Commercial Vehicle Group Inc (CVGI) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Commercial Vehicle Group Earnings Conference Call.

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

I would now like to introduce your host for today's conference, Kirk Feiler, Vice President of Corporate Development and Investor Relations.

Sir, you may begin.

Thank you, Lauren, and welcome to our conference call.

Joining me on the call today are Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group; and Tim Trenary, Chief Financial Officer.

They will provide a brief company update as well as commentary regarding our first quarter 2019 financial results.

We will then open up the call for questions.

This conference call is being webcast and a supplemental earnings presentation of available on our website.

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 the 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, Kirk.

Good morning.

Thank you, everyone, for joining our call this morning.

We delivered record results with sales for the first quarter of 2019, increasing 13% to $243 million, supported by ongoing strength in the heavy- and medium-duty truck end markets.

Operating income rose 24%, and operating margins increased modestly over the prior year despite continued wage inflation driven by regulatory changes in Mexico and other inflationary pressures.

From a segment standpoint, our Electrical Systems segment delivered another robust quarter with revenues growing 17%, and operating income expanding 18% versus the first quarter of 2018.

Overall, our markets continue to remain strong with solid activity with OEMs supporting our order book throughout 2019.

We have won and are launching some new wire harness business in Europe in the powertrain space as well as construction.

This includes new product categories for us like high speed data cables and high voltage power systems.

The increasing demand for safety and video systems in vehicles and equipment drive the need for these types of products.

This contributes to our need for the capacity expansion project underway in our Ukraine facility.

While there have been some pockets of slowing in future heavy truck orders and the North American construction business, with a strong backlog, our customers remain bullish about global off-road equipment demand and the North American truck build.

We also remain confident in our ability to drive continued performance for 2019.

Turning to Global Seating.

We had several new customer and product wins during the quarter with revenues increasing 9% and operating income rising 14% versus the prior year quarter.

In addition, we saw a lot of positive activity at the 2 industry conferences we attended during the quarter, bauma in Germany and the 2019 Heavy Duty Aftermarket Week in Las Vegas.

At bauma, the show was well attended by global OEM manufacturers who showed a lot of interest in our new SCIOX and [Unity] product lines.

In Las Vegas, at the Heavy Duty Aftermarket Week, which is North America's largest gathering of independent distributors in the heavy-duty truck industry, there were some great opportunities to touch base with key decision makers and potential customers to showcase our depth and breadth of product offerings.

In particular, our truck seat brands, National and Bostrom, remain strong in the retail space.

In terms of new awards, as we discussed in March, we are awarded the next-generation heavy-duty truck platform, utilizing our World Platform seat solution for Dayun, a leading heavy- and medium-duty truck manufacturer in China.

We also won a new contract with our long-term customer, Foton Daimler to supply a newly engineer heat and ventilation seat for their new high-end truck platform also located in China.

We continue to see progress in our ability to capitalize on the evolution of product in Asia to more premium seat offerings.

Shifting to the broader industries we are in.

For the first quarter of 2019, Class 8 truck production was up 20% compared to the prior year.

ACT currently estimates 2019 North American heavy-duty Class 8 truck production at approximately 337,000 units, a 4% increase over the 2018 build rate.

Of note, the backlog for Class 8 orders provides more visibility than it has historically, given the rush to secure production slots in the second half of 2018 versus the first quarter of 2019.

There are some mixed signals in this segment with new Class 8 truck orders being down the last few months.

This could be related to the lack of build slots in 2019, given fleet's little reason to order now, but we are keeping our eyes on the patterns that they developed.

The backlog is still approximately 8 months.

The overall GDP was higher than expected, but freight rates have moderated with spot rates being down and contract rates forecasted as flat in 2019 compared to 2018.

Class 5-7 truck production was up 4% in the first quarter of 2019 compared to the prior year.

For full year 2019, Class 5-7 production is expected to total 268,000 units, largely flat versus full year 2018.

Medium duty orders have moderated somewhat, but they are operating with record backlogs, so we expect medium-duty truck builds to continue to perform well.

Overall, the global construction market remains strong.

We are seeing challenging year-over-year comparisons in this business given the fact that last year we were running high levels of current production and catching up the past due orders, somewhat inflating the comparison year.

We have largely caught up the past dues in our construction business.

And as a result, we're feeling some softening in North America, which impacts our wire harness business in the Electrical Systems segment.

We are also seeing some early reductions in parts of Asia, especially in Japan and Korea, which impacts our Global Seating segment.

China enacted an intentional slowing of their GDP but are continuing with infrastructure spending.

Assuming the launch timing for new truck seat programs in China stays on track, we believe we should have offsets to these conditions.

In North America, the overall economic picture remains largely unchanged from last quarter, while the global growth picture looks positive, albeit at a slower pace.

That being said all, indications point to another strong year for heavy- and medium-duty truck production in 2019, which aligns with the bullish sentiment of our customers.

As such, we continue to estimate Class 8 production to be in the range of 330,000 to 350,000 units.

We will continue to monitor all factors that might have an impact on demand, and we'll be prepared to react quickly if market conditions change.

Looking ahead, we recently announced the restructuring of our organization to better focus on the electrical and electronic segments while at the same time optimizing our seat business, pursue the regions where growth is more likely.

We continue to make strategic investments to position our business for accelerated growth.

Future trends point to growing electrical, electronics, connectivity and power, including data and services with opportunities in both current and adjacent markets.

As a supplier of critical product systems, we are sitting at the center of these dynamic trends, giving us the opportunity to expand our capabilities and meet the evolving market needs.

We are investing in our core capabilities as well as in our next-generation products to improve our ability to compete in targeted markets with the intent of diversifying our customers and geographic footprint that we believe will drive more consistent performance through a cycle.

We plan to accomplish this by investing organically and potentially through strategic acquisitions.

For example, the Ukraine expansion I mentioned earlier, which we are targeting to be in production later in 2019, will support the new wire harness customers in Europe.

In addition, our new wire harness facility in Morelos, Mexico, which will ramp in the second half of 2019, will include flexible digital assembly boards and the latest technology in wire harness processing equipment.

Morelos will be a leader in complexity management utilizing Lean Six Sigma operational productivity and efficiency, thanks to the use of methods and technologies that we have developed as experts in the low- to mid-volume wire harness manufacturing environment over the past 40 years.

Secondly, we've added a new facility in our Saltillo, Mexico campus.

That is purpose-built to supply large tonnage injection molded parts coupled with secondary assembly processes.

The plant reflects the growing demand for these types of parts by our current customers as well as new customers.

This growth has required us to expand this part of the Trim business, and we will transfer some assets from existing facilities as well as add new assets.

We expect this to be fully operational in the second half of 2019.

Lastly, we opened a new facility in Thailand for Global Seating to support growth for existing customers.

We've been operating with a partner in Thailand for a few years while developing the business, which is now evolved into its own operation.

We see this as a strategic opportunity to align with our current customers already there, but also the new recently announced multinational OEMs who are building new equipment manufacturing plant in Thailand.

They will need local content and trusted partners for their new operations.

From an inorganic perspective, we see opportunity for scalable, high CAGR adjacencies that will enhance our capabilities, improve customer diversification and/or mitigate cyclicality.

We will, however, be disciplined in our pursuit of this type of growth.

From our perspective, the areas that we see M&A or joint venture opportunities could include: first, extending our current capabilities or applying what we are good at in other attractive market segments that are less cyclical, especially in the wire harness or interior trim product categories; second, acquiring new capabilities or technologies that are aligned to attractive electronic industry trends and build upon current product capabilities or market strength; and third, expanding our geographic footprint for global coverage with the same or similar categories.

Lastly, I would like to briefly discuss the continued traction of our lean efforts -- our lean efforts are making in the business.

More than 30% of the global employee population has been certified in our Lean Six Sigma programs, including more than 70% of supervisors and above.

For the last few years, we've been giving internal president's awards to the best performing and most improved lean teams in the company.

This year we raised the bar of the award program to focus on value streams that must be certified against an objective set of world-class benchmarks we developed.

We also added a third award for those in the administrative areas that are not related to production, where there are opportunities to improve processes on profitability.

The level of participation was exemplary.

Our winner for the best performing team was the wire harness team in our Shanghai, China plant.

The most improved was located in Agua Prieta, Mexico wire harness facility.

Lastly, the nonmanufacturing winner was a cross-functional team focused on order to cash and improving our cash cycle.

Congratulations to all of these employees as well as the employees who applied.

The result of these outstanding efforts are excellent improvements across the company as we continue to drive waste out.

This is an exciting time at CVG, and we are well positioned today to benefit from industry tailwinds supporting our core businesses, while at the same time pursuing growth that will set the stage for continued performance in the future.

We look forward to updating you as we execute on our strategic initiatives.

With that, I will turn the call over to Tim to discuss the financials in more detail.

Thank you, Pat.

First quarter 2019 consolidated revenues were $243.2 million compared to $215.7 million in the prior year period, an increase of 12.7%.

The increase in revenues year-over-year reflects higher heavy-duty truck production in North America and continued strength in the global construction markets we serve.

Class 8 truck build in North America increased 20% in the first quarter of 2019 compared to the prior year period, and truck builds for Class 5-7 increased 4% compared to the prior year period.

Foreign currency translation adversely impacted first quarter consolidated revenues by $4.5 million.

Consolidated operating income for the first quarter of 2019 was $19 million or 7.8% of sales compared to $15.3 million or 7.1% of sales in the prior year period.

The increase in operating income is primarily attributable to the increase in sales volume, partially offset by wage inflation driven by minimum wage, regulatory changes in Mexico and other inflationary pressures.

Notably, while we continue to make investments in our commercial and product development teams across the company, we maintained SG&A at similar levels the last year notwithstanding the 13% increase in sales.

Interest and other expense increased $2.6 million in the first quarter of 2019 compared to the first quarter of 2018.

The sharp increase was due primarily to the noncash effect of marking to market the company's interest rate swaps.

Cash, interest expense was up approximately $0.3 million in the first quarter 2019 compared to the prior year period.

Consolidated net income in the first quarter of 2019 was $11.1 million or $0.36 per diluted share compared to a net income of $9.9 million or $0.33 per diluted share in the prior year period.

Turning now to our segment results.

For the first quarter 2019, Electrical Systems revenues were $143.6 million compared to $122.9 million in the prior year period, an increase of 16.8%.

Foreign currency translation negatively impacted Electrical Systems revenue by $1.6 million in the first quarter.

The Electrical Systems segment generated $16.5 million of operating income in the first quarter of 2019 or 11.5% of sales compared to $14 million or 11.4% of sales in the prior year period.

The operating margin for the Electrical Systems segment was negatively impacted by approximately 100 basis points in the first quarter of 2019 related to the impact of wage inflation in the North American wire harness business as a consequence of minimum wage regulatory changes in Mexico.

As you may recall, in December 2018, the Mexican government legislated increased minimum wages in an area running along and just south of the U.S. Mexico border, so called free zone of the northern border.

As such, in the first quarter of 2019, our wire harness facility in Agua Prieta is subject to this new minimum wage and was adversely impacted by $1.4 million.

We continue to take a number of actions to reduce the impact of this increase in our labor costs, including pricing adjustments on certain products in our wire harness business.

We're beginning to close the gap and continue to estimate that 2019 net financial impact of this new regulatory burden at under $3 million.

Global Seating segment revenues were $104.1 million compared to $95.1 million in the prior year period, an increase of 9.4%.

Foreign currency translation negatively impacted Global Seating revenue by $2.9 million in the first quarter.

Global Seating segment operating income also improved in the first quarter of 2019, generating $8.3 million or 8% of sales compared to $7.3 million or 7.7% of sales in the prior year period.

Operating income was negatively impacted by raw material price increases, mainly steel, but we are offsetting with some price increases and other cost containment and reduction efforts.

We continue to believe that the recent reorganization of the company and associated consolidation of all seating into one Global Seating organization will benefit the company and our financial results.

More specifically, we believe this action will better allow us to leverage resources and best practices in engineering, product development and manufacturing, while maintain -- eliminating redundancies and providing a global, more scalable platform for effective and efficient operations.

In addition, we are taking actions to localize elements of the supply chain in China to achieve cost efficiencies.

We remain optimistic about the growth of this segment.

During the first quarter of 2019, we paid down an additional $5 million of debt further improving net leverage to 1.3x trailing EBITDA.

As of March 31, 2019, we had a liquidity of $118 million, which includes $54 million of cash and $64 million of availability from our asset based revolver.

There were no borrowings under our asset base revolver at March 31, 2019.

This concludes our prepared remarks.

I will now turn it over to Lauren for Q&A.

Lauren?

(Operator Instructions) Our first question comes from [Mike Shlisky], who is a private investor.

Couple quick ones here.

First, Pat, you kind of outlined a whole bunch of new investments that are coming down the pipe that have already started or will come later on in the year.

Is there any way you can kind of quantify what that might have meant to this quarter's numbers?

Or it could be -- find a way to back that out to figure out what the margin might have been without some of these pretty nice looking investments?

[Mike], it's Tim.

The -- for the most part, the incremental investments have come from essentially repurposing some other spend in the company, so there hasn't been a significant impact on the company's results to date including the first quarter.

Okay.

You have outlined some things you've got kind of rolling out later in the year.

I think you mentioned Thailand and some other places, so there might be some additional investments to come.

Do you think that will require any -- again anything new as far as new cash to be put to work there?

Or will it be again some more asset repurposing?

And secondly, do you think you'll have to take out any extra debt this year as you go through the year to get those things done?

Or could you, actually, in fact, due to your good operating results, hopefully, take down your debt later on in the year, which way might that go?

Yes.

[Mike], again it's Tim.

First of all, with respect to the capital investment, we are making some extra investments, if you will, in Eastern Europe and in Mexico in our Trim business, in our harness business.

Those investments are not so large as to get us outside of our sort of generally accepted range of, let's say, $15 million to $18 million of CapEx per year.

So we might probably be at the higher end of that this year.

But if -- they're not so extraordinary as to skew our results tremendously.

With respect to any investments and how they might impact the P&L, I just would point out that over the last couple years here, the company's sales have as increased about 35%, and we have been able to maintain the company's SG&A expense at a number that is around $60 million-or-so a year.

And we've done some of that by repurposing spend to more value accretive activities.

Having said that, as we have reorganized the company here and have increased our focus on the electrical segment and opportunities there, but also in optimizing our Global Seating operations, I do expect there to be here this year some increase in SG&A.

I don't -- it's not going to be dramatic.

It might be something on the order of 5%.

But still nothing that would dramatically affect our performance, but we think expenditures that are very important to advance the company's opportunities that we have with the reorganization of the company including corporate development activities and more specifically, some -- perhaps some M&A activity.

Okay.

Great.

And that kind of goes on into my next question.

So if and when there is a somewhat large downturn in the global truck market or the construction market or perhaps both at the same time, since you had your last downturn which must be 3 years ago now, maybe even 4, can you maybe outline what's changed this time as far as your lean operation and your mix and your sort of new process kind of come out since then?

Or you think that this time the operating pull through on the downside could be on the better end of the range than you've seen in previous downturns if and when it happens, assuming kind of what you've done, and what you've cut and what you've made more efficient over the last couple of years?

Well, I would offer this.

So being in a cyclical industries that we are in, we always keep an eye to the changing environment.

And as we are trying to expand certain parts of our operation, we've been working hard to maintain our flexibility, so that we can adjust as needed to the top line.

It's kind of one of our tenets in the way we operate.

So we will still have the flexibility on the variable side that we've maintained the last several years, and so we see that as an opportunity.

We've also been increasing the amount of some of the digitalization.

When we talk about the digitalization, a lot of that is in and around how we can be more flexible and automate certain parts of our operation, which we think are going to help us in a downturn.

So I think what I would say to that is we've maintained a pretty lean infrastructure in anticipation of at some point in the future having to adjust our business.

And so I think we're prepared for that.

And I don't know that we will be a whole lot different as far as the downside drop is concerned.

But I think we are prepared to stay within the ranges that we have historically.

I don't know if you want to add anything to that, Tim or...

No.

I think, Pat, you did a good job of covering it.

I would just echo Pat's comments about the investments we made in Lean Six Sigma and some of our operating processes.

The truck build in North America, Class 8 truck build, is expected to decline a little bit starting in 2020.

That decline is not anticipated to be extremely dramatic, and there's no reason to believe that construction equipment build will vary dramatically as well.

Having said that, to Pat's point, when our business contracts, if it does because of the cyclicality, I think we have a demonstrated ability to react appropriately.

I do not believe, absent some very serious cyclical decline, that we would strip out fixed expenses.

So said another way, [Mike], I believe that with reasonable reductions in revenues, we would expect to stay within that 20% to 25% band.

Okay.

Can you give us a little more color also lastly on some of your new product categories you've been pursuing, things like generators or other kinds of off highway equipment that you've been looking at for a couple of years now, I would imagine?

Just kind of what's been the kind of latest progress there?

And then maybe kind of secondly, if 2020 is a downturn year for the broader cycle, given what you've signed more recently, both in your traditional trucking and off highway business, and some new categories, do you think you might have some opportunities to see a bit of a outperformance versus the overall market next year?

Yes, okay.

So we announced, I think -- as you know, sometimes announcing specifics on the new business is challenging as our customers have a say so in that.

But as we announced last year, we brought on a new customer which is ramping, I think still right now, or close to ramped up in Sullair, which is an industrial power generation customer, it's an area that we continue to see benefits and growth in around the globe.

And we also have been seeing recreational customers which we think have opportunities in not only wire harness, but also on the trim side.

And so those categories have been some places where we're getting traction.

We've announced here recently the Chinese truck domestic producers.

A couple of wins there, but we will, I'm sure, have further announcements this year.

And what we're seen with our new product categories there that are built specifically for the domestic side of China truck is there's a lot of opportunity.

And we're getting some good traction there.

So we're seeing wins in those areas which are exciting.

We have had some medium duty penetration that is also going to continue to help us, not only grow the business, but also lessen the amplitude of the peaks and the valleys of some of the cyclicality in our business.

So those are some of the areas that we see.

We've also developed a game plan which we've -- which we're not necessarily ready to go public with yet.

But in general, we've targeted -- I mentioned it a little bit in my opening remarks, we've targeted certain parts of our product portfolio that seem to have a good crossover capability.

So when you look at our wire harnesses and you look at some of these other products that we're starting to venture into in and around the wire harness space, we see applications for those in industrial markets in some of the adjacent specialty vehicle segments, trailer manufacturing, appliance industry.

There's lots of applications for both hot wire harness and also the same capabilities that we have on the interior trim side.

So we think we'll be able to convert some of our capabilities and asset utilization into balancing that with some things outside of our traditional market segments, and that's really in and around a little bit of -- that's on the fringes of some of the strategic changes that we're making on the way that we approach the business.

Okay.

Just a quick follow-up there.

You have mentioned -- you mentioned that there might be some acquisition opportunities or JVs.

Can you give us a sense as to the sizing?

Is there are a chance that these will be debt funded or these might be just smaller cash-on-hand type of deals?

So to be determined, [Mike].

I will tell you this that the folks that we have are focused on M&A, by and large, are exploring smaller companies.

I would say these companies generally have sales of $50 million a year or less.

Most of them are even around $25 million, $30 million, $35 million something like that.

So these, to date, have not been extraordinarily large transactions.

We are building our domestic cash beginning in the second quarter.

We had some working capital build in the first quarter, so we used up much of our domestic cash.

But as you might have read in the Q, we just brought some money, about $6 million, back from Eastern Europe, and are in the process of repatriating about $10 million from China.

So that along with just our business and our cash flow from operations, at least what I expect for the remainder of this year should cause us to have some additional domestic cash build with which to do acquisitions.

Having said that, should we be so fortunate to find opportunities that would outstrip our cash on our balance sheet.

We have, as you know, been working on our leverage which is down just south of 2x on a gross basis, 1.3x on a net leverage basis.

The paper we put in place 2 years ago, the institutional term loans is a good piece of paper, it's flexible and it allows us to flex up just within bounds should the opportunity to present itself to do an acquisition that would require some additional debt.

So I think we're reasonably well positioned to execute on any acquisitions.

(Operator Instructions) And I'm not showing any further questions at this time.

I'd now like to turn the call back to Mr. Pat Miller for any closing remarks.

Well, as we mentioned earlier, we see this as an exciting and dynamic time for the company as we strive to move forward with our new initiatives and capitalize on opportunities we see in our space and some of the adjacent markets.

I appreciate everybody joining the call, and we look forward to talking in the future.

Have a good afternoon.

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

This does conclude today's program, and you may all disconnect.

Everyone have a wonderful day.