Rich Lavin - Chief Executive Officer
Tim Trenary - Chief Financial Officer
Commercial Vehicle Group (CVGI) The 2013 Bank of America Merrill Lynch Leveraged Finance Conference Call December 4, 2013 8:50 AM ET
With us we have Commercial Vehicle Group on the leading manufacturers of Class-8 in heavy truck parts, interesting story and a pretty interesting time for the truck cycle. With us today we have Rich Lavin, the CEO of the company as well as Tim Trenary, the CFO and John Hyre, the Director of Investor Relations of the management team which were grateful for them sharing this much time, is going to give us a 15 or so maybe minute presentation and then we’re going to try to open up for Q&A for another 10 or so minutes.
Without further ado I’ll kick it over to CVG.
Thank you good morning. I’m Rich Lavin, I am the CEO of Commercial Vehicle Group. I have been in the company for just over six months. So still a relative new comer before, I joined CVG on June 1st, as with Caterpillar for 29 years, my last position with Caterpillar was Group President with responsibility for global construction equipment and development and deployment strategies in the emerging markets.
Tim and I are pleased to be here with you today to talk about the Commercial Vehicle Group. Tim is also a relative new comer, he just completed two months. So we're bringing a little bit of new perspective to the opportunities that we see with Commercial Vehicle Group.
We got a couple of slides, we plan to leave plenty of time for Q&A. But just to give you an overview of the company, just as we look at our product mix, seating, harnesses, panel assemblies, the breakup in percentage of sales is shown below. I think the point of charge that fundamentally CVG is a product organization, a product driven organization. We need to be focused on developing and delivering products that will create value for customers globally.
I think for those of you who know Commercial Vehicle Group, you know that we have been a North American centric company for a number of years, but we've begun to develop our global manufacturing and distribution network.
And this is a look at our footprint, we have manufacturing facilities located in each of the tri spheres, the Americas, Europe, Asia Pacific. We think this gives us a significant strategic advantage in growing out our business in those parts of the world, where we see the greatest opportunity.
I have got a slide later in the presentation that compares opportunity across different segments of our business North America versus China. The same comparison that we made North America versus India, North America versus other parts of Asia, other parts of Eastern Europe. But the point is we've established I think a good manufacturing footprint, a real strategic advantage for us. At the same time, we're taking a hard look at our North American footprint to determine if there are rationalization opportunities to create greater efficiency in our North American manufacturing operations.
Just a quick update, as I mentioned largely new management team from the CEO, and CFO to the managed director of Asia Pacific I have got an organization chart in a minute which I will use to introduce my leadership team, but I think we have got an exceptional group of leaders who will help us drive the profitable growth that we are committed to over the next several years.
Early in my tenure, early in Tim’s tenure we step back and did a deep dive of the business to make sure that we understood areas of operation that we had to address in order to I would say straight to the foundation of the company so that we could build on that going forward. I reorganized the leadership team, we moved from really as I mentioned kind of a North American center of product line focused organization to one where we now have division presidents that are challenged with accountable for developing their global business.
We also did some work to identify key initiatives and again would help us address areas of the foundation of the company that had to be addressed in order to ensure that we were strong moving forward. And in that regard we are really moving from evaluation to study period to execution and for each of these initiatives we identified very distinct, very explicit value propositions that we are committed to delivering over the course of the next several years.
This is a look at leadership team. I have highlighted in three global divisions, presidents, Kevin Frailey with responsibility for Global Construction Ag & Military, Pat Miller with responsibility for Global Truck & Bus and Timo Haatanen with responsibility for Global Aftermarket & Structures. Geoff Perich shown below I brought Geoff from Caterpillar. He had a 25 plus year firm with cat in product development manufacturing and marketing. He is heading up our China really our Asia Pacific operations. He has been with us for about two months and the service side of my organization is shown on the right hand side of the chart. The point of this chart was that we are globally focused and the key segments of the business are being lead by I would say seasoned professionals, who understand our business, understand our customers business and their needs and beginning to gain on depreciation for what it takes to build out a global business.
Just a quick look at some of the opportunities and supporting initiatives that we have driven over the past over months to sure the areas of business, our North American truck is going to continue to be a very important part of our business. So we want to step back and understand what we needed to do from a product and also service standpoint to maintain our position, our stock position in that market.
Construction and Ag represents an outstanding growth opportunity for us globally. If you look at the percentage of our revenue represented by construction and Ag is slow. But Kevin Frailey has got a good line of strike to the product strategies or service strategies that will help us build that business out on a global basis.
First, comment about China. I have got to turn a minute and again compare the opportunity in North America and China across each of our key segments that is the critical growth market for us and we have got the right guys in place Geoff Perich to help there.
And finally on product, new product development and designed to value. As a company that is fundamentally a product oriented company, we have got to understand from the customer back what it take to create products that need value expectation of the customers on a global basis going forward.
This is a chart that compares opportunity in construction, Ag and truck North American versus China, you can see the figures for 2014 in construction which I think are good example of comparison. In ‘14 about even 81,000 units will be built in construction in North America and about 365,000 in China, now all of that is not an addressable market for us.
But even if you see that one half of that is addressable by CVG, in other words this comprise with customers that appreciate the value preposition in hearing of our products. It’s more than 2x opportunity versus North America, you look at agriculture the same type of comparison, you look your truck the same type of comparison.
We've made, I would say steady gains in China over the past couple of years. But we are really committed to accelerating our investment in our growth in that part of the world. We think we can grow profitably in China going forward as a part of our overall and profitable growth commitment.
So in summary, I think we have got really an exceptional leadership team, I think we’re now focused on growing our business globally. We understand that we've got to be developing products, the pre-differentiation in value for our customers going forward and we've got the organization in place to drive that in the coming years.
So with that I’ll turn it over to Tim Trenary our CFO, look forward to taking your questions in a couple of minutes.
Good morning and thank you for joining us today. I will in just my brief comments this morning, share with you some of my initial observations, with respect to CVG’s financial affairs and more importantly I think the opportunities that have financially going forward. Before I do that now I wanted to just take a look back briefly and where we've been.
On the chart here, sales represented by the bars and super imposed on those bars, operating income margins for this past seven quarters. As you may know the company’s sales approximately, 50% of those sales are derived directly from North American heavy truck segments.
Another 20% is derived from the construction equipment segments. So 70% of the company’s sales are derived in those two segments and substantially all of those right now in North America. So as those end markets go so goes in that respect our top line. And as you may know over the last four quarters or so those two segments more so the heavy truck segment than the construction equipment segment have not been as robust as they have been in the past. So as a consequence that sort of behavior or result is reflected in our financial results.
I want to say however that with respect to the second and third quarters of 2013 and the operating income margin in those two quarters. In the second quarter, a burden of about $2.5 million associated with senior leadership changes in the company. And in the third quarter, three special items one of which was in charges associated with some consulting activities that was $2.8 million. We incurred a $2.7 million impairment charge in the third quarter and almost $2 million or $1.8 million in charges associated with the reduction in force of the company, which I'll come back to in a moment. So, if one were to reflect these operating income margins before giving effect to of those special items, they would be improved up around 2% or 3%, but clearly not that good enough.
Now, as I said or as Rich indicated I've been with the company for a couple of months. And during this period of time my preliminary observations with respect to CVG and the opportunities that the company has really been by and large confirmed. More specifically, I believe the company has a very real opportunity to enhance our margins, starting with the gross profit margin, EBITDA margin, operating income margin to grow the top-line organically and then finally to some extent to diminish the impact of cyclicality especially heavy truck market in North America on the company’s financial affairs.
First of all with respect to margins, there is really three primary areas of focus here for the company right now. The first of which is assessing the company’s manufacturing capacity and utilization thereof. We are in the final sort of stages of evaluating that and I frankly expect in the not too distant future here that there will be some action that come out of that that will affect on manufacturing footprint.
Secondly is operational excellence, a term that broadly describes the use of lean manufacturing techniques and the manufacturing facilities. We believe the company has an opportunity to improve a little bit in this area, as a consequence of that we have a program that is almost complete to drive operational excellence into our manufacturing facilities, that program will be launched very shortly after the first of the year.
The third area of focus is with respect to our costs and especially with respect to our SG&A costs which includes research and development and engineering et cetera. And I am not going to characterize my comments with respect to SG&A as reducing the SG&A expenses but rather as addressing those expenses. And what I would like to think about in this case is in many instances a repurposing of certain elements of the company’s selling, general and administrative expense away from activities that aren’t as value accretive as they might be to areas of spend that are more value accretive. So by a way of example I mentioned that the third quarter is burden with almost $2 million in charges associated with a reduction in force. That reduction in force was an assessment of the company’s spans and layers and our headcount and resulted in reduction in our salaried workforce by about $4 million annualized. I fully expect that most of that savings will be reinvested back in the business to enhance our research and development, product innovation, enhance our product line management structure that we’re in the process of building, enhance our sales organization and more generally enhance our ability to go to market to see some of the opportunities that Rich just described to you.
Now once we have focused, or as we are focusing on this cost structure, the next step will be to leverage that cost structure to create value and to do so through growing the top line organically and in part, and doing that to diminish the cyclicality.
So, as we have already indicated, the organization of the company has been changed. We are now organized around global end markets, truck, bus, construction, agriculture, military aftermarket; a global organization across those end markets instead of a regional sort of prior organization.
So, the ability to drive diversification geographically, across the various end markets and amongst the customer base and the product portfolio I believe is greatly enhanced with this global end market strategy. As a consequence of the ability to diversify that top line with this organization structure, as you can appreciate, that diversification I believe will diminish the historical impact that the North American industry and more specifically the heavy truck industry has had on the company’s financial affairs. But more specifically, as we drive geographic diversification into for example China and India and as we drive end market diversification a little bit more into construction and agriculture and away from truck, I believe the cyclicality will be diminished.
As you’d appreciate, we’re going to be deploying I believe a reasonable amount of incremental capital to accomplish these initiatives. First of all capital required to assess and drive the improvement that I think is going to come from this capacity utilization analysis and therefore the manufacturing footprint. We’ll be deploying capital within our facilities, equipment for new business, equipment for productivity improvements coming out of the operational efficiency program, and then finally as Rich indicated that our hardware product based organizations that we intend to deploy a reasonable amount of capital for product innovation.
Our capital structure and liquidity is well suited to allow us to accomplish these objectives. We have $250 million in notes that are not due until 2019 and a recently renewed ABL, $40 million commitment renewed last month that runs until November of 2018. So a covenant like capital structure, if you will. And then to the right liquidity of $75 million of cash under balance sheet and then availability under this amended ABL of about $30 million, so about a $100 million of liquidity.
So taken together, the covenant like capital structure and this nice liquidity position I think will afford the company the flexibility it needs to (inaudible) or execute on the initiatives that we've just described.
I wonder if you would want to take-away and I really do think it’s an important take-away. I think you will take-away from this conference, this presentation today that there is a new management team and that the management team is driving a very frankly large amount of change in the organization, the way we go to market, the way we organize, the way we look at our manufacturing capacity, operational excellence et cetera. And so, there is so much change, this is sort of in the nature of a journey. That’s the way I look at it.
And as we embark on this journey, I believe as I said at the outset, that there is very real financial opportunity for the company, but it will take a little bit of time to develop and come over the next quarters. So, stay tuned; more to come; and again, thanks so much for joining us today.
Great. Thank you very much. We have about 12 minutes for our Q&A and before I dive in with my questions. Do we have some questions from the audience? Okay. So, we can keep it interactive, but I'll keep it up for first few.
Bigger picture in the truck industry, when I started following sector, 250,000 Class 8 vehicles were like okay number; you're hoping for 300 and above. But it seems like the industry is having more difficulty as the 250 number hitting their margin target. What are the things that you put in place since you've been (inaudible) a short amount of time that could help you improve profitability, if we stay in 250 range with Class 8 North America?
Yeah. We're -- can you hear me okay? We haven't finalized our forecast for 2014. So, we're hoping for more than 250 in 2014 as well.
But I think some of the steps we've taken in some of the steps that we have taken or intending to make is a more profitable even at 250 and below. Tim mentioned one meaning with our manufacturing footprint. We think we have opportunity to reduce our manufacturing footprint to rationalize it and drive higher efficiency, better cost performance on the manufacturing and the business. At the same time, we’re really focused on the R&D to design into the business.
We think there are great opportunities to design to value which means that we design our products not only to meet customer expectations but also to take out cost that may have been built up to generations of design, focused not on both performance and cost but just on performance.
The (inaudible) didn’t really address I think that an organization that become a little bit heavy. We’re going to continue to look at organization to ensure that we’ve got the proper span of leadership now to ensure that our costs are inline but also ensure that our leaders have the most challenging opportunities they can have in the organization.
(inaudible) to focus, if you look at the headline, it keeps in coming out. But maybe you can broadly discuss your exposure to perhaps 5 to 7 maybe talk a bit about is it broken down by military, agriculture, construction, the specialty end markets that we kind of been thinking about (inaudible) business?
Yeah. And we are heavily a Class 8 oriented organization or trying to develop Class 5 to Class 7 opportunities as well. I think the more important segments for us frankly are construction and ag. Our construction represents a healthy percentage of our total sales, but if you look at our share of total construction opportunity, total ag opportunity, that’s where significant opportunities lie for us. And so Kevin Frailey who’s heading up Global Construction, Ag & Military is really going to be focused on that aspect of business. And as a product organization, we’ve really been driving I would say truck oriented product that we try to find application for in 7. Kevin is really going to be driving an organization that develops products for construction or as, and not just in North America but on a global basis.
As far as military is concerned, it’s a good segment for us, but everybody is aware what’s going on with military spending generally, so there will be reduced opportunity in military going forward.
Is there question from the audience? You talked about the need to build the company geographically, you’ve talked about you need cut cost obvious areas, you’ve also just made slight reference to product. And I wanted to ask you as two new guys coming to the organization, looking at it; what do you think about the product portfolio? What do you need to do potentially to expand it, what about quality to have a couple of caterpillar, can you -- just asking the product comes true and it stay top notch or is there stuff there you need to do to enhance?
Yeah. Good question. Well, first of all, the thing that impressed me is (inaudible) my experience with CVG (inaudible) As I mentioned in response -- with the global construction, I think we’re a good supplier of CAT. And so my appreciation for the quality of the company really excited with the opportunity. Having said that, I think our existing product line needs some refreshing. And so we are taking a hard look at our designs in [fleet] as an example.
But not just the design (inaudible) for North American market; I think we want to create an appreciation in the part of our global division presidents that they need to be designing products to meet different product propositions in different parts of the world. In caterpillar for example, one of the things in China was we need to have not just a world-class product availability for world-class customers, if we’re going to be competitive for serious markets in that part of the world, we have that different tiers and products available for different customer across the broad value proposition spectrum.
So that I think really defines the product development challenge. I think the scope of our product line right now will support the sort of profitable growth we want to drive. Real challenge for us will be to refresh and change those designs to ensure that we’re meeting, as I described it, a broad range of value prepositions in the emerging markets but also in the U.S. and Europe.
What's been happening relative to your market share in recent years; has it been stable, one way or another?
Our largest business which is truck and bus, our market share has been relatively stable. As you know we have a strong position in North American truck specially. It’s become a very, very competitive market. So, there have been puts and takes certainly on specific deals. But I would say that our share in that business has been holding up.
The opportunity for us to grow share, as I mentioned before, is really construction and ag. And that’s again with North America. Again construction represents a healthy percentage of our total revenues, but we think we've got real opportunity to grow share in construction and to grow aggressively from a fairly modest revenue base right now and as it does.
The balance sheet question and that with the industry has been a little bit tough, looking at slide 15 of previous slide deck, as of 9/30th $75 million of cash and you have an ABL commitment of 40 availability there, how do you feel of the next 12 months here liquidity looks? It’s hard for us to model our cash flows because as the EBITDA closer breakeven for the recent quarter, but we know that’s going to go up. So, just sense of -- since you’ve been at the company, how do you feel like your liquidity looks the next few…
So, I think that the liquidity -- as we sit today, the $75 million of cash and the [$3 million] availability under the ABL; that's a nice liquidity position. The question I think you're trying to address is over the course of this change or this transformation that Rich and I are describing, what might that liquidity should look like?
As Rich indicated, we're not done with our business plan yet for 2014. I can tell you that preliminarily setting aside restructuring actions associated with the manufacturing capacity utilization footprint, I don't think that that liquidity position will be [diminished] all that much okay. So said another way, I think even at these volumes, we can get the company pretty close to cash flow neutral having to invest…
From an operations point of view, yes.
And then some of the initiatives restructuring that you have identified, can give us a magnitude yet or what type of cash that could absorb?
More to come on that. I'm just not quite -- we're not quite done with the analysis.
Yeah. Okay. So, we have time for a question or two more. Does anybody have from the audience?
Hi, thank you. Tim, it's about a year ago you made two acquisitions and given your focus or really internally on the company, I was wondering if today acquisitions are off the table and it's more of an internal focus until market recovers, you guys really have a good lay at the land? Thank you.
Yeah. I'll take the first one of that and then turn over to Tim. I think that the real opportunity for us to grow over the next several years on the organic side, I think I described some of those opportunities in earlier comments. Having said that, we're not going to be absent from the M&A market. We are going to continue to be in the market taking a look at opportunities to expand our product line, to expand our market presence. I think there are still good deals to be done, especially in China. So even though we are going to be sharply focused on organic growth, we’ll look for opportunities to grow by acquisition as well.
I will follow up on that Richard’s answer, developing a little bit and Doug’s comment about the company’s liquidity. I’ve discussed this with Rich and we’ve discussed this at length. I really believe that the best use of the company’s financial resources today is to first enhance our core business in the manner in which we’ve described today. I think there is really quite a lot of value to be achieved in the course of doing that. And once having done that and completed the journey that I described, the ability to add value by adding on acquisitions, I will be improved because we will be adding them into a core business that is I think already been improved. Okay? So having said that if an opportunity comes along that is sort of a [no brainer,] we obviously would consider. But the first focus is going to be to grow organically.
There is a question in back, right.
Do you have the internal talent and associated resources available to you already in order blow up big change in the company?
I would say we are always interested in adding talent. But the three guys who are heading up the global business for us, I have got a high level of confidence in them. Tim has joined us as CFO, he is the seasoned CFO, he understands how to build and develop the financial end of the organization. We’ve got a guy leading Asia who has lived there for 10 years. So, I would say at the top of the company, I am very confident that we got the right people and right jobs to drive the sort of group that I described.
I think lower in the organization especially in product development, we have the opportunity to add some people who can help in that area. And I am talking about our very active product management organization, where the product manager has responsibility for building out a product based global organization as a part of construction, ag, truck and bus and aftermarket. So, I would say in the product area that’s where we are looking for some additional talent.
Great. I think that leaves us with just 3 seconds. So, thank you for joining the presentation. We thank you very much for given us the time. And (inaudible) the rest of the day guys.
Thanks very much, thank you.
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