Commercial Vehicle Group's CEO Presents at Citi 2013 North American Credit Conference (Transcript)

| About: Commercial Vehicle (CVGI)

Commercial Vehicle Group, Inc. (NASDAQ:CVGI)

Citi 2013 North American Credit Conference Call

November 6, 2013 2:45 PM ET


Rich Lavin – President and CEO

Tim Trenary – EVP and CFO


David Leiker – Baird

David Leiker – Baird

Good afternoon. I’m David Leiker, I cover the Global Auto & Truck markets at Baird. Our next presentation comes from Commercial Vehicle Group. The company was formed in 1997 through the acquisition of two companies. This if followed by several acquisitions which broaden the company’s exposure to the commercial vehicle market and added new product lines.

Today the company supply seating into your trim electrical systems, cab structures and vision systems. Sales are expected to be around $770 million this year we’re expecting EPS to be at loss. We’ll begin with a short overview of Commercial Vehicle Group and then we’ll have a discussion then.

Rich Lavin

Thanks, David. Good afternoon.

David Leiker – Baird

Forgot to introduce you.

Rich Lavin

You can do so.

David Leiker – Baird

Representing the company is Rich Lavin, President and Chief Executive Officer. You joined the company in May, end of May and Tim Trenary, Executive Vice President and Chief Financial Officer to join next month and John Hyre, is in the audience as Director of Investor Relations. Sorry about that.

Rich Lavin

Thanks, David. Good afternoon. We’ll do, I think a quick overview of CVG, overview of CVG and then get into Q&A. First of all look at our product line. This is based on 2012 revenue numbers. You can see heavy concentration in the seating. But really in our existing product line, we cover everything for commercial vehicle cabs. So if it’s in or attached to a cab, we try to be able to offer to our key OEMs and key end users.

Looking at our manufacturing footprint, as you can see heavy concentration in North America, but we’ve also got facilities located in the U.K. and Europe, Czech Republic in Ukraine, in India, in Australia and China.

The real opportunity for us to grow going forward is on the organic side and it’s really outside of North America. We got a very strong position as you know in North American truck. We’re building a position in construction in Ag in North America but we think we have the most significant opportunities to grow organically outside of the U.S. principally in China.

Just to get an update on the company, new management. I joined the business at the end of May. So, I’ve been with CVG for about five months. Tim is just completing his first month as Chief Financial Officer. We’ve also reorganized our leadership team. We moved from a very, I would say product focused organization to an organization now that’s led by division presence with global accountability, looking kind of managing their business from the customer back.

So the purpose is to establish executive leadership, globally focused and intensely concentrated on customer needs and customer expectations. That drives back into a very customer focused product design process that should deliver going forward, products that really meet the expectations, deliver value for our customers.

We just completed a deep review of different aspects of our business. It’s more of a short-term focus, are concentrated on product design, product development, product introduction, focused on growth in China, focused on growth in construction and Ag. We feel very good about where that process let us over 10 or 12 weeks and we’ve got initiatives in place to really drive key aspects of our business in the short-term.

Look at the leadership team, its split between the service side of the organization which is on the right-hand side of the chart and the operation side of the organization on the left-hand side of the chart. The three division Presidents driving goal of this is, Kevin Frailey, Pat Miller and Timo Haatanen, Geoff Perich is located in Shanghai, he’s managing our business across Asia-Pacific.

But as you can see on the operation side of the business, we’re really focused on global customers, global markets, global products. And the accountability for developing our business is really at the division president level. Each of them has responsibilities I mentioned for design, manufacture, sales, overall profitability of their portion of the CVG business.

Our focus going forward is really going to be in three areas, best people and best culture. I talked about the executive level reorganization that I think now has the best people in best spots to drive value with CVG.

Best product, at the end of the day, we’re a product oriented company. We’ve got world-class processes to design, manufacture and introduce products that, meets our customer’s expectations.

And then finally, best processes. As you saw from our manufacturing footprint we have manufacturing assembly facilities located around the world. We need to make sure we’re driving best practices, highest productivity, highest efficiency in each of those manufacturing facilities.

I’ve got a couple of charts to compare the North American opportunity it gives the China opportunity a cost construction Ag and truck. I’ll just talk to the China chart. As you can see in 2013, the build of construction machines in North America, will be about 90,000. In China it will be about 334,000. We are at the very beginning of our journey of building out our business in China.

We’re doing a good job right now I think of addressing the multinationals on the construction side of the business. But there is a wide range of multinational companies along with I would characterize as best-in-class Chinese companies that we have an opportunity to address over the next couple of years.

So the real challenge there in China is to extend our reach and deepen our relationships with key customers across the board, not just multinationals like Caterpillar, Komatsu and Deere, but also with the best-in-class Koreans, the best-in-class Japanese and the best-in-class Chinese companies.

And finally, as I mentioned we’ve got a very strong position in North American truck that we’ve got to build on going forward. Organic growth, we have outstanding prospects going forward, much of that frankly is going to be driven by expanding our product line-up to address customer needs outside of the U.S. in the emerging markets what customer expectations are different in terms of technology, overall quality of the product and certainly the price-point they’re willing to pay.

And finally, world-class processes and making sure we’re hiring the best of the best and training and developing them in a culture that really empowers and enables them.

So, with that I’ll turn it over to Tim for some comments on the financial side of the business. Thanks.

Tim Trenary

Good afternoon. I’m Tim Trenary, and I would characterize myself as the new-kid on the block, not for the fact that there are lots of new kids on Rich’s block. We have an entirely new team – management team so I’m looking forward to working with them.

As you know, I’m sure about half of the company’s business is really very closely tied to the North American Heavy Truck business. And so, as that business goes to a large extent goes our business. And on the chart here, the last seven quarters of sales and super-imposed on those Southern Orange sales bars is the operating income margin for each of these quarters.

So, you can see that over the past three or four quarters or so as the North American Heavy Truck business has dipped a little bit so has the company’s sales and coincidentally the operating income margin.

Now, with respect to however the operating income margin in these second and third quarters of 2013, I want to call out a handful of special items here. You may recall in the earnings calls from the last quarter, the second quarter of 2013 the company’s operating income was impacted by about $2.5 million of charges associated with the changing of the senior executive leadership of the company.

And this quarter, in the third quarter if you listen to our earnings call this morning, you would have learned that the operating income in the third quarter was impacted with about $2.8 million of charges associated with some outside consulting services, $1.8 million in charges primarily associated with a reduction in force at the company which by the way will yield about $4 million a year in benefits starting in this quarter, the fourth quarter. And then finally, an impairment charge of about $2.7 million.

So, if one were to adjust the operating income for the second and third quarters, to reflect this, the operating income margins on the slide here were drift up between the 2% or 3% level. But even at that level we don’t find that satisfactory.

In the course, as you’re going to push in a number of discussions I had with Rich in meetings, before I joined the company and then over this past four weeks, I formed a series of observations before even coming here. And those observations have really only been confirmed as I said, since I’ve been here in the last four weeks.

And those are very simply this, I believe that there is an opportunity we can, we should and I think we will scale this company. We will grow the top-line. As Rich mentioned I see that happening substantially all the way through organic growth as supposed to acquisitions.

Secondly, with respect to the company’s margins, whether it be the gross profit margin, the EBITDA margins or the operating income margin that results from that room for improvement there. And finally with respect to the cyclical nature of the heavy truck industry and its impact on the company, I believe we have some opportunity to mitigate the impact of that.

Having said that, I’m going to leave this for just a second, I’ll come back and expand just a little bit on these observations in just a minute.

The company’s capital structure is relatively straight forward, $250 million of notes which were due in 2019. They first become callable next year in April. And we have an asset based loan commitment of $40 million we haven’t drawn anything on it. And they are available to us today about $27 million. If I sort of take that – those notes and that ABL together, I would sort of consider that in a way of speaking, in manner of speaking as saying, it’s sort of a covenant life capital structure.

With respect to the company’s liquidity, $75 million of cash on the balance sheet at the end of the third quarter and as I said a moment ago, $27 million of availability is pursuant to the ABL. If you take collectively, the notes and the ABL and the covenant life structure that comes from that and the liquidity that the company has at this point in time, I really believe it will forge the company, the management team to tremendous amount of flexibility to exercise on all the initiatives that Rich just touched very briefly on.

Coming back to my observations and this on this slide is a small subset of a number of items that Rich spoke to a moment ago. But this is sort of how I think about how Rich spoke to, how it will impact the company’s financial affairs.

We are in the process, quite of ways into the process of evaluating the company’s manufacturing capacity utilization and therefore the company’s footprint. We’re also in the early stages in this case of evaluating the operational efficiency in many of the company’s facilities. And I know that Rich has every intent to sort of develop a CVG way of driving efficiency into certain of our facilities. So these two things for example taken together I firmly expect to enhance the company’s margins, as I mentioned a moment ago.

With respect to comments around going to market and diversifying whether there would be customers, products or markets. The way the company is now organized geographically, I think will go a long way to assisting us in going to market, to create diversification of geographically customers, products etcetera. So this of course I expect to drive the top-line, enhance the top-line to organic growth.

And then, if you can sort of think about that in the context of how it might have fit or mitigate the effect of cyclicality on the company, to an extent we’re able to change that revenue mix, diversify that revenue mix on the top-line, geographically and customer wise etcetera. That denominator in any sort of equation, whether it would be share etcetera, with the importance of the North American Truck business now withstanding the fact that we enjoy a very nice position in that market and intend to defend it.

The importance of that will diminish somewhat in the context of the entire revenue portfolio and therefore I think take the edge of the cyclicality to some extent.

So, look it’s easy for me to stand up here and say this, this is quite a lot of heavy lifting. There has been a lot of work done already. There is a lot more work to do. We have as a management team embarked on a sort of journey. If you will, it will take I think a meaningful amount of time to realize that journey and the benefits of that journey. But I really and truly believe that the company will bear a very meaningful amount of fruit financially from that journey.

So, standby, more to come. Thank you very much.

Question-and-Answer Session

David Leiker – Baird

Great, thank you. Rich, let’s start, as why do you come to CVG?

Rich Lavin

Well, I retired from Caterpillar at the end of 2012. I retired from the position of Group President’s responsibility for global construction equipment. And I knew CVG as a supplier to businesses I had responsibility for. And so, post retirement, as I was approached with different opportunities, this was one that came to my attention.

And so I knew CVG well. It had an excellent reputation with Caterpillar as a supplier. I ran the track line frankly, that’s one of my goal firstly in Caterpillar just to make sure I was doing my due diligence from the standpoint of a purchaser of CVG products.

And as I studied the company, I thought up here, a really good foundation has been laid in terms of global investments, in terms of scope of product line, in terms of I would say investment in R&D and engineering. So it was a combination of factors that really attracted me to CVG.

And I’ve got to say, I haven’t been disappointed since I got there. I think some of the things I heard about CVG as a quality, reliable partner to OEMs has certainly played out. I’ve seen that in action since I’ve been there.

David Leiker – Baird

That’s great. And Tim, what about you?

Tim Trenary

Well, let’s say I’ve been – I’ve been associated with two global manufacturing companies that were organized at one time in a manner in which CVG used to be organized, which was sort of discreet geographic units around the globe that had their own practices, their own engineering R&D, the way they went to market etcetera.

In each of the two instances in the past that I’ve been associated with that sort of a model, we change that – the company changed that model to more of a global approach much in the same way that Rich has changed the organization of our company focused on certain global end markets.

And what I experienced in these other two circumstances is that when a corporation organizes in that manner, there is a fair amount of value creation that’s unlocked from the standpoint of sharing best practices, R&D, a better approach to the customer, etcetera. So I think there is a tremendous amount of upside from that standpoint.

And as I said David in my comments, I really believe that there is an opportunity to grow the top-line here, improve the margins and take the edge off of this cyclicality with the approach that we’re taking.

David Leiker – Baird

I think that sounds great. That the review that you’ve done to consulting work, what can you share in terms of – that would led to this structure and my guess is you already were down this road before that. But what’s – what are some of the takeaways from that that you can share with us?

Rich Lavin

David, let me jump in first and then I’m sure Tim, has a couple of comments he like to share about the work we did with McKenzie. We reorganized before we started the work with McKenzie. The reorganization really came out, I think my experience in Caterpillar, because I saw an organization that at one point in time is very focused on products.

We then organized around global business units. And so Group Presidents with accountability for the performance of an end-to-end business, they had something I really wanted to see in CVG, Senior Executives with global accountability for developing a business. First of all I think it’s a best way to build a global business but secondly it’s more satisfying I think for the executives. They’ve got an end-to-end business to manage and develop over time.

The McKenzie work was really the result I think of identifying some shorter term opportunities to focus on key areas of the company. As I mentioned earlier, we’re fundamentally a product company. We got to make sure that we’ve got world-class product design, development and introduction processes. And we got to make sure we got processes that are tied into strong voice of the customer because our differentiation is created by delivering greater value for our customers and meeting more of their needs for the price that they pay.

So, it really was around product, it was around China, as a key market for us going deep on what we can develop in China over the next 24 months. Taking a hard look at our position in North American Truck and understanding even with our strong position what more we could do to support our customers in North American Truck.

And finally, it was really around construction in Ag. I mean, very strong position in truck, beginning to build a strong position in construction with some of the multi-national players. But we’re really at the very beginning of building on a strong business with the Ag manufacturers. So that was really the – I think the early recognition that drove us to focus on those areas with McKenzie.

What’s interesting is that at the end we really created value propositions for each of the projects. So, we have something to manage in each of the projects back into the top and bottom line of the company.

David Leiker – Baird

And we have a question over here.

Unidentified Analyst


David Leiker – Baird

I think the question is talking about over the last 10 years, the revenues have grown but the profit margin have generally been study and that the profit margin deterioration has come out of SG&A and can this business model support that type of cost structure?

Rich Lavin

Yes, well, we’re taking a hard look at our entire cost structure. In our release we mentioned the fact that we’re taking a look at the leadership organization, the entire organization. And we’ve taken probably 5% to 6% of total surrogate management headcount of the organization. That will drive about $4 million in annualized savings, that’s on top of the $4 million of savings we expect to realize from the closure of the cab in States.

I wanted to hear is we focused on, this is our manufacturing footprint, I might have mentioned when I put the footprint slide up. Look, I think the footprint affords us advantage in building a global business. But I think you could we’re over-concentrated in manufacturing assets in North America. So, we’re taking a very hard look at our manufacturing footprint. We would probably consolidate North American capacity, we’re still spending nothing to announce at this stage.

But we’re also, laser focused as Tim mentioned on client level productivity and efficiency. We traveled to the facilities I’ve seen firsthand, Tim is beginning that process, seeing first hand of the different manufacturing processes, we’re implying in different proxy organization with really varying degrees of productivity and efficiency.

What I’d like to achieve is, on the CVG operating system, which is common throughout the organization, one where we’re sharing best practices and really driving I would say productivity performance tied back to key metrics that are the same across the operation.

So I take your point of our SG&A. I think we’ve taken some early steps to begin to deal with that. We’ve got some good studies tied up to deal with it further.

David Leiker – Baird

And you looked at drawing into some of these other areas where you’re not as represented as what you’d like to be. Are these organically developed product offerings or acquisitions still going to be part of the CVG story?

Rich Lavin

Well, I think acquisitions are certainly going to be a possibility. I don’t think we’re going to be and the acquisition driven growth company. I think organic growth as Tim mentioned is going to be the key for us. But if in China, we come across a good play that will enable us to add product, add manufacturing capacity, add customers, add engineering, we’ll certainly take a hard look at it.

But we’re really looking at strategy of designing product in country for the country based upon the needs of the customers we’re supplying to. I think it’s really – I think are losing proposition to design product outside of China is an example and try to deliver deep reaching product into China.

So, we’ve got an R&D Center located in China. We’ve got engineering resources we developed in China. And they’ve really been challenged to develop a product line that is right for Chinese customers. They will expand our addressable market and enable us to grow organically there.

David Leiker – Baird

Okay. Any questions on the guidance?

Unidentified Analyst


David Leiker – Baird

The question is that the previous structure seemed to be silo based on products. Did that carryover on the manufacturing side and are there opportunities there?

Rich Lavin

So, there are certainly opportunities to consolidate and maybe expand certain facilities incorporating other products into the same facilities. If you look at our manufacturing footprint, I think you’re seeing manufacturing assets that have been brought together through acquisition.

And I think we’re just now in the process of doing some of the integration work that will enable us to get to a more efficient product manufacturing footprint. But consolidating from smaller facilities into maybe one or two larger facilities is certainly an alternative we’re exploring.

Tim Trenary

And Rich, I want to add. I mean, as you know, we already have a handful of facilities in which we run multiple products in those facilities. So, I do think that that’s an opportunity.

Unidentified Analyst


David Leiker – Baird

Well, the question is was procurement centralized before?

Rich Lavin

The Company has been on both sides of that. I think about 24 months ago, they broke up a global purchasing organization and put purchasing into the facilities. And I think the facilities have done a good job over the past couple of years managing their delivery requirements. I don’t think with this personal purchasing responsibilities we’ve really leveraged our, spend to the extent that we can.

So, putting Global purchasing under Timo Haatanen, who also has global after markets and structures, puts purchasing in the hands of someone who has deep experience packed around the purchasing area. And I think by bringing it back under a single leader, we’re going to have an opportunity, really to leverage our, spend to a greater extent.

David Leiker – Baird

Well, that’s of all the additional questions there, management will be available in the player (ph) for a breakout. Please join me in thanking Rich and Tim for sharing their thoughts on the company.

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 All other use is prohibited.


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

About this article:

Tagged: , Auto Parts,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.