Commercial Vehicle Group's CEO Discusses Q12013 Results - Earnings Call Transcript

Apr.25.13 | About: Commercial Vehicle (CVGI)

Commercial Vehicle Group, Inc. (NASDAQ:CVGI)

Q1 2013 Earnings Conference Call

April 25, 2013 10:00 am ET

Executives

Merv Dunn - President & CEO

Chad Utrup - CFO

Analysts

Mike Shlisky - JPMorgan

David Leiker - Baird

Rob Kosowsky - Sidoti

Operator

Good day, ladies and gentlemen. Welcome to the First Quarter 2013 Commercial Vehicle Group Earnings Conference Call. My name is Dave. I’ll be your operator today. (Operator Instructions). As a reminder, the call is being recorded for replay purposes.

Now, I would like to turn the call over to Mr. Chad Utrup, Chief Financial Officer. Please proceed, sir.

Chad Utrup

Thank you, Dave. Thanks everybody for joining the call today.

As usual before we begin the call, we do some Safe Harbor language. Merv will then give a brief company update and I’ll take you through our results for the first quarter of 2013. And then at the end, we’ll take time for your questions.

With that, I’d like to remind you that this conference call contains forward-looking statements; actual results may differ from anticipated results because of certain risks and uncertainties. This may include but are not limited to expectations for future periods with respect to cost saving initiatives, tax positions and estimates, financial covenant compliance and liquidity, new product initiatives, economic conditions and the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, risk associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings.

With that, I’ll turn the call over to Mervin.

Merv Dunn

Thank you, Chad and thanks to all of you for joining the call.

From an end-market standpoint, our first quarter played out as expected and it’s basically uneventful. As we projected business volumes in the first quarter of 2013, ended up very similar to the fourth quarter of 2012 and in fact were down slightly from a build perspective.

We continue to believe we will see a sequential uptick in Class 8 build rates from Q1 to the second quarter and second half of 2013. Our 2013 estimates for North America Class 8 build remains in the range of 250,000 to 260,000 units. As indicated in our last earnings call, we felt that the weakness in construction market would linger for another quarters or so and then began to pick up till the second half of 2013, this two prediction -- as construction revenue remain relatively flat in the fourth quarter of last year continued. We think the global construction markets would be strong over the coming years but it currently experiencing short-term softness due to the need to deplete excess inventories.

Our military aftermarket OEM service order showed a little improvement during the period compared to the fourth quarter of 2012. The closure plan for our Statesville, North Carolina facility continues on schedule and it’s expected to be completed by the end of this quarter. The products made there will be absorbed into other CVG facilities. We expect to see approximately $2 million to $3 million in savings from this consolidation effort for the full year 2013.

Also, as a cost savings measure, we are continuing to operate with reduced labor force. As anticipated, our overall cost control efforts improved our financial performance in the first quarter compared to the last quarter of 2012. Although, this is not where we would like to be due to weaker market conditions in current capacity gaps, we are continuing to focus on short-term cost control efforts. We are doing this while ensuring that our facilities and our staff prepare for the anticipated ramp of our end markets in the coming quarters. We are also working to ensure initiatives for the CVG’s long-term growth are not cut short.

Our two acquisitions made at the end of the fourth quarter of 2012 are in effect for the full quarter with CVG. Our Daltek acquisition remains on track to meet our expectations for the year. However, similar to our end markets in North America and China softening in the India market, is having an impact on our new JV, I’m sorry, a new acquisition Vijay Seating (sic) Vijayjyot Seats in India.

In terms of new business, I’m pleased to report that we’ve been awarded a new contract to supply seating to Caterpillar’s Building Construction Products Division. These seats will be used in smaller weld loaders, smaller tractors and many hydraulic excavators. We will produce them at our national seating facility in North Tennessee with production expected to begin in the third quarter of this year. Initial production under this agreement will support Caterpillars facilities in North and South America. This new business award fits perfectly into the diversification in growth strategies we have set for CVG by expending our market penetration for construction seating in North America.

Lastly, at the beginning of March; I announced my plans to retire from CVG in 2013. I’m pleased to have been the Founder and CEO, CVG for so many years, while here assembled a great management team that globalized and grew this company although I will miss. CVG is a great company and will be 99.99% the same after I leave. As you know one person does not make a company. I have no doubt that we would find the strong leader to fill my shoes and take CVG onto its next phase of growth and global success for years to come.

In summary, I want to repeat that we believe the current market weakness in short-term and that we planned to continue to following our five year growth plan. I want to assure you that our team remains focused on long-term corporate strategy to expand our global footprint, broaden our product portfolio and grow our customer base. That means we would continue to invest in this search for strategic acquisitions and other growth opportunities. We would also keep our focus on growth to new business wins and target 4% to 6% organic growth or better in 2013 and beyond.

In addition to a great management team, our cash position and balance sheet offer us as an excellent opportunity to do that on a global basis.

At this point, I’d like to turn the call over to Chad for financial overview.

Chad Utrup

Thanks Merv.

As Merv did indicate, the first quarter of 2013 was rather uneventful from a market standpoint, on our fourth quarter earnings call in February, we indicated that we expected the first quarter Class 8 market to be up slightly from the fourth quarter and that we thought the Global Construction Market would be relatively flat to the fourth quarter. As it turns out, our estimates were fairly accurate although Class 8 production was down slightly versus the fourth quarter of last year. From an end-market perspective, our first quarter looked like similar to the fourth quarter of last year with the exception of our two acquisitions.

Looking at the first quarter of 2013, our revenues were 177.8 million, which is a decrease of $59.2 million or 25% from the first quarter of 2012. Our OEM truck revenues declined approximately $41.7 million or 34% versus the first quarter last year. We also saw a decline in our Global Construction Market revenues versus a year ago of approximately $16 million or 30%. Collectively, our other end markets including bus, ag, military and aftermarket declined from Q1 of last year nearly $7 million or 11%. These market declines were moderately offset by incremental acquisition based revenue of over $5 million which was also down slightly from our expected levels due to weaker market conditions.

On a sequential basis compared to the fourth quarter of 2012, our revenues increased approximately $4.5 million. This increase is primarily related to the incremental revenues from our acquisitions. Our OEM truck revenues declined modestly by $2 million on a sequential basis and we’re generally aligned with build level changes. And our construction revenues relatively flat. The moderate decline in truck revenues was offset by slight improvements in our aftermarket recreational and after end markets. Overall, again, Q4 to Q1 was fairly flat other than the incremental revenues from acquisitions.

Operating loss for the first quarter was $273,000 compared to a loss of $2.3 million in the fourth quarter, an improvement of approximately $2 million on an essentially flat market and revenue conditions. This improvement is a result of our focus on reducing cost and utilizing our variable cost structure and we’re pleased with our improvement when compared to the fourth quarter of last year.

Depreciation and amortization was $4.3 million and capital spending was approximately $4.5 million for the quarter. Our effective tax rate for the quarter was 18% and as you can see the rate differential to a more normalized rate is not indicative of a substantial impact from a dollar value perspective.

As we look towards the balance of the year, we may continue to see these fluctuations in our tax rate depending on how our end markets and earnings impact our foreign operations. As we do not record tax benefits or we have evaluation allowances in those regions.

Based on our current outlook for a gradual ramp in our end markets for the balance of the year, we currently expect a higher tax rate in the second quarter and a more normalized rate of say between 35% and 40% for the second half of the year based on our current outlook.

From a fully diluted EPS standpoint the quarter came in at a loss of $0.16. As of the end of this past quarter, we had a cash balance of approximately $65.3 million. This cash balance combined with our AVL revolver capacity means we have over a $100 million of liquidity available as we continue to look at strategic opportunities as Merv mentioned.

Looking at the full-year 2013, our estimates for North American Class 8 remains in the range of 250,000 to 260,000 units. And our expectation for our Global Construction Market remains flat to down 5% year-over-year. We continue to believe our key end markets will rebound gradually through the balance of the year.

In closing, we’d like to remind everyone that our end markets obviously due fluctuate because we have experience in these market fluctuations, we aligned our cost structure to be able to navigate through this swings that does not mean that our margins remain stable or flat through the peaks and valleys but that we have the ability to manage through these swings over the long haul.

We understand the swings are inevitable and some maybe deeper and some maybe longer than we would like but we continue to focus on adjusting our cost and targeting diversified growth to minimize the impact on a downside and maximize profit potential on the upsides.

Right now, we believe we are coming out of a low period for our key markets. We believe Class 8 has room for improvement and a Global Construction build rates would see upside through the balance of the year as well. Although our markets and margins are not currently where we would like them, we continue to stay the course through these swings and we’re very excited as we look towards the balance of 2013 and beyond.

With that Dave will open up the call for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And your first question comes from Ann Duignan at JPMorgan. Go ahead please.

Mike Shlisky - JPMorgan

Hi, there, Mike Shlisky, filling in for Ann. Good morning.

Chad Utrup

Hi, Mike.

Mike Shlisky - JPMorgan

Hey Merv, best of luck to you but I just want to ask you guys have any sort of update on maybe your search for a new CEO (inaudible) anything we can learn there?

Merv Dunn

Basically, we have three strong internal candidates and we have a few external candidates that are going through the interview process currently and looks like we’re going to have very strong field to choose from.

Mike Shlisky - JPMorgan

That’s great. That’s great to hear. And then moving on to your North American truck outlook, I mean you guys mentioned pick up in build rates in Q2 and going forward, but I do know you guys have a bit of reduced work force. So, I was wondering if you can really just share with us your plan for, how you are going to ramp production with fewer people to help you to do so?

Mervin Dunn

Well, part of our historical way we manage our company is when we go to a downturn, the first thing we do is to take out over time. That’s immediate. Second thing, we do is to take out temps, which is a little bit slower process and so when we start back up, the first thing we do you know when we see a ramp-up upcoming till we feel it out if it’s going to be a long-term or a longer term ramp up is we start with our over time. And then when we run a few weeks and we see that is not going to be just a few weeks up and drop back down again which are our market can do is that we start adding, bringing in temps and start the training process.

And then we slowly build up to where we level out the over time a little bit and run with temps and over time to lesser a degree on over time. And then when we start back down then we first time we do take out the over time back down like I discussed.

Chad Utrup

Yeah, I think to add to that Mike, Merv is exactly right. So what you are talking about if we are thinking of Class 8 just for example is, in the 250 to 260 range and we had 55,000 units in the first quarter. You are talking about maybe a 15% to 20% uptick from Q1 into run rate through the balance of the year.

So just to put it in perspective, if you got 10% temp and 10% over time, it doesn’t equate needing to double the size of the work force to meet the demand.

Mike Shlisky - JPMorgan

Got it. That makes sense. And then, I mean, finally, the CAG contract. It sounds like some of this is new projects having to work with before but I was wondering if you can give us, kind of view on just how much – how big that contract is, just we can sort of get our (military) as to what might be growth beyond just the market growth?

Merv Dunn

Well, we can do half of that for you. It is products that are new to the U.S. market for us. And overall new to our company in this particular product line but the technology is not new technology to us, its existing technology. And what its doing is strengthening the North America product portfolio as well as customer base or seats because I think, what to explain about our company is, we have been on seating we have been very concentrate in North America Class 8 market and so what – one of the things that we have done is focused very much on trying to expand that marketplace in North America to construction seats as well as ag and things like that. And this is our first really good nice contract in North America for construction for (inaudible) seats.

So then you know obviously our goal is to move into the rest of the world with Class 8 seats which we have done a really good job of into the Asian market including Japan and China.

Mike Shlisky - JPMorgan

Okay. Well, thank so much.

Operator

Thank you, Mike. Your next question comes from the line of David Leiker at Baird. Please go ahead.

David Leiker - Baird

Good morning, everyone.

Merv Dunn

Good morning, David.

Chad Utrup

Good morning, David.

David Leiker - Baird

Merv, I was wondering if you could give some insights in China what the truck and that construction sight hearing varying words, (inaudible) they are going to increase production in China, Volvo on the other hand and there is no sign recovery. Do you have any insights in the – what’s going on in the construction side. And then on the truck side where you are in launching your programs there?

Merv Dunn

Well, I just read the Komatsu statement right before, you guys came online. And that was kind of – we are not seeing that yet. So they are leading us a little bit faster than what we are seeing the turnaround, we are still seeing excess inventory has been burned off and

David Leiker – Baird

Yeah,

Merv Dunn

Thank Will for a little while. The one thing that I saw that was kind of interesting that I have not – that I just read yesterday was the – lessening of or the – I’m sorry the changing in some political stances in India which is opening up the mining which – so there is some growth that we are seeing that or we are hearing that’s going to start coming in mining where they are lessening up some rules in regulations to allow the mining to pick-up in India. So that side of the business, the mining – I hoping that is going to develop into more revenue dollars for us again on that side, which also would increase the bus market over there which helps our Vijay (sic) Vijayjyot Seating that we just talked about.

But as far as China in construction we are seeing something I’m not seeing at all – any signs of yet. So and I forgot last pat of your question.

David Leiker – Baird

An update on where you are on the truck side launching seats in the truck market in China? I think the one piece of business you have is pushed out a little bit, right?

Merv Dunn

Yes. And that is one thing I didn’t want to talk about a little bit. When we announced these programs and that sometime is reasonable we’re little hesitant about given that dollar number is sometimes they get layered into models like, it is a $60 million program, $15 million a quarter.

David Leiker – Baird

Right.

Merv Dunn

And it just does not happen that way. But what we are still seeing is a slowing of the Class 8 market over there. We still have not seen that pick back up to any kind of levels that would increase our build. And it is just still kind of pushed out a little bit on the business awards that we talked about in China. So we are still not seeing the -- guys, you need to do everything you can to pull this launch forward, its still being – they are still got the stiff arm type of thing about taking product right now.

David Leiker – Baird

Right. And then, just one last item here. Maybe Chad as you look at the military business with FMTV going end of life here in the second half of the year, when does that start to impact your number? And how much of it impact do you think that has?

Chad Utrup

Yeah. We are in our third consecutive quarter of military decline David. So, I think we are in the midst of that. Now, military still not big, it is $5.5 million and revenue for us in Q1. So it is not significant in the scheme of things, but we do see that continuing to taper-off through the balance of the year.

David Leiker – Baird

Okay. And then, lastly, Merv best wishes from me. I know we will stay in touch there. Okay.

Merv Dunn

Absolutely. Thanks David and thanks to all of you guys there that have shown so much support over the years.

David Leiker – Baird

Absolutely. You take care.

Merv Dunn

Yeah.

Operator

Thanks a lot. Next question comes from Robert Kosowsky at Sidoti. Go ahead please.

Rob Kosowsky - Sidoti

Hi. Good morning guys. How are you doing?

Chad Utrup

Hey, Rob. Good morning.

Rob Kosowsky - Sidoti

I was wondering, Chad, you have a idea what is the market outgrowth might be this year as a percent of sales? And may be kind of, is it going to be a little bit more aggressive into 2014 now that you may be get Photon orders coming though a little bit more so?

Chad Utrup

Yeah. I think there is two ways to look at that. Great question. There is two ways to look at that. One is I know some people on the call they look at it from a terms of percentage of one it is awarded and how much that value is worth. But what we really need to look at is when it actually gets into production. So when it actually becomes a financial impact.

So we are still targeting that 4% to 6% this year. Rob I would tell you it is probably going to be on the lower side of that. And exactly to your point as we get into later this year in some of those SOP dates come into play and really start to impact 2014, we would expect then to see a much higher number than the typical range that we give.

So we are still looking at that 4% to 6% range because we are targeting things and aftermarket growth. And we are targeting things in bus and India side of thing. So we are still targeting that level but when you have program like Photon, some of these larger ones that gets pushed out say 6 months or 9 months. That can certainly have an impact on that as a percentage of market out growth.

Rob Kosowsky - Sidoti

Okay. That’s helpful. And then I guess, as the quarter progress, how did you see, I guess monthly revenue, North America truck, did you see it step up with build rates and what happened on the construction side as well?

Chad Utrup

Honestly when we talked with everybody on the call two months ago, taking aside the monthly progression question. I mean, we basically put out there everybody with our truck would be relatively flat maybe up a little bit and we thought construction will be flat. And so i.e., the best way to read into that is, top-line is probably going to be flat. And that’s exactly what happens.

So our revenues throughout the period without having the exact numbers (inaudible) they track pretty well to the build rates. And our internal tracking does aside from some swings with market shares (inaudible) larger content for us.

It generally tracks with what you see in the build rates that come out and get published. And construction really no change, I mean, its just China has been way down, India has been down for us and North America has been down from where we expected say 6 months ago.

So it's been relatively flat through the period.

Rob Kosowsky - Sidoti

Okay. But would you expect to see construction step up in the second quarter based up on what CAG was saying earlier this week?

Chad Utrup

Our current expectation is that through the second quarter we will see a gradual ramp and then the last half of the year as we sit here today things are going to be pretty strong in terms of new build production for both truck and construction.

Not that major to speak of right now for short term but as we look through say the second half of the year, we are going to see it gradually building up in both those markets.

Rob Kosowsky - Sidoti

Okay. And then I guess, this one last question, I know, I appreciate the fact that you think that the market down to right now is transcend temporary and we are starting to see signs of life from some of your customers. But I’m just wondering if you needed to, where do you think you could bring breakeven down to on the company, if it was kind of a bad economic environment you needed to really turn the screws on cutting cost?

Chad Utrup

Well, I think the best way to answer that is, is in two parts. One is, let’s look at Q4 to Q1 without acquisitions, sales were flat and we improved the bottom-line $2 million. Some of that is FX and some of it's this and that but we improved to $2 million. And what Merv mentioned earlier we mentioned on the last call is we are already in the process of closing and consolidating our North Carolina facility. We expect $2 million to $3 million of savings from that.

So what you are really talking about is, is a little bit of overhead and some capacity reductions which obviously don’t happen overnight but they are already in process. So, there is several things that we can and are doing. And I think all you have to do is look at Q4 to Q1 to see the impact of that and look at what we are planning on already for the balance of this year.

Rob Kosowsky - Sidoti

Okay. Thank you very much.

Chad Utrup

Thanks Rob.

Operator

Thank you very much. There are no further questions for you gentlemen. So I would like to turn the call back over to Mr. Merv Dunn for closing remarks.

Merv Dunn

Come on guys you have all really let us off easy today. Thank you. Either we are getting clear about describing our process or something. Anyway really, really want to thank all of you for taking your time this morning to call in. And thanks for the ride and appreciate all of the plan we have had with everything. So Chad will be here to carry things on. Take it over Chad.

Chad Utrup

Thanks guys. I appreciate it. Obviously if you have questions, John Hyre is the right guy to get hold off, be happy to talk for anything you need. Thank you for joining today.

Merv Dunn

Bye.

Operator

Thank you both gentlemen. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a very good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!