Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Commercial Vehicle Group Inc (NASDAQ:CVGI)

Q2 2010 Earnings Call

August 5, 2010 10:00 am ET

Executives

Chad Utrup - CFO

Merv Dunn - President and CEO

Analysts

Greg Williams – JPMorgan

Keith Schicker - Robert W. Baird

Derek Wenger - Jefferies & Co

Kirk Ludtke - CRT Capital Group

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2010 Commercial Vehicle Group Earnings Conference Call. My name is [Fab], and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Mr. Chad Utrup. Please proceed.

Chad Utrup

Thanks everybody and welcome to the conference call. Before we begin the call today I’ll read through Safe Harbor language as usual. Merv will give a company update. And then I'll take you through the results, the second quarter of 2010 afterwards we'll take time to answer your questions.

With that, I'd like to remind you that the conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties. These may include, but are not limited to the economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, 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 Merv.

Merv Dunn

Good morning and thanks Chad and thanks to everyone who has joined our call today. If (Inaudible) we are not in the same location today. I kind of got stuck on the web service on some customer calls.

Overall the second quarter showed continued progress. On a year-over-year basis as revenues increased and our cost containment efforts continue to work. We are pleased with both our operating and financial performance. We also feel that our cash position and the fact that we have no debt on our revolving credit facility at the end of the quarter but within a solid financial position as our industry recovers from the economic turbulence of the past few years.

We had originally anticipated a stronger start for 2010 with mid-year slowdown, followed by a moderate uptake in the later part of the year. When looking sequentially at our second quarter, we are pleased to see that although revenues for the second quarter were down slightly compared to the first quarter, where we are still able to make an improvement in our operating income, excluding one time charges as previously announced closure of our Norwalk, Ohio facility in May.

To-date, some recovery signal such as US employment figures are mix, others such as the increasing trend in North American class 8 sales show improvement. In addition we feel that our European and Asian construction business is experiencing a positive trend and strengthening as the year progresses. Combined with the American Trucking Association reports of improved freight levels, we believe that a moderate cyclical recovery maybe progressing.

Additionally, we continue to feel that pent-up demand exist and our key end market and we should start to see a moderate volume improvement towards the end of 2010. While, we are slightly optimistic for the balance of the year, we are still projecting that we won’t see significant improvements in our heavy duty truck business volumes, up to 2011.

China continues to be a vibrant and growing market, and has real potential for the growth of CVG in both the construction and the heavy truck market. During the quarter we were pleased to announce that CVG was selected by XCMG a leading Chinese construction machinery manufactures has one of the two key seat suppliers for their extensive family of products.

We will provide them with a range of constructions seats, products for multiple vehicles lines including mobile cranes, rollers, wheel loaders, excavators, graders, truck cranes and concrete pumps. We recently started production of the seats designated for XCMG’s crane product at our Shanghai facility and with five additional production for other XCMG construction vehicles over the next 12 months.

As we progressed in our relationship with XCMG, we anticipate that we will supply around 70% of their seating requirements for all of their product lines. We estimate the annualized revenue from this additional business to be in the range to $4 to $6 million as today’s volume levels.

XCMG is ranked as one of the largest construction machinery producers in China and this new agreement represents a great opportunity for us. We consider this new business to be strategically significant, because it demonstrates our ability to market and sell products in China where we are seeing great long-term prospects exists for us to grow our business. This additional revenue also supports the aggressive growth target we have set for our China operations.

During the quarter we were also pleased to that CVG rejoined the Russell 3000 index. We see this as a positive development that shows we are emerging from the undervalued position of our company’s stock experienced during the recession. We also feel that being included in Russell Index will result in increased exposure and help get the CVG story more widely distributed.

While our results over the past several quarters are showing positive trends. We continue to remain focused on profit improvement initiatives. All of our employees around the world have worked extremely hard to improve our operating and financial performance and we are all excited to aggressively continue this trend into the future.

At this point, I'd like to turn the call back over to Chad for a financial review and then we’ll get into questions-and-answers. Chad

Chad Utrup

Thanks Merv, revenues for this past quarter were 142.3 million, which is an increase of 38.8 million or 37.5% from the second quarter of 2009. This increase is not only the result of an estimated 42% increase in the North American class 8 build rate from the prior year, but also reflects an increase in our global OEM construction revenues which were up more than a 100% from the prior year period as well as our military revenues which were up more than 70% from the prior year period.

We recorded approximately 1.4 million of restructuring charges related to the previously announced closure of our Norway, Ohio facility. Excluding this one time charge, our operating income was $4 million or 2.8% of sales, which is an improvement of approximately 15.6 million over the prior year period when excluding one time restructuring and impairment charges. This represents a 40% contribution margin on the incremental revenues of 38.8 million, which is a direct result of the cost free alignment and margin enhancement efforts we have been discussing and taking action on for the last 12 to 18 months.

This is also reflected in our performance compared to the first quarter this year. Sequentially, revenues were down approximately $4.1 million from the first quarter, while operating income actually increased to $0.4 million excluding restructuring charges.

Depreciation was approximately $2.8 million and amortization was 60,000. Capital spending was 2.1 million for the quarter or 1.4% of revenues. We recorded a gain of approximately 1.3 million as other income, which is primarily related to the mark-to-market of our forward foreign exchange contracts. Our tax-benefit of $0.7 million recorded for the quarter is primarily attributed to changes in tax reserves and geographic tax-rates and valuation allowances against our deferred tax assets.

As of the end of this past quarter, we had a cash balance of approximately $52.4 million and the capability to borrow an additional 22.5 million under ABO without financial covenant requirements. With this level of financial flexibility, we believe we are in a very good position to absorb working capital needs as our end markets continue to recover as well as pursue key areas of growth.

With that said, we currently do not expect to have to comply with any financial maintenance covenants for 2010. While we are not providing guidance at this time, we would like to point out a few key revenue assumptions for the balance of this year. Recall from prior conference calls and announcements Navistar's decision to in-source the cab assembly business to Mexico. We currently estimate this to impact our revenues by approximately $6 million to $7 million per quarter moving forward.

In addition, our military business has performed extremely well over the last several quarters; however we did not currently anticipate these levels to sustain without incremental vehicle orders. This may impact our revenues by approximately $3 million to $4 million per quarter moving forward.

And lastly, the key assumption we would like to mention today is that we are currently estimating North American class 8 units in the range of 150,000 to 155,000 units for the full year 2010, which is obviously a positive trend from the run rates we have seen from the first half of this year and which should partially offset the other items that I mentioned

In summary, we believe that our results this past quarter speak for themselves and we are looking forward to continuing our focus on operating and financial improvements as well as our long growth strategy as we move forward.

And with that, we’ll open up the call for any questions?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question will come from the line of Greg Williams from JPMorgan.

Greg Williams - JPMorgan

With your truck forecast update, can you help us with a quarterly progression of truck builds, how you see that untold in North America for the back half of the year?

Merv Dunn

Yeah probably something with a range of 150, 155 you are probably on the 40 range for Q3 and approaching 45 range for Q4, we still see a tail in the later half of the year.

Greg Williams – JPMorgan

And given Chad the updates to the Navistar and the military revenue outlook, do you expect the earnings positive in the back half of the year?

Merv Dunn

Well I don’t want to get into too much of the revenues the key-point is pointing out for you guy’s the revenue impact for the military in the Navistar and then obviously that’s going to be at least partially offset by at least our positive outlook for the truck market. I think we’ll be pretty close to that, I don’t want to get into too much of that, because there is so many variables that go into it Greg, since we are not giving guidance, but you have seen what we have done in the first half of the year and trucks are going to be we are forecasting truck unit to be higher than that in the later half and offset by some of these other things.

So without getting into it too much, I don’t expect it to be significantly different.

Greg Williams - JPMorgan

Can you just tell how your investments, the new investments in China, India and Mexico. Do you have a timetable or outlook for these investments?

Chad Utrup

I think on the last call we talked about Mexico, probably be more of an immediate priority for us and would expect to see something from us. We are looking to do something here in the next 12 months or so. India maybe a little bit longer horizon 12 to 18 months period.

Operator

Your next question will come from the line of David Leiker from Robert W. Baird.

Keith Schicker - Robert W. Baird

It's Keith Schicker on the line for David. I just want to circle back and hit the Navistar question again. If I want to think about the profit impact of that business, you've said you were taking out all the fixed costs. That basically just to assume or is it safe to just assume the variable profit of that business is lost sequentially. How should I think about that?

Chad Utrup

Yes that’s correct

Keith Schicker - Robert W. Baird

And then, the military is going to dip $3 million to $4 million on a year-over-year basis?

Chad Utrup

Yeah sequentially the number that I gave 3 million to 4 million, that’s without a whole lot of visibility in the military side for new vehicles that’s kind of just our current estimate based up where Q2 was.

Keith Schicker - Robert W. Baird

Okay, so that's kind of a sequential drop.

Chad Utrup

Yeah

Keith Schicker - Robert W. Baird

And then, the sequential performance Q1 to Q2 is the reason for the gross margin increase that you didn't have some cost associated with this Navistar business in there, and maybe that was a little higher than it would normally be or what was the up gross profit and down revenue, what was behind that?

Chad Utrup

Yeah that’s part of it, the other pieces can, as the year progresses things like material cost reductions and just further overhead absorption within the cost of sales helps alleviate some of that, so the Navistar piece the closure is part of that, but you are going to get in to further cost reductions, accumulative cost reductions as the year progresses too.

The 4 million down from Q1 to Q2 and being at a high margin as probably a little abnormal I wouldn’t say that that’s something to pencil out quarter-over-quarter as we talked about and we are still pretty comfortable with that 20% to 25% contribution margin level, but we did exceed that and outperform that from Q1 to Q2.

Keith Schicker - Robert W. Baird

Okay. And then lastly, if I think about some of the business announcements and even smaller acquisitions that you've made, specifically here in North America, really over the '07 through '10 time period, how would you look at or how would you conceptualize your content per vehicle over the course of the next cycle relative to the previous cycle? It seems like there will be a bigger opportunity there for you.

Chad Utrup

Yeah I think the biggest change as much as we hate talking about content per vehicle; the Navistar change, that's a cab assembly, that's a high dollar content. So, just off the top of my head, that may be, on an average we have probably been another $1,100 - $1,200 unit range. that maybe a $200 impact overall, weighted average overall impact to us, but the new business that we brought in last year and things that we have targeted this year, I mean obviously our targeted is to get it back-up to and exceed that, but in relatively short order.

We have already of the 25 or so million of new business that we announced last year, 75% of that was class 8 truck related so we have already picked up quite a bit of that. How much of that is in average content, I am not exactly sure, but we are pretty comfortable and confident of the ground that we have gained with those and current new business wins and prospects that will outlay the Navistar removal.

Merv Dunn

Keep in mind; we are also seeing our growth start-up in Asia with our truck business too. With the announcement of Nissan, [Volvo or UD as] maintenance now. So, we are not just seeing the content in the US, we are seeing content in the rest of the world change too.

Operator

Your next question will come from the line of Derrick Wenger from Jefferies & Company.

Derek Wenger - Jefferies & Co

Yes, three parts. First of all, depreciation and amortization for the second quarter, what was CapEx as well and what's the outlook for CapEx for the year? And then lastly, availability on the lines and that letters of credits drawn?

Chad Utrup

Yeah, as I mentioned earlier depreciation was 2.8 million, amortization was 60,000 CapEx was 2.1 million, CapEx for the year probably be in hat 1.5% to 2% of sales

Derek Wenger - Jefferies & Co

And then, availability on the lines and the letters of credit?

Merv Dunn

We have 1.7 million of letters of credit. We have nothing drawn on our lines, so we have got the full availability, up to 20.22 million without covenants, 27.5 with some fixed charges covenants and 52.4 million in cash

Derek Wenger - Jefferies & Co

Okay. And the $22.5 million, that would be before the $1.7 million of letters of credit, right?

Chad Utrup

Yes.

Derek Wenger - Jefferies & Co

So, would be a net of $20.8 or whatever?

Chad Utrup

That would be true

Operator

(Operator Instructions). And your next question will come from the line of Kirk Ludtke from CRT Capital Group

Kirk Ludtke - CRT Capital Group

I just wanted to touch again on the Navistar contract. Is this a contract where you still assemble or you still manufacture components and you just lost the assembly portion of the contract or was it just an assembly?

Merv Dunn

First of all, we didn’t lose it in the prospect of that term is normally used. This was something as in source because they had a plan; they wanted to move it through the Mexico, that was underutilized. We still supply all the components to it and we still supply many of the, or started supplying many of the interior components. So, I tend to think that we are still focused upon the perception of the negativity of the cab in source that we are forgetting about all of the business that has been awarded to us by them plus that cab was for two years in a row, their Diamond Star award for quality and delivery. So the performance of CVG to Navistar was in no regard for this move

Kirk Ludtke - CRT Capital Group

So simply that it was no longer economic to ship it that far?

Merv Dunn

It was never worth economic to ship it that far.

Kirk Ludtke - CRT Capital Group

Or either the fact that they moved the production to Mexico really precipitated the change?

Merv Dunn

We could have put a plant up in Mexico, but it did not make economic sense for us nor did it for them.

Kirk Ludtke - CRT Capital Group

I would think that just assembly portion of the contract to be pretty low margin business?

Merv Dunn

(Inaudible) split now the margin on that, but I think you can see the performance that has been going on since that moved down what we are projecting for the future, but with the new business that were gained and with what we are seeing pickup in the agriculture or the construction market and Europe and Asia. As well as we feel very comfortable with our company and the way that we were growing it’s strategically pricing it.

Kirk Ludtke - CRT Capital Group

Do you have any other assembly business that might be at risk because of the Navistar's decision to move production to Mexico?

Merv Dunn

The assembly business we have for now is Star and all other business we have pretty good long term contract with that and we feel pretty comfortable where we at with that business. And we look to still be growing the structures business. This was one of the phase we were closing down yet another structures

Kirk Ludtke - CRT Capital Group

And I know you don't like talking about margins by program, but I guess the military is probably an above-average margin program?

Merv Dunn

Well, I think when only see military and after-market, slightly above some of the other margin shift.

Operator

There are no further questions in the queue; I would now like to turn the call back over to management for closing comments.

Chad Utrup

Thanks everybody for joining the call, we are pretty pleased with the progress, this is our 5th consecutive quarter of operating income improvement, and looking forward to moving forward.

Merv Dunn

Again to echo, Chad, thank you very much. We are extremely proud of our company. We have even during the downturn we were continuously winning business. We have got our company very well positioned starting back from 99, when we were a 100% in the US and with two customers basically making up that 95% of our business with one product line, you can see where our company has positioned itself now, and we will continue to move forward with that strategic plan to globalize our company as well as introduce new product lines and become more of a technical innovative-led company. And, I think the results are showing for themselves. Thank you, again.

Operator

Thank you all for your participation in today’s conference. This concludes the participation. You may now disconnect. Have a great 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!

Source: Commercial Vehicle Group Increase. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts