Commercial Vehicle Group's (CVGI) CEO Patrick Miller on Q1 2018 Results - Earnings Call Transcript
Commercial Vehicle Group, Inc. (NASDAQ:CVGI) Q1 2018 Earnings Conference Call May 4, 2018 10:00 AM ET
Terry Hammett – Head of Investor Relations
Patrick Miller – President and Chief Executive Officer
Tim Trenary – Chief Financial Officer
Mike Shlisky – Seaport Global
Ray Benvenuti – D.C. Capital
Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Commercial Vehicle Group Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.
I would like to introduce your host for today’s conference Mr. Terry Hammett, Head of Investor Relations. Sir, please go ahead.
Thank you, Michelle, and welcome to the conference call. Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group, will provide a brief company update; and Tim Trenary, our Chief Financial Officer, will provide commentary regarding our first quarter 2018 financial results. We will then open the call up for questions.
This conference call is being webcast and may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost-saving initiatives and new product initiatives among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties 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; financial covenant compliance and liquidity; risks associated with conducting business in foreign countries and currencies; and other risks as detailed in our SEC filings.
And now Patrick Miller with a brief company update.
Thank you, Terry. Good morning and welcome everyone. I appreciate you joining us today as we discuss our first quarter results, our end market performance and our forward opportunities. We are pleased to report that our first quarter 2018 revenues improved by $42.3 million or by 24% over the prior year period. Operating income was $15.5 in the first quarter of 2018, a significant increase over the $4.6 million of operating income in the first quarter of 2017.
Tim is going to provide further detail on our financial performance in a moment. Our two major market segments North American heavy-duty truck and global construction continue to ramp up demand as we progress through the first quarter of this year. Our top OEM customer showed strong year-over-year sales increases in Q1 and there are sign to indicating that these growth trends could continue into 2018 especially in truck and bus.
North American medium and heavy-duty truck order rates performed strong in the first quarter of this year, reflecting the second best level in history. These order levels are good predicators that 2018 is likely to be a strong build year. As the OEMs work to increase production to elevate the increasing backlogs. We believe solid trucks fundamentals including pricing, equipment utilization and used truck values coupled with continued economic growth in the United States support this strong truck demand for the full year.
ACT and FDR are currently forecasting 328,000 and 330,000 units, respectively for 2018, up from 256,000 units in 2017. Accordingly, we are maintaining our 2018 Class 8 truck production forecast of 300,000 and 325,000 units. On the OEM construction side, which represented approximately one-fourth of our consolidated revenues in 2017, market conditions in 2018 appear to be favorable year-over-year, due in part, to larger-than-expected supply chain constraints in 2017.
Most of the global regions that we support are seeing elevated consistent growth, including Asia, Europe and North America. Asia Pacific market continues showing a favorable growth trend with heavy and medium-duty construction machinery, expected to continue growing around 20% to 25% year-over-year, driven by machinery exports into China infrastructure actions.
North American fundamentals for construction are also in good shape, with higher backlogs and channel inventories leveling out. The North American heavy and medium-duty construction market is expected to grow 30% to 35% in 2018, when compared to the prior year as a result of an improved global construction industry, production backlogs and exports attributed to a weaker U.S. dollar.
The European market supported locally by our KAB Seating team and our wire harness operations is expected to grow its medium and heavy-duty construction market by 25% to 30%. Additionally, several of our off-road customers also participate in the mining industry, which has seen a recovery, driven by the higher commodity markets. We are encouraged by the trend we see in these markets that we participate in, and the orders look favorable for these markets, as we progress throughout 2018.
Both segments within our business contribute to our improved performance in the first quarter 2018, with our Global Truck and Bus segment, sales up almost 26% and our Global Construction and Agriculture segment, sales up 24% as compared to the same period last year. In addition to the higher sales, we’re also seeing higher operating income. Both segments of our business are adjusting to becoming more accustomed to the sharper-than-normal increases in production, in both the North American Truck and Construction markets we serve.
We do expect to see additional volume pressure as the North American Truck OEMs push to meet order demand. Year-over-year, our operating income margin improved from 4.5% to 9% in our GCA segment, while our GTB segment improved to an operating income margin of 10.3%. Although, conversion of incremental sales to operating income is still not where we would like it to be, mostly burdened by commodity prices, [indiscernible] costs associated with accelerated build rates. We have made significant progress since this time last year.
The majority of commodity challenges are related to steel, copper and chemical-based components. Prime components of the seats, structures, interior trim and the wire harness products we produce on a global basis. We’ve made some progress with our customers on raw material cost recovery, and there are more pending actions underway to reduce this impact over time. We have to mention that if commodities continue to increase, our pricing will trail that dynamic.
Before I turn it over to Tim to review the numbers, I want to recognize two of our facilities, who had an outstanding performance and are recipients of the annual 2018 President’s Award. At Chillicothe, Ohio facility, Escort Manufacturing value stream has won the best Lean Value Stream President’s Award and the Esqueda, Mexico wire harness manufacturing facility is one of the most improved Value Stream President’s Award.
These awards are based on a set of objectives performance measurables, evaluated annually by our operational excellence group. You may recall Esqueda with a new wire harness facility we started last year, and the gains they are making are impressive. The performance by these two teams is exemplary as supported by the data. Both teams achieved a 90% score in the six target metrics, safety, first pass yield, customer quality, schedule attainment, efficiency and downtime percentage. We look forward to providing you with updates on the progress we have made with our lean operating initiatives across our global enterprise, as we progress through the year.
Tim will now cover the quarter’s financial results.
A - Tim Trenary
Good morning. Sales were up 24% this quarter compared to the prior year period and operating income rose to $15.5 million, a margin of 7.2%. This was achieved notwithstanding the continuing pressure of rising commodity prices, tightening labor markets and costs associated with the accelerating build rates. As for the company’s consolidated financial results for the first quarter of 2018, revenues were $215.7 million compared to $173.4 million in the prior-year period. This improvement in the top line is primarily attributable to accelerating heavy-duty truck production in North America and higher global construction equipment production.
Foreign currency translation favorably impacted this quarter revenues by $7.1 million, or 4.1% as compared to the first quarter of 2017. Notwithstanding the significant improvement in the sales, we continue to maintain our costs discipline. SG&A or selling, general and administrative expense of $15.3 million for the quarter is not up substantially. Operating income in the first quarter was $15.5 million, a margin of 7.2% compared to $4.6 million in the prior-year period. These improved results include the benefit of the actions taken to address the costs associated with the labor shortage in our North American wire harness business and the absence of the facility restructuring and litigation settlement costs in 2017.
Net income in the first quarter 2018 was $9.9 million or $0.32 per diluted share as compared to $0.6 million or $0.02 per diluted share in the prior year period. The effective tax rate in the first quarter was 27%. We modeled a 25% to 35% effective tax rate for the year. Depreciation expense in the first quarter 2018, was $3.5 million; amortization $0.3 million; and capital expenditures were $1.8 million. Although capital spending in the first quarter was unusually low, we expect a spend increase as the year progresses, and therefore, our 2018 capital spending plan remains in the range of $15 million to $18 million.
Turning now to our segment financial results. Global Truck and Bus revenues in the first quarter of 2018 were $128.3 million compared to $102.1 million in the prior year period, an increase of 26%. This increase is primarily attributable to the higher North American heavy-duty truck production. Operating income in the first quarter was $13.2 million compared to operating income of $8.3 million for the prior-year period. This increase in operating income reflects the increase in sales volume and the absence of the $1 million of costs in 2017 associated with the now completed facility restructuring.
As for the Global Construction and Agriculture segment, revenues in the first quarter of 2018 were $91.2 million compared to $73.5 million in the prior year, an increase of 24%, due primarily to higher global construction equipment build. Foreign currency translation favorably impacted first quarter revenues by $6.7 million, or 9% as compared to the first quarter of 2017. Operating income was $8.2 million in the first quarter of 2018 compared to $3.3 million for the prior-year period. These improved results include the benefit of the actions taken to address the costs associated with the labor shortage in our North American wire harness business.
Because of the significant improvement in our top line over the past year, including a 15% increase in the first quarter of 2018 sales as compared to the fourth quarter of 2017, we’re investing in working capital. Accordingly, as of the end of the first quarter, the company had borrowings of $7.5 million under its asset-based revolver. Liquidity was $94 million at quarter-end, $38 million of cash and $56 million of availability from the asset-based revolver.
Here are some takeaways from our call this morning. The cost reduction and facility restructuring initiatives are complete. These initiatives yielded benefit at the upper end of the range anticipated at the outset and cost about half as much as initially projected. Although, labor availability for the wire harness facilities in Mexico continues to be a challenge, the actions taken to address the matter have by and large been successful.
The company’s top line reflects healthy economies where we do business and therefore, higher build volumes for our products. Sales were up 24% this quarter from a year ago and sales are up 15% from last quarter. But the healthy economies have strained supply chains and putting pressure on commodity prices and causing some labor markets to tighten. We have initiatives underway to address these business issues.
Notwithstanding the significantly higher sales, the company’s SG&A expense is not up substantially and is contributing to operating income, which is up threefold this quarter compared to the prior year period. All things considered, the company is doing well.
That concludes our prepared remarks. Thank you for joining us this morning. It’s a pleasure to be with you today. And we’d be happy to take any questions you may have. Michelle?
Thank you. [Operator Instructions] Our first question comes from the line of Mike Shlisky with Seaport Global. Your line is open. Please go ahead.
Good morning, guys.
Good morning, Mike.
Kind of wanted to start with the operating pull-through question, assuming a solid quarter on that here. Could you give us a sense based on what you know now? Whether you think you can keep that going at least for the year-over-year operating pull-through into Q2? Maybe I could get a few comments if you could also on Q3 and Q4, there are some prior year lumps in the margin that might be worth looking at as we model Q3 and Q4 of this year?
Okay. Hi, Mike it’s Tim. Yes maybe the best way to sort of set the context for this answer is the pull-through, the sequential pull-through, the – more specifically, the first quarter of 2018 compared to the fourth quarter of 2017, that pull-through was around 25%, which is well within the range that we expect. And frankly, going forward, assuming the commodity prices don’t spike up tremendously, and said another way, simply may continue to drift up, which is what we expect. We would expect to be able to continue to deliver pull-through at or near the low end of our range of 20% to 25%, that would be on a sequential basis.
Perhaps, again, assuming there aren’t any big aberrations on a year-over-year basis because of the charges you mentioned a moment ago were associated with Mexico, there might be somewhat higher pull-through year-over-year. To your point of – later in the year, I think you’ve seen this before, certainly in the fourth quarter, production schedules tend to get a little choppy, sales drift down, there’s holidays. So some times we – generally the pull-through falls off a little bit in the fourth quarter.
Okay. That’s a great color. Just to kind of clarify, the truck build in U.S.-Canada is generally a little higher in Q2 than it is in Q1, that’s just typical seasonality. And construction, I believe, when you hear from some of the OEMs, they’re still ramping up their production rates in Q2, probably in Q3 as well for both those markets. So just – so is it kind of fair to say then, if we do see sequential improvements in top line, you’ll see sequential improvements in operating profit to go along with it? There’s no lumps that were in 1Q of special savings you got et cetera that, that made the first quarter unusually high. Things look pretty smooth going forward.
Yes. I think the first quarter was – there’s no unusual pluses or minuses in the first quarter. It’s representative of the business.
Okay. Great. As you go through some of the other companies first quarter conference call, some of the OEMs, there are still companies that appear to be in need of some wire harnesses. There’s been some global supply issues. You guys seem to be producing reasonably well. I don’t want to go into any actual individual contracts or companies here, but do you think there are opportunities to gain some business from some other suppliers that have not been able to supply as well as you have?
Well, so this is Pat. Good morning, Mike. It’s a good question. I think that the issue probably is complicated because you’ve got global supply chain constraints on some common components that cut across the lot of wire harness, and those are going to affect everybody and then – and are affecting many of our customers. And so it really depends on really depends on the kind of conquest you’re talking about whether it fell within those constraints or not.
So some common components, there aren’t a lot of it, alternatives are least validated alternatives. And we are working to try to mitigate some of those things with some our customers, but I think those are some of the issues. That being said, I do feel like there’s opportunities. We’ve talked before, we’re still looking to expand our capacity this year. And as we do that we hope some of those other constraints don’t mitigate those opportunities that you you’re referring too.
Okay. And maybe then more broadly, Pat. Can you give us some color on your efforts to kind of get a bigger foothold in some other new markets, such as further Ag penetration or the appliance market, et cetera?
In relationship to just – you mean, general growth.
Yes, kind of, like, if you can update us as to how it’s going on getting some new deals signed with other end markets out there
I would say, we’ve had some minor successes that we think are important, but they’re not necessarily showing up in a big way on the top line. Honestly speaking, as we’re – we’re trying to deal with some of these larger market accelerations, it has overshadowed and as we’re trying to align and increase our capacities to match our customer demand. I think that’s overshadowed some of the organic activities with the exception, I would maybe point out in Asia, we continue to focus on growing our businesses in those regions, where we’ve got some – the markets that just have – are expanding, so there’s lots of opportunities there. And so I think that’s how I would answer it, Mike.
Okay. May I just step back real quickly on the high cost of raw materials here. Could you update us on how that went in the quarter? Were you able to go back to some of the OEMs and maybe get a bit – better contractual pass-through rate there? Or is that still something that’s pending here for the rest of the year?
Yes, so it’s a mixed bag. We have gotten some recovery and – commodities affects us for sure. It’s a big part – our spend is a big part related to some of the core materials that I mentioned in my opener, and so we still have actions pending. Unfortunately, I think that the problem is just the bar keeps moving up, so as we’re working through deals around the globe frankly, not just North America, it matters what’s going on with the raw material prices.
And right now, as Tim mentioned, we’re seeing that still ticking up. And I do think, what happens in these trade discussions and things that are going on in that arena can impact that one way or the other. So there are still actions pending for sure. And we are not at a state of equilibrium. But we did have some things happen that were in our favor in the first quarter and we had some deals that we worked out, but we’re still at the negotiating table in other areas.
But if there, I say that the sort of pool mines is definitely opened with the OEMs and there’s a good back and forth and people are aware of what’s going on, on the other side of it, right?
Yes. There is no doubt that everybody is aware, and it comes down to details and nuances of how things are going to be managed and handled. And so for us it’s just really – it’s required, it’s mandatory that we have ability to pass on those raw materials, and so that’s thing we we’re working. I think we will get those deals worked out. We told you three to six months in the first quarter, and I think that’s pretty commensurate, some things may phase out a little bit into the third quarter. So I hope to have at least our arrangements clarified by then.
Mike it’s in the package of supplement. Just please a little bit – just to reiterate I think what Pat alluded too. These conversations aren’t – you don’t have them, and then they’re done in this environment. As we indicated, as long as the commodity prices continue to drift up, the compensations become ongoing sequential, if you know what I mean. So, and as Pat alluded to in his comments, as long as the commodity prices are going up and we’re having these conversations, even as we experience success because the prices are going up, it still puts some pressure on the margins.
Okay. That’s fair. One last one from me, maybe this is for you, Tim. I guess you had the interest costs ticked down like 33%, 35% from the last quarter. I know you did a big refi last year, but that was in the second quarter, I think. So can you give us a sense as to what happened there? And if there – is that a good – is the $2 million or so run rate good to go for the rest of the year? Or with a little bit of borrowing here, it may go up just a little bit for the second, third, and fourth quarter?
Yes. So Mike, $80 million of our $172 million, now I think of term loan debt is fixed with an interest rate swap. And as interest rates increase as they – as you know, there’s a done, that swap becomes more valuable and so the accountants cause us to sort of mark that to market, and so it gets more valuable and as the offset to that, reduces interest expense in the quarter in which the mark happened. So the interest expense in the first quarter is unusually low because of that mark-to-market adjustment, I think that, Terry, will correct me if I get this wrong, but I think interest expense in the range of $3 million to $3.3 million a quarter, setting aside any mark-to-market would be a good number.
Okay. Perfect. I will pass the line. Thank you so much guys.
Thank you. [Operator Instructions] Our next question comes from the line of Ray Benvenuti with D.C. Capital. Your line is open. Please go ahead.
Hi, good morning Pat and Tim. Congratulations, it’s a very nice quarter. I wanted to follow-up more on the penalties that you’ve seen in the last quarter based on the three areas that you wish to accelerating labor costs material and the cost to support ramping schedule. Maybe you can get us a feel for, in dollar amounts, how much that’s affecting operating income? And hopefully what you think you might be able to recapture of that material outflow through to your customers ultimately?
Hi, Ray, it’s Tim. We have we’re not prepared to sort of articulate at that level of detail the impact that this is having – those three elements are having on the business. Sufficed to say that when taken together as we’ve said in the past, they have resulted in some margin compression. We’ve been able to deal with much of it, certainly, much of the labor issues in Mexico, some of the manufacturing and efficiencies associated with the accelerating build rates are coming down, but they’re still there to some extent, additional scrap, additional labor, additional over time, et cetera, but they’re coming down.
And as I said, with respect to the material increases, those issues are still before us and are still creating some pressure on the margins. But, as Pat indicated, we have a number of conversations underway to mitigate that impact. So all three of them continue to be front of mind and the part of our business plans, and I think we’ve got a fair number of initiatives underway to address them.
Understood. Thanks for that Tim. One last question, you reported that you had about $7.1 million of foreign currency translation impact on the revenues year-over-year. Could you kind of give us a feel for what the currency translation impact has been on the operating income line?
Well, that’s a very complicated answer and calculation. Let me just sort of give you rule of thumb. Again, it depends on where, which region the foreign currency translation impact occurred. But by way of example, if it occurred in an area of the globe in which the company has a good operating income margin, then basically you can take that $7 million, and let’s say, that the area that it occurred and just to make this simple, was 10%, it would have 10% – $7 million or $700,000 impact on the operating income.
So that, as I said, that was just an example, and really the real calculation gets down into the various geographies and where it occurred. So rule of thumb, you could apply some operating income margin percent to that $7 million to sort of give you some sense for the company taken as a whole, what the impact is on the operating income.
Okay. Great. Well Tim and Pat thank you for taking my questions. Again, very nice quarter, keep up your work. Thanks.
Thank you, and I’m showing no further questions at this time, and I would like to turn the conference back over to Chief Executive Officer, Patrick Miller.
Thank you. Well, I just want to tell everybody, I appreciate you joining the call, and I think, Tim, summarized it pretty well at the end of his opening comments. We’ve got a lot of positive things going from our markets and where we’re participating, and we are doing our best to make sure that we capitalize on that. We do still have a lot of challenges, and we’ve spelled some of those out and we’re working diligently to mitigate those challenges and optimize our benefits for the shareholders. So appreciate you joining the call, and look forward to talking to you soon.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.
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