Commercial Vehicle Group, Inc. (CVGI) CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Commercial Vehicle (CVGI)

Commercial Vehicle Group, Inc. (NASDAQ:CVGI)

Q2 2013 Earnings Call

July 23, 2013 10:00 AM ET

Executives

Chad Utrup - EVP, CFO and Secretary

Richard Lavin - President and CEO

Analysts

David Leiker - Robert W. Baird & Co.

Robert Kosowsky - Sidoti & Company, LLC

Mike Shlisky - JP Morgan

Barry Haimes - Sage Asset Management

Operator

Good day, ladies and gentlemen. Welcome to the Second Quarter 2013 Commercial Vehicle Group Inc. Earnings Conference Call. My name is Tahitia. I’ll be your operator today. At this time we are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, the conference is being recorded for replay purposes.

Now, I would like to turn the conference over to your host for today Mr. Chad Utrup, please proceed.

Chad Utrup

Thank you Tahitia and thanks everybody for joining us on the call today. Before we begin today’s call I’ll read through some Safe Harbor language. Rich will then give a brief company update and I will take you through our results for the second quarter of 2013. And at the end we will take time to answer 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 savings initiatives, tax positions and estimates, financial covenant compliance and liquidity, new product initiatives, the economic conditions and the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies and other risks detailed in our SEC filings.

And with that I’ll turn the call over to Rich.

Richard Lavin

Thanks Chad and thanks to everybody who joined us online today. I am happy to be able to speak with you today and I am looking forward to getting to know many of you better as we talk about our results and our plans going forward. Even though I’ve been at CVG for two months I would like to take some time today to speak about the past quarter and then talk to you about my parts and I will look for our key end markets and what I believe to be significant opportunities as we forecast the next three years for CVG.

Our second quarter really held no surprises from an end market perspective. The North American Class 8 production levels were approximately 67,000 units and our outlook for the full year is approximately 250,000 to 255,000; meaning we don’t expect much additional uptake from the Q2 run rate over the last two quarters of the year. We did see approximately 12000 additional units in Q2 over the run rates of the prior two quarters which is reflected in our top line sales.

Our global construction market revenue in Q2 also saw an increase of approximately 8.5% relative to the first quarter of this year and our bus, military aftermarket in OEM services and other markets collectively also increased by about 7% from the first quarter this year. Overall these end market increases contributed to a 12% revenue increase on a sequential basis over the first quarter.

Our expectation of a strong construction recovery in the second half of this year remains the largest at risk end market in our view. Although we did see an uptick in Q2 over Q1, the prevailing concerns over inventory overhang and specifically the immediate construction market recovery in China is a major focus for us as we look at the back half of 2013 and into 2014. We believe the overhang situation in China had improved particularly with the MNC manufacturers and we see more normal production rates going forward in China.

Our current expectation with the global construction market is that the second half of this year may see a 10% uptake over the run rate of the past quarter with heavier (weighting) towards the end of the year.

We continue to remain in close contact with our customer base, and while the rebound seems to be longer weighted than originally anticipated. We do believe the demand is on the rise as well I believe that the construction industry presents the single largest growth opportunity for CVG over the next several years.

As you may know my pre-CVG crew is in the global construction equipment industry and I have spent a good part of my career living and working in Asia. As we work our growth plans going forward, we will focus on the construction and equipment industry globally and with a keen focus on China and the rest of Asia. The company has established a solid base of operations in China and I expect to see increasing demand for products across Asia as the build out of infrastructure and transportation in that part of the world continues.

Since I have been on board, over the past eight weeks, I have visited a number of our facilities and have had a great introduction to our products, our processes and our people. I have gained a very positive impression of the manufacturing expertise in our facilities and the emphasis is placed on safety, quality and employee involvement. I have also gained an appreciation for the customer relationships within CVG. Having been on the OEM side for many years with Caterpillar, I can tell you that CVG is a well respected company with a strong reputation for safety, cost, quality and delivery.

As many of you know CVG has been built in part through acquisitions over the years. And while the M&A market is not quite as robust as it has been in the past, I believe that M&A has evolved in our growth and diversification objectives going forward. We will continue to be in the market and we will be opportunistic as we assess the market. However, I want to emphasize that CVG is an excellent position to realize significant expansion through organic growth.

With that in mind, we will stay sharply focused on developing product programs that will help us more effectively create value for our customers, build new customer relationships and invest to meet the needs of our growing customer base. Our goal is to continue to reinforce a strong value differentiation in our products, our manufacturing base and our sales and service efforts.

I would like to offer a couple of examples. During the past quarter our Bostrom seating brand introduced to new line of truck mattresses that feature industry leading Serta technology. Serta is the number one mattress manufacturer in the United States. Bostrom and Serta teams work together to create a unique product offering to combine the strength of two premier companies known for comfort and quality.

In June, we were honored with the Hino Motors USA’s Excellence In Value Improvement Award. Hino is a well recognized high quality brand that CVG has provided to Class 6 and 7 truck seats to, since 2007. This award recognized CVG’s proactive and ongoing collaboration with Hino to increase product value and address cost challenges. Finally during the quarter, our electrical systems facility in Edgewood, Iowa achieved platinum status under Caterpillars Supplier Quality Excellence Process Program. This is the second year in a row the Edgewood facility has received this honor.

To earn the Platinum designation, the team had to deliver a near flawless execution in customer satisfaction. We salute CVG’s Edgewood employees for earning Caterpillar's highest Supplier Quality Excellence Process rating twice in a row.

These examples of new product introductions, manufacturing excellence in customer collaboration are prime examples of what we must continue to reinforce and expand upon. It is my goal to continue with the progress CVG has made over the year and push us towards industry leadership in areas such as manufacturing excellence, product offerings, quality and shareholder returns.

In summary, our end markets remain challenged and as a result our operating margins remained under pressure. As you know CVG has a highly variable cost structure which allows us to fluctuate up and down with the demand of our end markets. That said we remain focused on the improvement of that margin pressure even during weaker markets such as we are experiencing today.

In response to this dynamic we are focused on several key areas going forward including short and long term growth objectives, primarily organic opportunities. In other words leveraging the assets in products we have in place today.

We are also going to be focusing in M&A which may arise as we continue to focus on global expansion and diversification. Second, ongoing evaluation of our manufacturing footprint and efficient use of our assets, our objective to be clear is to rationalize our global footprint to enable more efficient utilization at current production run rates while maintaining our ability to respond to peak run rates. We fully expect global construction equipment in truck markets to recover.

Number three, new product development, introduction and product cost. We’ve got to be focused on introducing products that add value to our customers going forward, meaning that features and costs have got to be in line with customer expectations.

Number four, capitalizing on the strong opportunities which I believe exist in the global construction end markets and along those lines. Number five, expanding market share in China and India. Although Asian markets are not as robust as it were several years ago. CVG’s opportunities for expansion there with existing and new customers are attractive.

Enclosing I would like to reiterate how excited I am to be on board with CVG and how optimistic I am for the opportunity in front of us over the next several years. I will look forward to continuing to build o the foundation that were set before my arrival and I will look forward to meeting with many of you as we move ahead with our plans.

At this point I would like to turn it over to Chad for a financial review.

Chad Utrup

Thanks Rich. And as Rich indicated the second quarter of 2013 really held no surprises from a market standpoint. On our last earnings call we indicated that we expected the Class 8 markets to be up sequentially from the first quarter and that we thought the global construction market we are beginning to see an uptake into the second quarter.

Looking after second quarter 2013, our revenues were a $198.9 million which is a decrease of $43.8 million or 18% from the second quarter of 2012. Our OEM truck revenues declined approximately $30 million versus the second quarter of last year. We also saw a decline in our global construction market revenues versus the second quarter of last year of approximately $18 million or 31%.

Our military markets also saw a decline of approximately $3.5 million or 45% from the same period last year. These market declines in OEM truck construction and military were offset by increases from other end markets including bus, ag and after market which collectively increase nearly $8 million or 15% from the second quarter of last year.

On a sequential basis compared to the first quarter of 2013, our revenues increased approximately $21.2 million or 12%. Our OEM truck revenues increased by $13.5 million or 17%. Our global construction revenues increased from the first quarter of this year by approximately $3 million or 8.5% as Rich mentioned.

All other end markets collectively also increased by approximately$4.5 million or 7% it is primarily related to a decline in our military orders offset by increases in our aftermarket, bus and other markets.

Operating income for the second quarter was $2.1 million compared to a loss of 273,000 in the first quarter of this year, and improvement of approximately $2.4 million on an increase in revenues of $21.1 million. As mentioned in the press release we did incur certain expenses this quarter related to the change in leadership of approximately $2.5 million as well as approximately $1.1 million of foreign exchange expense during the quarter of which approximately 600,000 was related in the market of our future contracts. We called these items out because we believe it is important to make sure you understand certain one-time or unique costs during the period as we look at sequential and year-over-year performance.

Excluding these items for the quarter are operating income improved by approximately

$6 million on a revenue increase of $21.1 million or 28% on a sequential basis from the first quarter. As you now we continue to focus on flexing our costs up and down to achieve our targeted 20% to 25% contribution margin and we are pleased to have exceeded our targets this past quarter comparing to the first quarter of this year.

Depreciation and amortization was approximately $4.2 million and capital spending was approximately $3.3 million for the quarter. Our effective tax rate for the quarter was 46.4%, as we look to the balance of this year, we may continue to see fluctuations in our tax rate depending on how our markets and earnings impact our domestic operations and our foreign operations where we do not record tax benefits due to the need for evaluation allowances. Based on our outlook, we currently expect tax rates for the second half of the year to be in the 45% range comparable to that this past quarter.

Our fully diluted standpoint at the quarter came in at a loss of $0.06. As of the end of this past quarter we had a cash balance of approximately 64.9 million. This cash balance combined with our ABL revolver capacity means we have over a $100 million of liquidity available and puts us in a very good position as we continue to focus on long term initiatives and growth opportunities. Our working capital initiatives specifically around inventory management and improvement has proven successful to date this year and we will continue to remain focused on maintaining flexibility in our capital structure.

Looking at the full year 2013, our estimates for North American Class 8 units is the range of 250,000 to 255,000 units as Rich mentioned. As Rich also indicated our current expectations for our global construction market is that the second half of this year may see a 10% uptake and above the run rate from this past quarter, with heavier weighting towards the end of the year. Aside from market and revenue expectations, we continue to focus on cost opportunities and our targeted contribution margin levels. We are heavily focused on further improvement on our operating margins as we progress to the balance of this year and in 2014.

And with that, we will open up the call to any questions.

Question-And-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions) Your first question comes from the line of David Leiker from Baird. Please proceed.

David Leiker - Robert W. Baird & Co.

Good morning everyone. A couple of things. I understand you talked about continuing to look at the business and evaluating where the company is. If any of you could share some thoughts of within the business model, which end markets do you think CVG has got the strongest competitor position and where there’s places that you may need to bolster it someway?

Richard Lavin

Sure. I think if you look across the company, you’ve got to be impressed with our competitive position with truck, especially North American Truck. It’s strength for the company right now. It’s a very important market for us. And there is one that we are going to continue to be focused on. I would say, as I mentioned in my remarks that the single greatest opportunity we have for growth going forward is in global construction equipments, I think we are doing a very good job working with some of the multinational players in their home countries but also outside of their home countries especially in China and Asia.

As we look at the opportunities for improved share by customer, I think we’ve got real upside. So you know, truck is a strong point. I think construction equipment is a real bright spot for us and opportunity we are going to be intensely focused on going forward.

David Leiker - Robert W. Baird & Co.

Great, and then on the cost structure side, how much of this you think, I guess, what kind of scale do you think are the actions that need to be there, is it more, trimming and pruning at couple of places or is there something more dramatic?

Richard Lavin

Well, we are really at the outset of that analysis or I’ve a better sense of anything probably a month or so down the road. I don’t think we are looking at dramatic steps. You characterize it pruning around the edges. I suppose it is closer to that than the other end of the spectrum. But I will have a better sense of that probably 4, 6 weeks down the road.

David Leiker - Robert W. Baird & Co.

And then the last item I think I know the answer but there has been this target out there of doubling the size of the company in 2016 through organic growth and through acquisitions. Any thoughts on that at this stage?

Richard Lavin

Yeah David, I’m digging into that. I think a couple of comments, one is it; I think the opportunity for organic growth over the next couple of years is probably greater than we might have assumed at the time that we set that target. So whatever the target is, I think, maybe 100% of that will come from organic growth than we anticipated, especially in the construction side. But again, I’m not so sure, down the road, I think we will probably have a better sense as to the specific target that we set in 2016. I do know that we are also going to be much more focused on ensuring we are driving profitable growth.

So whatever the target is, there is going to be very sharp focus on ensuring we are driving industry leading profitability as well.

David Leiker - Robert W. Baird & Co.

I realize that it is a lot early for that, but I just wanted an initial thought from you.

Operator

Your next question comes from the line of Robert Kosowsky from Sidoti. Please proceed.

Robert Kosowsky - Sidoti & Company, LLC

Hi good morning Rich and John, how are you doing? Rich, thanks for the overview you gave but kind of more specifically related to this year, and the next twelve-month outlook. How does some of the market outgrowth opportunities look I know we have been waiting or Foton to get launched and just kind of anything else that you could see layering in over the next few quarters that could be meaningful or at least just additive to the sequential growth profile?

Richard Lavin

I know that a large part of our projected growth has been in Asia, especially in China. I think there are a couple of things happening in China that makes me optimistic. We will see a more favorable growth trajectory there in the next 12 to 18 months. One is that, there has been some credit easing. Another is, there has been some discussion about government stimulus to ensure that they are at least 7.5% GDP growth rate for the full year 2013. And 7.5% seems to be the standard for the GDP growth going forward. So, you the combination of credit easing with maybe some government stimulus in China makes me optimistic that we are going to see more favorable growth trend in China.

Europe is relatively flat I think everybody is aware of the overall economic situation in Europe. We don’t have great expectations for improved markets in Europe. North America, with perhaps a couple of policy moves by the Obama administration could be much more attractive. But we are optimistic about North American growth as well.

Robert Kosowsky - Sidoti & Company, LLC

Also regarding the (multiple speakers)

Richard Lavin

Rob, I’m sorry, just wanted to say. I wanted to mention the after market as well. Even as we might see lower growth rates in certain markets, I think we are going to continuously improve after market opportunity is as people turn to maintaining and updating the product as opposed to replacing with new.

Operator

(Operator Instructions) Your next question comes from the line of Ann Duignan from JP Morgan. Please proceed.


Mike Shlisky - JP Morgan

Hey it is Mike Shlisky filling in for Ann. Quickly on the DeKalb closure. Please give us an update on how that’s going and what kind of cities do you expect during 2013 maybe on annualized basis going forward. I guess the same question for Statesville any update there?

Chad Utrup

Thanks Mike, good question. What we had talked about in the past was combine those two consolidation opportunities were going to be between 3 million to 4 million of annualized savings. As you know, the Statesville closure just happened in this past quarter in the month of May. DeKalb is not fully there yet. So it’s coming in the back half of the year but when completed, we expect 3 million to 4 million of annualized savings for those two combined.

Mike Shlisky - JP Morgan

Just secondly, the Class 8 truck industry had a pretty big ramp in production during Q2 versus Q1. Can you just take us through how you guys were able to react during the quarter? Were you paying overtime, were you running more shifts? Just a little bit about how you guys were able to adjust to the higher industry production levels during the quarter?

Chad Utrup

There was indeed a ramp up, but I think it’s all relative to the starting point Mike. I think with the Q1 being at 55,000 units, that’s clearly in our view below the ongoing demand and Q2 levels seem to be in the right range of what we would classify as a normal market. So, although there was a reasonable uptake from Q1 to Q2, I think it’s relative to the starting point of being fairly depressed in Q1. So, we didn’t have a lot of significant costs or uptake or ramp up costs in the second quarter, although the percentage was up. That was fairly gradual uptake as you look at Q1 into the three months of the second quarter. So, nothing significant really to call out in terms of overtime or ramp up costs from our perspective.

Mike Shlisky - JP Morgan

One quick final one here. Based on what you guys, what your contrary was during the opening comments there, it looks like you got to scale back your Class 8 forecast just a little bit, it looks like we are in the truck OEMs to that as well (inaudible) you guys are just a little bit more towards the lower end of your prior time tenure?

Chad Utrup

Indeed, that’s right Mike. We were previously at 250 to 260 for the year. So we trimmed that back to 250 to 255. Q2 was relatively close to what we expected. And what we did is just trim back the second half of the year by 5000 units or so. So, not significant, but you are correct, it’s closer to our previous lower end of the range.

Mike Shlisky - JP Morgan

What caused that minor scale back there? Was it just what we saw from orders in June or is there any kind of other tonnage you are hearing from the OEMs out there?

Chad Utrup

No, I wouldn’t classify our change as a significant one. It’s really a combined effort of what we see in orders and our discussions and conversations of how we feel about the customer’s planning for the back half of the year. So, there are a lot of inputs that go into that. I don’t think our change is significant from where previously were at.

Operator

Your next question comes from the line of Barry Haimes from Sage. Please proceed.

Barry Haimes - Sage Asset Management

Just following up on the last question, I wonder if you could talk a little bit about the psychology of the customers on the truck side from a vantage point of, if we look at truck and freight has kind of been soft, pricing has been also below as expected around the year and (NYSE:HOS) has come and gone and there doesn’t seem to be any great impact. So, with (HOS), the big question mark, you know, sort of come and gone, what your hearings from the customer base?

Chad Utrup

Well I think all of those inputs go into our outlook for the back half of the year, as the previous question was, what caused us to soften a little bit. Again although, it wasn’t a significant drop, I mean, a lot of those things are inputs into our decisions and our outlook for the balance of the year. Of course the biggest drivers what we are hearing from the customers in terms of their production levels and where they are going to target their market share but without getting into specific customer matters, I mean, those are all the things, the softening you mentioned in freight, and a lot of those inputs is really what drives our higher outlook for the balance of the year.

I think as we look at 2014, there has been a lot of optimism out there in terms of units. We will probably have a better sense of where our outlook for 2014 is at the time of our next earnings call, but I think a lot of those things that you have mentioned will certainly play into that.

Barry Haimes - Sage Asset Management

Just one quick follow up, if I could. If you look at the big four truck OEMs, and if you look at your market shares with each of them compared with their market shares, are there any of those four we should think about where your market share is greater than theirs or by far more or less or are you roughly spread across the floor comparable to their market shares?

Chad Utrup

Well, our products are fairly well spread across the top four. Obviously, you know Packard has been one of our top customers along with Daimler, Volvo, Mac and Navistar. So, the big thing that we would typically call out from a market share or content perspective is probably the Volvo Mac side of things because we do our work Mac and Volvo on the structural cab itself, which just in and out of itself is a higher content item. So that particular notion aside, we are fairly well spread across each of the top four, from content and share perspective from our products.

Operator

Ladies and gentlemen we have no more questions in the queue at this time.

Richard Lavin

No more questions?

Operator

No sir, no more questions.

Richard Lavin

Okay, everybody thanks for joining the call. I hope you have been given a good sense of where we came out in the second quarter and some of our plans going forward. And we look forward to being back at the end of the third quarter. Thanks very much.

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