Commercial Vehicle Group, Inc. (CVGI) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Commercial Vehicle Group Incorporated Earnings Conference Call. My name is Krystle and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. John Hyre, Director of Investor Relations. Please proceed, sir.

Thank you, Krystle, and thank you and welcome to everyone on our conference call today. Before we begin today’s call, I’ll read through our Safe Harbor language. Rich Lavin, our CEO will give a brief company update and then Tim Trenary, our CFO will take you through our 2013 third quarter results. We’ll then go to a question-and-answer session. With that, I would like to remind you that this conference call contains forward-looking statements, including but not limited to expectations for future periods with respect to market trends, cost saving initiatives, and new product initiatives. Actual results may vary 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 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 detailed in our SEC filings. I would like to now turn the call over to Rich.

Thanks, John, and good morning everyone. Welcome to our call. As mentioned in the press release we issued last night, our major end markets, specifically North American truck and global construction experienced a slower than anticipated quarter and that negatively impacted us. Despite that, we remain focus on actions to transform our organization and improve our performance in the fourth quarter and in 2014. Going forward, we will continue our efforts to deliver a strong fourth quarter and position the company for profitable growth and improved shareholder value in 2014 and beyond. During the third quarter, we experienced softening end markets as several large customers announced plans to take weeks out of their production schedules through the end of the year. Industry estimates now indicate that Class 8 truck builds in North America are likely to be approximately 252,000 units. We also anticipate the global construction equipment business will remain flat for the remainder of the year. We had been projecting a second half industry uptick in construction equipments, but several of our principal customers have cut their second half build schedules and that impacts our business, of course. As you know, we have a track record of flexing our cost structure in response to cyclical markets and we continue to take the necessary steps to ensure that are costs match the changing demands of our end markets. At the same time, we have made changes in our organization to right-size our business and position us to take advantage of both short and long-term strategic opportunities in key markets. Specifically, we implemented various right-sizing and cost reduction initiatives in August and September. These included a reduction in contract and temporary labor, a reduction in overtime and travel and entertainment, a salaried and management hiring freeze and an across the board reduction in our salaried and management workforce. The reduction in force resulted in a charge of approximately $1.8 million for the quarter. Also during the quarter, we continued with efforts to enhance our market position and the short and long-term performance of the company. To facilitate that work, we engaged an outside consulting firm to assist in developing initiatives to drive cost savings and accelerate profitable growth. In September, we concluded a 10-week phase of data gathering and assessments, during which we identified a list of initiatives to drive performance improvements across the company on an accelerated timetable. With the first part of the transformation process completed, we have moved to the execution phase of these projects, sharply focused on delivering the value proposition for each of the projects. The areas of focus include; building on our strong North American truck market position and identifying strategies to increase support of key customers, improving our global construction and agricultural marketing and sales efforts to be better positioned to serve these key segments. I’ve mentioned the importance of organic growth opportunities. And construction and agriculture globally are 2 segments where we will be sharply focused in the coming quarters. Next, developing plans take advantage of growth opportunities in China, India and Southeast Asia across all of our lines of business, marshalling and directing our research and development resources toward meeting customer needs and delivering enhanced value for our customers, refining our product design and introduction processes, rationalizing our manufacturing footprint, driving operational excellence throughout our facilities and de-layering the organization through a spans and layers analysis to reduce cost and expand leadership scope. This consulting work resulted in a $2.8 million charge for the quarter, which we view as an investment in the future of CVG. This in-depth evaluation of the company will, I’m confident, contribute to improve our overall performance and enhancement of our competitive position. As an example, the reduction in force resulting from the spans and layers review is expected to produce in immediate annualized cost savings of approximately $4 million. We will begin to see the impact of that work in the fourth quarter. The other initiatives I mentioned earlier will deliver value in 2014 and beyond as we continue along the execution path. During the quarter, we also announced the realignment of our executive leadership team to better focus CVG on customers and global end markets. Under the new structure, Kevin Frailey is serving as President of Global Construction, Agriculture and Military. Pat Miller is serving as President of Global Truck and Bus. Timo Haatanen is serving as President of Global Aftermarket and Structures and of Global Purchasing. These changes have established a more aligned organization structure with a stronger focus on our major global end markets and our customers’ specific needs and opportunities. Each president has accountability for carrying out the CVG global strategy within their businesses from product design to sales execution. This will also provide our customers of one point of senior contact for each CVG product and end market. The feedback we’ve gotten from the customers we have spoken with, regarding to changes in the organization have been quite positive. We are now aligned with our global customers in better position to capture their voices in our products in go-to-market strategies. As a part of this realignment, we also announced the addition of Geoff Perich as Managing Director of Asia Pacific which includes China, India, Southeast Asia and Australia. Geoff brings more than 30 years of experience in the construction equipment and mining industries in Asia Pacific, North America and Australia to CVG. He is based in Shanghai and has a director reporting relation to me with a strong matrix reporting relationship with the global presidents, as he executes a regional strategy through day to day leadership of operations in those markets. With these changes, and the addition of Tim as CFO, we have an exceptionally strong leadership team in place to grow our global business. We’re currently looking to supplement the team with a Managing Director of European markets to succeed Timo who held that position before transitioning to President of Global Aftermarket and Structures and Global Purchasing. When appointed, this person will be responsible for the day to day execution of our European customer, product, engineering and sales strategies, as Geoff is on a Pan-Asia basis. The Managing Director will continue to be based in Europe, with a similar matrix reporting relationship as Geoff with the division presidents. In other news during the quarter that I’d like to share with you, our C.I.E.B. facility in the Czech Republic, which produces seating for truck and bus, was granted the CEKIA Stability Award in September. Our employees there helped the company earn the highest rating possible in the Most Stable Company of the Year category, recognizing the facility’s excellence in serving our customers. We congratulate them for their achievement which sends a very positive message to customers about our status as a quality supplier in that area of that world. In addition, our new India operations received a certificate of best delivery from Tata Marcopolo Motors Ltd., recognizing our strong partnership with Tata’s Lucknow operations. Furthermore in August, CVG’s Sprague Devices brand introduced a new line of all-makes wiper motors for the Class 6 through 8 truck aftermarket. For 8 decades, Sprague has been a major supplier of wiper motors and systems for medium and heavy-duty truck platforms. Sprague’s all-makes product means dealers and distributors will now be able to stock a small inventory of motors, wiring harnesses, and brackets while still covering most Class 6 through 8 trucks in the North American aftermarket. Just as we’re impacted by downward trends of our end markets, we will also benefit as markets recover. We’re beginning to see some encouraging trends in key markets as compared to the same period last year. I am enthusiastic and encouraged as we head into the fourth quarter and plan for 2014. Longer term, we believe we are well positioned for growth in the industries we serve, particularly as we build out our global business footprint. In the emerging markets, the continuing trend of urbanization, wealth creation and increased domestic consumption coupled with population growth and increased infrastructure needs will positively impact our key industries; construction, agriculture and transportation. We are committed to making the investments necessary to support our customers as they take advantage of these positive trends. Finally, as you know, Chad Utrup, who served as CFO for many years, announced his resignation effective November 1. I am very pleased that Tim Trenary joined us as Executive Vice President and CFO effective October 7. Tim comes to CVG most recently from ProBuild Holdings LLC, a privately held North American supplier of building materials where he was the Chief Financial Officer. Tim also brings strong global automotive supply chain experience as CFO of EMCON Technologies Holdings Limited and DURA Automotive. His industry experience and his background in finance function development, capital formation and M&A will help us take our performance to a new level. And at this point, I’ll turn the call over to Tim for a financial review.

Thank you, Rich. Good morning everyone, and thank you very much for joining us. As Rich mentioned, our 2 major end markets, North American truck and global construction remained soft in the third quarter. Additionally, certain of our customers have announced plans to take weeks out of their production schedules through the end of the year. For the third quarter of 2013, our revenues were at $187.9 million, a decrease of $16.9 million or 8.2% from the third quarter of 2012. This decrease reflects a decline in orders for new vehicles in our North American truck and in global construction end markets and a decline in orders for our military and agricultural end markets. Offsetting the declines in these markets were increased revenues in our bus, aftermarket and other end markets when compared to the third quarter of last year and incremental revenues from our Daltek and Vijayjyot acquisitions. We incurred an operating loss of $3.4 million in the third quarter, compared to operating income of $8.9 million in the third quarter of 2012. Net loss for the quarter was $7.3 million and earnings per diluted share was a loss of $0.25, compared to income of $30.5 million or a $1.07 per diluted share in the prior year quarter. As an aside, you may recall that the $30.5 million in income in the third quarter of last year benefited from $27 million of income tax benefit, which arose primarily from the release of valuation reserves of the company’s deferred tax assets. Operating results in the third quarter were impacted by $2.8 million in charges for third-party consulting services. Rich has described the benefits we expect to derive from our investment in these services. Also during the third quarter, we incurred employee separation charges of $1.8 million primarily for a reduction in force to right-size and delayer the organization. Anticipated savings associated with this reduction in force are approximately $4 million a year. Furthermore, assets totaling $2.7 million were impaired in the third quarter, of which $1.3 million related to impaired manufacturing equipment and $1.4 million related to impaired IT systems that are no longer in use. Cash as of the end of the quarter was $75.1 million and availability on our ADR [ph] revolver which has no outstanding borrowings was $27.2 million, net of $10 million liquidity block and $2.8 million in letters of credit. The cash balance at quarter-end benefited somewhat from the timing of certain payments at quarter-end. A few moments ago, Rich described some of the opportunities the new management team has identified, opportunities to increase our top line and to improve our cost structure. The realization of certain of these opportunities will necessitate investment in the business and I expect our liquidity to stand us in good stead as we develop and execute the initiatives throughout 2014. And with that, we’ll open the call up for questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Mike Shlisky.

Good morning. I wanted to ask you quickly about your efforts to kind of right-size your workforce. Given what happened in the third quarter, are you kind of done with all that work or are you still identifying additional cuts and additional savings in 2014?

Mike, this is Rich. We’re going to continue to review our organization as demands in the business change. The reductions that we took over the past couple of months were really the result of a spans and layers review that we conducted along with the outside consultant that got us to what we think is an organization today which is right-sized relative to the business opportunity that we’re looking forward to. So nothing further is planned at this stage, but as I mentioned, we’re going to continue to take a look at our organization and make sure that it’s sized relative to our business opportunity.

Okay, great. And then just want to ask you quickly, you also mentioned a sharper focus on the Ag business going forward, I think it’s kind of widely seen that it’s not going to be necessarily a huge growth business in the overall market in 2014. What can you kind of tell us about where you see opportunities to grow in a market that might not grow all that much next year?

I think the growth, Mike, that we’d be expecting in 2014 in Ag would not come through kind of industry expansion, it would come through, I think, our being more focused on taking advantage of the opportunities that are in the Ag market. Ag represents a relatively small percentage of our total revenue. As Kevin Frailey, who is now leading global construction and Ag becomes much more focused on that market, we think we’re simply going to be positioned to compete better for the opportunities that we’ll see in 2014 and going forward. So again, it’s not really dependent upon growing with the industry; it's dependent on being more effective in working with the customers going to market with the broad range of products that we currently have.

Got it. That makes sense. And I got to slip in one more, I think it would be hard for me to not ask this, but can you tell us your maybe -- I know it’s only October or November. What’s your view on the truck market in North America for 2014, any growth expected or would it be more flattish next year?

Well, I think there are a number of projections out regarding North American truck for 2014. We’re still working through our projections, Mike, but I think at this stage, we’re looking for modest industry growth ‘14 over ‘13. We’ll have more of -- I think a number to tie to that projection in the future.

[Operator Instructions] Our next question comes from the line of Robert Kosowsky with Sidoti.

I was wondering if you’ve -- now that you’ve kind of repositioned the sales structure of the company. Can you talk about, if there is any or what magnitude of low-hanging fruit you might see with your customers, now that you’re taking a little bit more of a customer centric approach to servicing them?

Well, Robert, I think that’s certainly going to play out over the next couple of months, but what I can tell you is that in China as an example. With Geoff Perich in place as an Managing Director and working very closely with our global presidents. I think he is getting much closer to what the needs and expectations of our customers are in China across the board, the full range, from Caterpillar in construction and mining equipment to some of the on-highway truck manufacturers. So, I think we’ll certainly see the effects at the sales line going forward, but that’s one example of how I think we’re getting much closer to the needs and expectations of our customers in China through the organization we’ve put in place. So we’re seeing examples of that I think across regions and across products. But we now have alignment in the organization going from the global presidents with design and total business performance accountability, down to the regions where our managing directors have responsibility for developing customer relationships and executing regional strategies.

Okay. Is this more a function of just better cross-selling in the near-term, just there's opportunities to cross-sell a little bit more?

That will certainly be a part of it. In other words, we've moved from a very product focused organization to one where the global presidents have responsibility for selling the CVG house, and so they’re going to be working very effectively as I mentioned with the regional heads in getting that done.

Okay. And then, Chad had usually spoken about a 4% to 6% market outgrowth assumption, is that something that you still see as possible in the organization? Would it be better in kind of the next few years as you get a little bit more of these cross-saving or cross-selling synergies, or what is a good way to frame CVGI’s opportunity to expand beyond the market?

Expand sales beyond the market that we’re currently serving?

Yes. Just, if the markets are up 10%, but you’re up 12%, because you’ve got a little bit more [indiscernible].

Yes. I don’t think I’m in a position today to kind of repeat that expectation, but I would expect as we get the organization fully embedded and we’re much more active in participating in deals across our product lines, that we’ll see perhaps growth that outstrips industry growth, but that’s got to play out. I’m not in a position today to give you a percentage expectation in that area, Robert.

Okay. And then, we have always been waiting for a Foton to start to hit. I was wondering on the status on that and also the new Cat contract that you have as well?

Yes, Foton is ramping up. We think that’s going to be a very good relationship for us. We’ve developed a seat for Foton that we’re delivering today. We’re introducing refinements in the design that I think will improve their acceptance of the product, but we see them ramping up to the expected level of business that we first talked about when that relationship is established. The Caterpillar business is coming on line. As you know, Cat has cut back their production schedules a bit for the balance of the year. And so we’ve seen a little bit of softening in the sales to Caterpillar, but that’s a good strong relationship that we’re working hard to develop.

Okay, and then finally, is there anything else you want to do meaningfully or lower the break-even of the company or are you fine with just these kind of more incremental -- the $4 million is definitely a step in the right direction but it’s not like a major kind of lowering of the break-even point. Is there anything that you need to do that, or are you pretty comfortable with where you are right now and it’s going to be just kind of executing on the growth?

No. We’re going to be looking at our manufacturing footprint, Robert, as I mentioned. That was one of the areas where we got really some deep assistance from the third-party consultant. So we’re moving ahead with that analysis. And as we consolidate our manufacturing footprint especially in North America, I think we’ll see effect on our break-even. Also we’re moving ahead with operational excellence initiatives across the organization which will have we think a significant effect on productivity and efficiency at the plant level.

With no further questions in the queue, I would now like to turn the call back over to Mr. Rich Lavin for closing remarks.

Okay. Just a couple of wrap-up comments. We really do think that CVG has a strong foundation for growth going forward. We’re committed to making the changes and making the investments necessary to profitably grow this business going forward. We’re confident in the near-term course that we’ve set out. We’re going to turn our attention to long-term strategy in the fourth quarter and we look forward to sharing our results with you in future quarterly calls. So thank you very much for calling in. And if there are any further questions after the call, we’d be happy to take those. Thank you.