Commercial Vehicle Group, Inc. (CVGI) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Commercial Vehicle Group, Inc. First Quarter Earnings Conference Call. My name is Marie and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the call over to Merv Dunn. Please go ahead, please proceed.

Good morning, and thanks to everyone for joining. At this point I’d like to turn the call over to Jeff Vogel, Jeff is standing in for Chad Utrup today. Chad is little under the weather. So Jeff, would you go through the Safe Harbor language for us.

Thank you, Merv, and thank you everyone and welcome to our conference call. Before we begin today’s call, I will read through our Safe Harbor language. Merv will then give a brief company update, and I’ll take you through our results for the first quarter of 2012, then we’ll take time to answer your questions. With that, I’d like to remind you that this conference call contains forward-looking statements. Actual results may differ than anticipated results because of certain risks and uncertainties. These may include, but are not limited to expectations for future periods with respect to cost savings initiatives, financial covenants, compliance and liquidity, new product initiatives and economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles to which CVG is a supplier, risks associated with conducting businesses in foreign countries and currencies and other risks detailed in our SEC filings. I would now like to turn the call over to Merv.

Thanks, Jeff, and thanks to all of you that’s joined our call today. We continue to see strong production volumes in the North American Class 8 market during the first quarter of 2012, as well as moderately positive trends in our bus and aftermarket orders for the quarter. Although our global construction markets were relatively flat for the quarter compared to the fourth quarter of last year, we currently expect moderate uptick throughout the balance of the year as we mentioned on our last conference call. As you know North American Class 8 orders have been fairly weak since the beginning of the year, but we still believe that we will experience a healthy build rate through the end of 2012 and we have yet not adjusted our estimates of 280,000 to 290,000 units for North America. We based our outlook on high fleet ages, which signals a continuation of replacement demand along with the backlog of orders. The American Trucking Association monthly freight index continues to show strong tonnage levels compared to a year ago, which should also help support continued demand for heavy truck. We are pleased to report that our operating performance delivered solid financial results during the quarter. We continued our trend of improved revenue and operating income. This quarter marked our twelfth consecutive improvement in operating income, excluding impairments and we’re extremely proud of this trend. At the end of first quarter, we had $90 million on the balance sheet and no debt borrowed on the revolving credit facility. With our solid balance sheet and our excellent liquidity, we feel we remain in an excellent opportunity to seek new business potentials on a global basis and are actively pursuing those opportunities. Throughout the quarter many of you have asked our acquisition strategy. We continue to seek opportunities that fit into our strategic goals of global expansion, diversification and product lines and an increase in our customer base. Sizewise, we will examine any opportunity we feel has the potential to add shareholder value. As we have said before, we’re primarily focused on emerging markets such as China, India and Brazil, but we will also consider opportunities in Russia, Europe and North America as they fit into our strategic business model. CVG has made up of many acquisitions over the years and acquisitions are an integral part of our growth strategy and remained a primary objective for the use of our liquidity. As we’ve discussed in the past, China has been a strong growth story for CVG, and they expect this year to see the highest revenue levels since we started production there in 2005. We currently expect revenues including internal product sales to reach over $90 million this year from our China operation and we are heavily focused on additional new business initiatives and growth of the domestic market. We are currently targeting over $200 million in revenues by 2015 in China; this type of growth is very exciting and we are extremely optimistic that we can achieve the same level of success over time in India, as we continue to gain momentum throughout the year. In March, we exhibited an array of products and new technologies at our 2012 Mid-America Trucking Show in Louisville, Kentucky. At the show, we had a special display which featured the new Care4 Station which we are producing for HealthSpot, Inc. The Care4 Station is a fully-enclosed medical kiosk, which we helped develop from concept through prototype and into production. It is designed to deliver primary care and specialty care to patients in settings such as pharmacies, truck stops, supermarkets and work places. CVG is interested in this exciting market because we want to be an integral part of shaping health trends in the industry and as a result an integral part as the solution that drives cost in the industry. We believe CVG can become a solid partner to our customers, fleets and drivers across the country by utilizing the Care4 Station station strategy. We believe HealthSpot’s advanced technology offer sensor solution and we are excited be part of it. In addition to working with drivers in our OEMs in this effort, we will manufacture key parts of the Care4 Stations at multiple CVG facilities throughout the country. All the pieces are then brought together and assembled into kits and shipped directly to the HealthSpot locations, where they are assembled and tested before they are put into operation; this new product fits well with CVG and is also consistent with our corporate strategy to use CVG’s comprehensive capabilities to diversify our product base and end markets, while at the same time utilizing forward thinking and technology to bring innovation to our industry and to our customers. To recap the quarter; we’ve remained focused on our strategy and vision to be continuing expanding our global footprint and product portfolio. We also continue our efforts to increase market share and our global end markets while maintaining a lean and flexible cost structure as well as a solid and sustainable financial foundation. At this point, I will turn the call over to Jeff for a financial review and then we’ll walk through questions after that.

Thank you, Merv. Our revenues for the past quarter were $237 million, which is an increase of $54.5 million or 30% from the first quarter of 2011. This increase is primarily as a result of our global OEM truck market revenues, which has increased nearly $43 million or 57% from the first quarter of 2011. Our global OEM construction revenues were up modestly by a few million dollars or 3% from the same period last year while our other end markets collectively increased approximately $10 million. This increase in our other end markets was primarily related to strong orders from aftermarket and bus products offset by a slight decrease in our military market. Operating income was $18.5 million or 7.8% of revenue, which is an improvement of approximately $10.4 million over the prior year period. Included in our cost of revenues in our first quarter of 2012 is a gain of approximately $865,000 related to the mark-to-market of our foreign exchange contracts. Sequentially, revenues were up approximately $11.2 million from the fourth quarter of 2011, with an operating income increase of $2.4 million or 22% contribution margin. As mentioned on our last earnings call, we did expect approximately $1 million in cost headwinds from a timing of our annual wage increases and LTA give backs in the first quarter. Taking this impact into consideration along with the gain from mark-to-market of our foreign exchange contracts, we are extremely pleased with our operating performance for the quarter. Depreciation and amortization was $3.1 million and capital spending was $3.4 million for the quarter and our interest expense was generally in line with what was discussed during the last conference call. Tax provision for the quarter was better than expected and is primarily related to tax expense for our foreign operations while our U.S.-based entities continue to be subject to valuation allowance. Looking towards the balance of 2012, our estimate for tax provision at this time remains in the range of 15% of pre-tax income, as we continue to monitor the status of our valuation allowances as we progress through the year. From a fully diluted EPS standpoint, the quarter came in at $0.42, which we are again proud to report as our highest diluted EPS levels since the fourth quarter of 2006. As of the end of this past quarter, we had a cash balance of approximately $90.9 million. This cash balance combined with our ABL revolver capacity means we have nearly $128 million of liquidity immediately available as we continue to look at strategic opportunities. As we look to 2012, we are not providing guidance. Our estimate for North American Class 8 units remain in the range of 280,000 to 290,000 units and we currently expect our global OEM construction market to remain flat to up 5% from what we saw in this first quarter of 2012. To recap, this quarter again marks our highest revenue, operating income and diluted earnings per share since the fourth quarter of 2006. This is our twelfth consecutive quarter of operating income improvement when excluding impairment and restructuring charges. This is something we are extremely proud of and we look forward to continue our focus on operating and financial improvements as well as our long-term growth strategy as we move forward. With that, we’d like to open up the call for any questions you may have.

[Operator Instructions] And our first question comes from the line of Robert Kosowsky from Sidoti & Company.

So the $900,000 gain that was included in the cost of goods sold, is that correct?

That’s correct.

Okay. And then also, just Merv what are you seeing as far as your production rates right now for truck, I mean, do you expect that to be taken a step down in second quarter, maybe third quarter, just real cycle [ph] in the weak orders that we’ve seen recently?

Well, the weak order so far hasn’t translated into any of our production schedule showing a dip from our customers. So we are retaining the same level and what we’re hearing from the predominant share of our major customers is that they are not going to be cutting back much on schedules. We guys have done the conference call with most of them and I think 2 of the 3 big ones are continuing at the build rate that they’ve had.

Okay. And then, also what are you seeing on the build side from a construction standpoint, do you see that kind of ramping up from 1Q?

We’re seeing that we’re kind of holding it flat in North America. We’re understanding from China that we’re starting to pick backup over there on both truck and on construction. So that seems like it’s going to have a little bit of an uptick but in the U.S. we are kind of staying pretty much flat with our projections.

Okay. And then finally, just a little bit more detail about like the genesis of the Care4 strategy and just kind of where that came from and kind of what the ultimate opportunity is?

Well, it’s a local business that started out and it’s really kind of revolutionizing the healthcare industry that it’s bringing a live doctor via video screen with actual medical devices available, which is really the kind of the difference between that and just video conferencing a doctor and he has actually got high-tech medical devices in the station to be able to do. And we’ve seen all the announcements come out that really the truck driver profession is one of the highest health risk professions in the nation. And with already a shortage of truck drivers, we just feel like there is going to be a major emphasis being put in on that. Plus when we look at our own factories, if we can set up, especially larger factories, much larger than some of ours can set up one of these stations inside the factory, where people can schedule their doctor’s appointment before or after work or during their lunch and breaks. It’s going to take some stress off of absenteeism. So we think it’s a great future. It took -- it allowed us to use up some capacity on some of our equipment that was not running at full capacity. It’s processes that we already had in place. So it was like we continue to do, it may be a process that’s used on a grab armrest for a door panel for a semi truck, might be a dash for a piece of construction equipment, now it’s making the big panels for a Care4 Station.

Okay. And then just finally, what are you looking at for the pace of new products launches during the course of the year, and how much total incremental revenue do you think you’re going to get from new products?

Well we’ve got, we kind of don’t get a lot of projection on what we’re going to do on new products unless we’re looking at aftermarket products. This year our goal is every year is to launch 2 new products, last year it’s a floor mat and new headliner. This year obviously the Care4 Station is one of the products that we’ve launched, but we’ve also got a new high-tech flooring that is going into place that’s a foam in back flooring that will allow clearer logoed emphasis, I think we present that at mats [ph] and also at one of the construction shows in Vegas. We’ve got a new over-molded wiring harness that’s starting to take off, we’ve got our new business venture that we’re doing for Skoda in Europe that’s taken off. Our new compact seat, which we just launched, we’re starting to produce some in India of a new compact seat for construction. So we got a lot of coming, but we always look on organic growth between 4% and 6% a year.

Okay. And do you think that's going to hit kind of pro rata over the course of the year, that like 4% to 6%?

Well, we've always hit between in between those numbers, I think last year it was even maybe up to 10%. But that's kind of the guidance we always give between 4% and 6%, we’ve never really fallen under that.

Okay, thank you. And our next question comes from the line of Ann from JPMorgan.

It’s Ann Duignan. Just a couple of follow-ups. Could you delve a little bit deeper into your comments on China's build rates beginning to pick up both on the truck side and the construction side, Merv, what specifically are you seeing there on both end markets?

What we're hearing from the customers and then what we're seeing out of the Chinese government about what they’re willing to talk about, I was just in Thailand last week, got back on Thursday a.m. We're seeing an overall optimism level picking up. We're seeing, talk about the GDP growth coming back to new level in India. We just saw the rate cut on interest, which is one of the first in a number of years. And the whole optimism in Asia is starting to pick back up, the truck levels we’re hearing from the customers and as well as well as the construction levels that they're starting to pick back up and starting to ramp up. They did not, their goal is obviously to get back to the numbers that they were before. And they think that they will have a complete rebound in -- by the second half of the year.

So would you characterize that more as that they hope that things get better in the second half of the year at this point rather than, “Gee, we’re actually seeing evidence of a reacceleration?”

No, we're getting, starting to get information from our customers to -- that the ramp up is starting and the schedules are starting to come back out. They’re fully expecting a recovery in the second half.

And is that specifically China construction and China truck or is that kind of emerging markets overall?

China construction and China truck, but we're hearing out of India some pretty good things coming out of there too.

Okay. I appreciate the color. And then Merv, you seem to emphasize the fact that you’ve got $90 million in cash, you’ve got capacity of about $128 million. Is that -- should we be anticipating some announcement in the near-term?

Ann, with us being made up about 18 countries or 18 companies you should always anticipate if we got cash and we got markets that are taking off in the right direction, and, or either a slump in an area where we might be able to pick up something at a reasonable multiple you know we’re going to be buying.

And any, in that context, is there any specific area in terms of product area or region where you think the opportunities are greater?

Well, we think obviously, that in Asia, and we obviously, I think we announced it over a year ago that we had signed an agreement with Volvo for Thailand and India for seats. So we’ve got to be setting up some type of operation in those 2 countries. Our emphasis will be on primarily Asia because that’s where we’ve got the biggest opportunity with brand new customers to get into the market deeper and deeper penetration with domestic Chinese manufacturers as well as the India manufacturers. Brazil is high on our radar screen with some of the maybe -- I’m not sure exactly the term to use for Europe, it has been a little bit slower than in the past. We hopefully, we’ll see some more things become available in that area at decent multiples that would be attractive to us. So all those things are kind of our radar screen at any given moment, we have several that we’re looking at.

And our next question comes from the line of David Leiker from Baird.

It’s actually Joe on the line for David. Just some quick ones from me. Could you just clarify what Bostrom contributed to revenues in the quarter?

Just a minute before we answer that.

Sure. I’ll maybe just ask my next one. With the military revenues not increasing and the commentary of that FMTV production is actually moving up. I’m just wondering if your content on that platform has changed or if it may be in nexus [ph] use going on that you’re not seeing an increase in your defense volumes?

I think on defense what we’re seeing, it’s been slight decrease and we’re not seeing with the ground transportation in defense any large orders that’s telling us that it’s going to go back up over where it’s at today. We think if anything, we’ll still maintain a slight decrease or pretty flat revenues from it.

[Operator Instructions] And we have another question from Robert.

Merv, I was wondering if you can just give a sense of how efficient your operations are going right now through the plants and do you see more areas for improvement and margin expansion at the current production rates or are you running pretty efficiently right now?

Well, if we’re running real efficiently it’s not been in any plans I’ve been in. So I think there is always opportunity for improvement, even when we’ve been running at what some of our guys would probably consider peak performance, walking through the plants. We’ve been around this long enough to know that we’ll probably never be what this group is content with it running at peak performance. So yes, there is opportunities to get better realizing that lot of the workers that we got especially in the temp ranks were not here 6 months ago. So the efficiency improvements that you get from there. Lines are just now ramping up, maybe for a second shift -- full second shifts so you pick up efficiencies there. So no, we think there is definitely room for improvement. And when we go to the Asia facility, one of our customers that we were bringing online, a domestic guy over there, they’re doing some changing around, I think there were some engine changes in Europe or in Asia that kind of happen like America when the engine manufacturers may have been ready before the fuel manufacturers were. So that’s been affecting a little bit of China also. So we think that will be picking up and that will help our efficiencies internal also.

Okay, but you would expect that on similar revenues say 2, 3 or 4 quarters down the road, you should have higher gross margins just based upon the kind of continual improvement that you do see?

Well we shoot for that every quarter to have improvement and I think this is the twelfth consecutive quarter that we have shown improvement.

Okay. And was there any like meaningful swing one way or the other from raw materials and maybe recapturing some of the previous price increases in the quarter?

Well we took a beating Q2 of last year because of raw material increases weren’t we said that they will be catching up in 3 months and obviously they caught up in 3 months and like we said at that point our raw materials anywhere run from usually 30 days to 6 months on the readjustment and we have changes come through. But we’re not right now not seeing a whole lot of raw material swings. I know there is one about the resins that’s about to come out. But that’s really not of any major impact to us.

[Operator Instructions]

Okay, it shows no more questions, is that correct?

There are no more questions.

Okay, well we would really like to thank you guys for taking the time to join us today. Obviously we’re extremely pleased with our quarter, but we’re probably even more proud that this is the twelfth consecutive quarter that we’ve shown improvement and it’s a good string and we continue to plan on adding to that string. So look forward to talking you again next quarter if not before then. Thank you.

Thank you, ladies and gentlemen, this concludes your conference call for today. Thank you for joining us. And you may now all disconnect.