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Commercial Vehicle Group Inc. (NASDAQ:CVGI)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

Chad Utrup - CFO

Kevin Frailey - EVP, Business Development

Analysts

David Leiker - Robert W. Baird

Alan Weber - Robotti & Co

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Commercial Vehicle Group Earnings Call. My name is Tony, and I will be your coordinator for today. At this time, all participants are in a listen-only mode and we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I'd now like to turn the call over to your host for today's conference, Mr. Chad Utrup. Please proceed, sir.

Chad Utrup

Thanks, Tony, and thanks, everybody for joining us on the conference call today. As usual before we begin the formal portion of the call, I'll first read through our Safe Harbor language. And Merv actually has a bit of a voice problem today, so I will then turn the call over to Kevin Frailey, our Executive Vice President of Business Development, for a brief company update.

And then I will take you through our results for the first quarter and our revised outlook for the balance of 2008, the full year 2008. And then we will take time to answer your questions.

I would now 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 will turn the call over to Kevin.

Kevin Frailey

Thanks, Chad. I'm not a particularly gifted impersonator, but today I will act as Merv's voice box. Thanks also to everybody who has joining the call today. We're pleased to report that during the first quarter of 2008, we were able to perform better than we had expected.

This is based on the fact that during the first quarter, the number of Class 8 units produced came in slightly better than we had anticipated, and our construction, military, and specialty product markets were stronger than we had expected. Obviously, that is welcome news. Still, we are not yet ready to call this improvement or trend and our outlook for the remainder of '08 remains basically the same.

In response to the slightly higher truck build rate during the quarter, we are making a positive adjustment in our expectations for the North American Class 8 build level. We now believe that Class 8 builds will be between 180,000 and 220,000 units which is up from earlier estimates of the 175,000 to 215,000 units.

In previous guidance, we also said, we thought our construction related markets would continue to improve. We are pleased to report today that this has been the case. As you know part of our strategy has been to decrease our dependence on the North American Class 8 market, which is and shall remain an important market for us.

But the continuing trend in our global construction markets is welcome news that demonstrates the growth potential we had anticipated, and confirms the soundness of our diversification strategy.

During the first quarter, we reorganized our global truck division to better adapt to recent growth patterns in our overall strategy as it has evolved. Accordingly, we established the CVG Specialty Products Group, which will be headed by Ken Bush as Vice President and general manager.

With this move, Ken is on very familiar ground as his past experience includes VP and General Manager, responsibilities in charge of multiple aftermarket plants for the Gabriel and Maremont divisions of ArvinMeritor.

Here at CVG, Ken has have held VP positions in operations, in sales, and in engineering within CVG's global truck division. Ken's background also includes a Bachelor of Science in Engineering Technology from Oklahoma State University and MBA from Oklahoma City University.

This group's mission is to continue to grow CVG's aftermarket, its service, marine and industrial product markets by providing strong product management and bettering our product availability. Growth in these markets is important to providing a strong and balanced company. We are confident that Ken will help us take it to the next level.

Elsewhere, with the additional opportunities presented to us by our acquisition of PEKM, we created a new position called Senior Vice President of Global Truck Sales. Patrick Miller has been chosen to fill this position.

Pat's qualifications include leadership roles he has held in global sales for light vehicles at Purolator, for Alcoa, and for Hayes Lemmerz. And as VP of Operations here at CVG in the global truck group. Pat has an engineering degree from Purdue and an MBA from the Harvard Business School.

A third structural change was to move Milton Kniss to the position of Vice President of Operations for Global Truck. In past conference calls, I think we introduced you to Milt, and the fact that his 30 plus years of global operations leadership are being put a good use by this company.

At the end of January, we moved into a new corporate headquarters and R&D facility located here in New Albany, Ohio. This new three-story 89,000 square foot complex combines four existing locations and creates a centralized R&D center directly connected to our many functional key areas.

This new R&D center is an investment that's truly world-class and enhances our position as a global leader in the commercial vehicle industry. It will help us develop better products and more innovative solutions for our customers.

It directly supports our long-term strategy to improve and expand CVG's product offerings. Throughout the year, we will be adding new capabilities to the R&D center. We are planning several open houses including an investor day at our R&D complex.

In March, many of you visited our OEM and our aftermarket booths at the Mid-America Trucking Show in Lowellville. At the show, we demonstrated several new concept products and sought user feedback on them. One of those concept products was a special version of our National Seating brands high-performance seat that utilizes environmentally favorable green materials.

This innovative seat features improved functioning and a reduced impact on the environment. The green seat incorporates special soy content foam that provides a reduction in petroleum requirements and bamboo fabrics possess a natural antimicrobial property without the use of chemicals. It also provides a natural cooling effect during long periods seated in the seat.

We also presented our new Aero Concept Mirror which was designed through the use of computer modeling to specifically improve its aerodynamic properties. The styling and shape of the new Aero Concept Mirror not only helps increase its aerodynamics, but reduces drag and improves a natural cleaning action to decrease the dirt on the mirror and the side windows.

CVG engineers were on hand at the show to seek user feedback on this prototype product as part of our continuous improvement process and our desire to involve user in a product's design.

We also showed a new over-molding wiring harness that offers improved operating performance especially in environments where we see a high-temperature or the need for chemical resistance. Additional benefits include high bundle density, lower space requirements, lower weight, and improved reliability and durability.

So as we look forward, our strategy calls for us to continue to focus on the integration of the acquisitions which we made in 2007, continue to more aggressively develop aftermarket opportunities to provide balance against the cyclicality of the North American heavy truck market, continue our emphasis on cross-selling our products, continue our efforts to control our costs, continue our efforts to develop new products, continue to expand internationally with existing customers' growth patterns and to continue to further diversify our end products, our markets, and our geographic footprint.

In summary, we are pleased with our first quarter. We are anxious to move into the balance of this year and the challenges and opportunities that it presents. We look forward to speaking with you throughout this year to update you on our performance and the changes we are making on a daily basis for the long-term prosperity for CVG.

So at this point, I would like to turn the call back over to Chad for details on our first quarter financial results.

Chad Utrup

As Kevin said, overall this quarter we are very pleased with our first quarter results. Our revenues for the quarter were strong at $197 million, which is only down about $1.8 million from the first quarter of last year, due mostly to our acquisitions, organic growth, and especially a strong construction, military and specialty markets for this quarter.

So despite a near 25,000 unit, or 33% decline in the Class 8 market from the first quarter of last year, we've been able to maintain our top line, which really says a lot about our strategy on growth and diversification.

Operating income was approximately $11.5 million, although as you saw from the press release that includes about $6.1 million gain from the sale of our Seattle facility during the quarter. Excluding this onetime impact, operating income was obviously around $5.4 million for the quarter and slightly higher than our lower end estimates for the quarter.

SG&A for the quarter was approximately $15 million and generally in line with where we would expect it to be. Depreciation and amortization was $4.7 million and capital spending was about $3.6 million for the quarter. Our estimates for the full year for both of these are about $20 million again for D&A and $20 million for capital spending.

We recorded a pretax expense of approximately $9.7 million from marking to market our forward foreign currency contracts and as previously mentioned, our methodology is changing for the valuation of these contracts, but we will continue to see these valuation adjustments, positive or negative, until each of our preexisting contracts expire.

Interest expense increased to $3.9 million for the first quarter of 2008, compared to $3.6 million from the same period last year. Mostly as a result of our average outstanding debt during the period, which increased year-over-year primarily as a result of our acquisitions from the fourth quarter of last year.

Our effective tax rate for the quarter was 122.2% of our pretax loss. This is of course out of the ordinary from our typical 36% ongoing estimate and is mostly related to one-time favorable adjustments for the quarter. For the purpose of our revised estimates for the year, we have assumed a tax provision rate in the range of 25% to 35% based on our estimated positive pretax income for the year.

Our diluted EPS for the quarter is based on approximately 21.6 million diluted shares and came in at $0.02. However, excluding the one-time items such as the Seattle facility gain of about $0.18, the favorable tax rate for the quarter of about $0.08 and the unfavorable mark-to-market expense of approximately $0.29, our true operating results would have been approximately $0.05 per diluted share for the quarter.

Our net debt at the end of the quarter was approximately $153.2 million, and we continue to focus on our balance sheet and especially working capital management. And we still at this point expect our free cash flow for the year to be in the range of $5 million to $10 million.

As indicated in our press release, we revised our full year 2008 estimates. We now expect overall Class 8 units to be in the range of 180,000 to 220,000 units. This is a moderate 5,000 unit increase from our prior estimates and is based on a slight improvement from our initial thoughts for the year.

Our expectation for revenues has been increased by approximately $12 million and is now in the range of $774 million to $826 million. Our operating income expectation has been increased by $9.5 million, and is now in the range of $26.5 million to $39.5 million. And our EPS expectation remains in the range of $0.10 to $0.50 per diluted share based on 21.7 million diluted shares. All these figures include our actual results for the first quarter and our revised estimates for the remainder of the year.

With that, we'd like to open up the call for any questions. Please, Tony.

Question-and-Answer Session

Operator

(Operator Instructions) With Robert W. Baird, your first question comes from the line of David Leiker. Please proceed.

David Leiker - Robert W. Baird

Good morning.

Chad Utrup

Good morning, David.

David Leiker - Robert W. Baird

A couple number of questions here first. If you take your guidance, the $3.5 million or so roughly that's a function of market performance, how much of that do you think is a result of the first quarter as opposed to the next three quarters?

Chad Utrup

A good portion of it, Dave, we really looked at the last three quarters and kept it for the most part unchanged from our initial thoughts. So a lot of that's coming from what we saw in the first quarter.

David Leiker - Robert W. Baird

Okay. And where do you think your tax rate is for the year?

Chad Utrup

I'm using a 25% to 35% range and 25% at the low end and 35% at the high end. By that I mean if you use our range of $0.10 to $0.50, and use about 25% on the low end and 35% at the high end. And that's just because of currently known fixed impacts that we have.

David Leiker - Robert W. Baird

Okay. And then a broader question if you look at, maybe you just kind of give us an update for current activities or wins, potential wins as it relates to cross-sell opportunities across the business and across different geographic regions?

Chad Utrup

Well, I think the biggest example is really the first quarter. We saw a lot of positive adjustments to at least our initial expectations in construction, marine, and some specialty vehicle. But really construction and marine was up considerably for us.

And that is a product of some of the market, but it is really a product of cross-selling too. So when I say earlier, a majority of our adjustment upward for the year is related to the first quarter, it's really from that.

So military product, we may not see that every quarter. But certainly was a favorable impact for us, so that's a perfect example of a recent win and some recent activity.

David Leiker - Robert W. Baird

Okay, great. Thank you.

Operator

Your next question comes from Alan Weber with Robotti & Co. Please proceed.

Alan Weber - Robotti & Co

Yes, good morning.

Chad Utrup

Good morning, Alan.

Alan Weber - Robotti & Co

Hi, there. Did you have for the first quarter of last year, what the revenues were from a heavy truck side compared to this quarter?

Chad Utrup

I do not have it handy with me, Alan. Obviously last year, the full year, we have reported but I do not have it handy with me the first quarter, no.

Alan Weber - Robotti & Co

Okay. And then I noticed in the annual report that it appeared that your aftermarket revenues in '07 were down, or maybe about flat with '06. Is that correct?

Chad Utrup

It could be. If you're including all other, it may not just be aftermarket, but probably a big portion of that would be specialty vehicle like the Ford GT, which ran out in '07, at the end of '06 really. So that was a considerable program that would have went away.

Alan Weber - Robotti & Co

Okay. I guess one other question was, are you still looking to grow the aftermarket business?

Chad Utrup

No.

Alan Weber - Robotti & Co

You really didn't mention that in the annual report you really didn't talk about that in your letters.

Chad Utrup

No, definitely, I think Kevin went through in what he just discussed, we made some structural changes to our business in the first quarter and what he went through was our specialty products division being led by Ken Bush. We have actually now dedicated a VP and GM role and other functions to specifically to the aftermarket and the specialty products division. So that's really what he was referring to.

Alan Weber - Robotti & Co

Okay, and then Kevin.

Chad Utrup

Yeah. But we continue to focus on it and we put some more emphasis to it by really making it part of our business with that new role.

Alan Weber - Robotti & Co

And my last question for now is, Kevin, when you talked about the products at the Kentucky show, what is typically the timeframe till showing the products turns into orders and actually turns into revenue for the company?

Kevin Frailey

It certainly varies. Some of these are concepts that we want to roll out to check the market for customer acceptance, so those are tough to make a call on. But we have one product, over-molded wiring harness that could certainly within the year, we could be into a small trial program with a real customer.

But others are really concepts to be out there to be checking acceptance in the market. We had a hive of activity around the aero-molded mirror and the soy-based foam for the seat and the green seat. And that is really an opportunity for us to see whether people -- we're talking to actual users of the product, as well as our OE customers.

Alan Weber - Robotti & Co

Okay, great. Thank you.

Kevin Frailey

Thank you.

Operator

(Operator Instructions). And gentlemen, there are currently no questions in queue.

Chad Utrup

Okay. I want to thank everybody for joining us for the quarter. Obviously, as always if you have any follow-up questions, feel free. And hopefully, we look forward to talking to you in another quarter. Thanks everybody.

Kevin Frailey

Thank you.

Operator

Thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect. Have a nice day.

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