

It's at 10 months now.

I'm going to estimate that it was 5 or 6 months in 2017.

I don't -- that's an estimate, okay?

Okay, okay.

We can come back with exact numbers.

We have the data.

I just don't have it in front of me.

That's great, okay.

And since you're selling in all these kind of different countries in the world, do you hedge your currency?

Or is that something that you've just played by the time?

No.

[Jay], it's Tim.

We -- certain cost currency cash flows around the globe, just a handful of them, are significant enough that we do actually do some currency hedging.

Okay.

Because -- so you guys have in India.

Indian currency is up about 10% versus the dollar.

So...

The Indian rupee is up 10% versus the dollar.

Yes, Indian rupee is up, yes, yes, yes.

Indian rupee is up 14%, actually, yes, all right.

I'm showing no further questions at this time.

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

Yes.

I just want to thank everybody for their time today.

And we have some encouraging results, and our market seem to be strong out into the future.

And we expect to continue to manage the challenges out there and capitalize on those.

So thanks again, and have a good afternoon.

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

This does conclude the program, you may all disconnect.

Everyone, have a great day.