Commercial Vehicle Group, Inc. (CVGI) Q1 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Quarter One 2015 Commercial Vehicle Group Earnings Conference Call. My name is Amla and I will be your operator for today. At this time, all participants are on 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 for replay purposes. And I would like to turn the call over to Mr. Terry Hammett, Head of Investor Relations. Please proceed.

Thank you, Amla, and welcome everyone to our conference call. Rich Lavin, CEO, will provide a companywide update; and Pat Miller, President of Global Truck and Bus will provide an update on his business segments; Tim Trenary, our CFO, will comment on first quarter 2015 results. We will also provide commentary on our long term strategy, CVG 2020 and answer questions. I would like to remind you that this conference call is being webcast. It may contain forward-looking statements including but not limited to expectations for future periods regarding market trends, cost saving initiatives, 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 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 detailed in our SEC filings. I would now like to turn the call over to Rich.

Thank you, Terry. Good morning everybody and welcome to our call. We're pleased this morning to report that our first quarter 2015 revenues improved by $22.2 million or by 11% over the prior year period. Operating income was $11.2 million in the first quarter, a significant increase over the $5.4 million of operating income in the first quarter of 2014. After adjusting for special items in each period, operating income pull through of the incremental year-over-year sales well within the range we expect and was 23%. Our earnings per share for the first quarter were $0.12 as compared to a loss of $0.02 in the first quarter 2014. These results illustrate our ability to improve near term earnings and margins even as we continue to invest in our long term strategy CVG 2020. North American medium and heavy-duty truck build rates remained strong in the first quarter this year. Class 8 truck production was over 79,000 units in the quarter. We believe solid fundamentals including pricing, equipment utilization and used truck values coupled with continued economic growth in the United States support strong truck demand for the full year. Accordingly, we are increasing our 2015 Class 8 truck production forecast to a range of 300,000 to 320,000 units. Pat Miller will provide more color on this momentarily. Our Global Construction and Agriculture sales increased 3% period-over-period before giving effect of the impact of foreign currency exchange on our business. There is every indication that the strength of the U.S. dollar vis-à-vis most other global currencies will continue in the near term. We therefore expect foreign currency exchange to adversely affect our sales and earnings throughout 2015. Generally, global market conditions in heavy construction equipment have been disappointing. This is especially true in China, where excavator sales a key element of our construction equipment end market in China maybe down as much as 10% or more this year. In the first quarter, we did benefit somewhat from our business in Japan, where weaker Japanese Yen drove increased equipment exports and bill rates. We are expecting modest growth in the U.S. construction equipment build in 2015 and flat to somewhat reduced U.S. agriculture equipment build. Agriculture is a market that offers significant growth potential for us domestically and aboard irrespective of market strength. It is much as our penetration of this market is well below levels we believe we can achieve. Indeed, we believe this market represents the single biggest area of potential growth for CVG globally. Our construction and agriculture global product line managers are therefore working diligently to expand our product offerings, improve our sales efforts and increase the percentage of the available markets we are addressing with our offerings. We are committed to allocating the resources needed to increase our market share in both construction and agriculture. As regards to the economic outlook for China and India, two important growth markets for us, both countries continue to develop economic policies to stimulate and accelerate growth. Most recently, China’s central bank reduced interest rates and increased money supply to boost the economy. GDP growth in China is projected to be 7% for the year and the introduction of new infrastructure stimulus is possible before year end. In India, the Modi government is considering various economic development projects to stimulate economic growth. We have not factored increased growth in China and India into our full year miles at this stage, but we are guardedly optimistic that we will see incremental GDP growth and industry improvement in both countries. As you know, we introduced our long term strategic plan CVG 2020 in the third quarter of last year. The overarching financial goal of CVG 2020 is to deliver top quartile total shareholder return. We are keenly focused on the key initiatives that are the enablers of CVG 2020. As those of you who are familiar with CVG 2020 will recall, inherent in the strategy is the deployment of resources for various margin enhancement initiatives and for product innovation. Expansion of our product lines and enhancement of our go-to market capabilities are key to the successful execution of CVG 2020 and we’re making significant progress in both areas. In addition, we’re investing in equipment to upgrade key manufacturing facilities and we’re driving Six Sigma based operational excellence through other operations to improve efficiencies and costs and expand margins. Notwithstanding these investments, we have a demonstrated ability to deliver and improved in our earnings. Operating income margin has improved in each of the past four quarters. We remain confident in our ability to deliver CVG 2020 and at the same time meet or exceed our near term profit goals. We’re making progress in our journey to enhance CVG’s overall competitors in the global marketplace to improve our financial performance of the long-term and to deliver top quartile shareholder return. We understand that achievement of our objectives at the result of offering our customers best-in-class products and services that enable their success. We will be successful only if our customers are successful. To close on my comments today, I want to acknowledge some exemplary achievements by the team at CVG. The Global Construction and Agriculture team in Shanghai was awarded SQEP Gold Medal Status for 2014 by a global OEM and one of our largest customers in the construction market. SQEP Gold Supplier Status is one of our highest recognitions of supplier excellence, third [indiscernible] recognition from this important customer. Although comparatively small, we’ve had several important business wins by our Asia Pacific team in China, Japan and Korea with key OEMs. The Global Truck and Bus segment was recently rewarded a new seat program by another important CVG customer Navistar. The seat program is generally for vocational trucks in the class five to eight market, Pat will provide more color for you on that in a moment. And finally, our aftermarket business, a critical part of our overall offering is expanding again more on this from Pat Miller. And with that, I will turn the call over to Pat Miller, President of Global Truck & Bus.

Thanks, Rich. I would like to start with some thoughts on the North American truck build rate. The build rates in our sales remained strong in Q1 and most indications are that high build rates will continue through the end of the year. As Rich mentioned earlier, we are estimating the Class 8 North American truck production for 2015 will be in the 300,000 to 320,000 unit range while others estimate a build rate approaching 340,000 units. So 2015 could be another strong build year for North American Trucks. There were some market indicators showing degradation such as the OEM truck orders dropping below expectations in March and the backlog lead time shrinking. In the past, these may have been indications of weakening market forces. The market commentary is, this is mostly due to the order slots being filled up for this year and we agree with that assessment. Bottom-line is we are managing our business with a more conservative view of Class 8 North American production levels in 2015. I’ve been asked about our ability to produce at levels commensurate with historical highs. Please note that CVG has adequate manufacturing capacity to meet high demands, even if production demand increases to levels seen in 2006. Main potential risk to 2015, production levels in North America are weather related supply chain interruptions and interruptions due to other suppliers to the OEMs, not associated with CVG. We continue to monitor these risks as well as our global footprint as it relates to current and future production levels. As I’m sure you can appreciate, CVG continually works to develop a pipeline of ongoing business. Given the lifecycle of truck platforms we bid on, business wins in our pipeline may take a number of years to be reflected in our operating results and therefore our bottom line. Additionally, we are not usually able to discuss publically many of the programs until our customer has announced them first. We’ve had some meaningful business wins of late. First, starting in 2014, CVG launched and ramped up production of a new seat program for the Navistar MGV platform targeted mostly for vocational trucks in the class five to eight markets. We’ve been in standard position in Navistar for air seats for more than 17 years, and this new seat program represents conquest business for CVG in the range $10 million to $15 million per year. This wins solidifies a strong partnership with Navistar that both companies continue to foster. This program entails shipping a new family of seat miles Navistar’s locations in Escobedo, Mexico and also Springfield, Ohio. Next, I want to touch on our North American aftermarket business. As you know, we produced the top two seating brands in North America for the truck and bus segment National Seating and Bostrom Seating. We continue to drive growth by improving our product breath and channel penetration, due to the launch of derivative products and also by expanding into new product segments. This effort has resulted in our aftermarket business in North America being up 18% year-over-year for Q1. CVG recently participated in the Mid-American Truck Show with both an aftermarket and also an OEM booth. Our booth [indiscernible] jurisdictions we operate. At the Mid-American Truck Show, National Seating launched a new seat product targeted specifically to the waste disposal and location market. We developed this product by working directly with large waste refuse seats to create a seat that meets our unique application. Waste disposal represents about 3% of the truck population of our 150,000 trucks on the road. These vehicles have higher replacement cycles due to the severity of the application. Our newly lunched refuse seat is water and stain resistant, allow easy in graft while not compromising the economic benefits found in our traditional seats. I also want to mention that we are introducing the Bostrom LTSS suspension seat product in May of this year. The LTSS suspension seat specifically engineered for the class 3 through 5 medium duty smaller cab over engine trucks. This growing market segments led by Japanese OEMs like Isuzu and Hino with new models coming from the domestic OEMs. Previously, this market segment utilize standard static seats, but as the models are introduced into increasing applications, we see a demand for professional drivers for compact low profile suspension seats and this plays right into our strength. Lastly, I want to comment on the new truck mattresses product we co-developed and launch last year in partnership with Serta mattress. It’s a departure from the traditional low quality basic mattress found in most trucks today and integrates Serta’s Cool Action Memory Gel Foam technology to give the driver the same comfort level enjoyed at home. We are just starting to see market penetration in 2015 Q1 year-over-year sales were up 37%. We expect this market segment will continue to grow as we ramp up our marketing efforts. These examples from our aftermarket team illustrate a very active effort to enhance and drive our aftermarket business, which continues to be a vibrant part of our company. And with that, I am going to turn the call over to Tim Trenary for comment on our financial performance.

Thanks, Pat. Consolidated first quarter 2015 revenues were $220.3 million, compared to $198.1 million in the prior year period, an increase of 11%. This improvement in sales was achieved notwithstanding foreign currency exchange rate or FX headwind. FX translation adversely impacted our top line in the first quarter by $5 million. Before giving effect to this FX burden on our top line, first quarter sales growth as compared to prior year was 14%. Setting aside the burden of FX translation and our consolidated revenue in the first quarter, substantially all of the top line growth was in our Global Truck and Bus segment, which continues to benefit from the robust trucks into North America. Operating income in the first quarter was $11.2 million, compared to operating income of $5.4 million in the prior year period. Pull-through of operating income on year-over-year incremental sales was 26% in the first quarter. This pull-through is an excess of what we generally expect and was achieved notwithstanding the adverse impact on our consolidated results of FX translation and FX transaction costs in certain of our foreign affiliates. On the other hand, and as I’ll more fully describe in a moment, year-over-year pull-through benefited somewhat from special items, excluding the impact from special items, adjusted operating income pull-through in the first quarter of 23% and, therefore, well within the range we expect. Our profit improvement continues to benefit from SG&A cost disciplines. SG&A in the first quarter of 2015 was $17.5 million, compared to $18.5 million in the prior year period even as we invest in value accretive activities in CVG 2020. FX translation accounts for approximately $0.3 million, about $1 million decrease in SG&A year-over-year. Net income was $3.6 million in the first quarter or $0.12 per diluted share, compared to a net loss of $0.5 million or loss of $0.02 per diluted share in the prior year period. Net income in the first quarter reflects an income tax provision of $2.5 million or an effective tax rate of 41% of pre-tax income. This effective tax rate is somewhat better than our full year estimated effective tax rate of 45%. For the first quarter 2015, depreciation was $4.2 million, amortization $0.3 million and capital expenditures were $2.9 million. In 2015, we anticipate being cash accretive even as we increase investment in our facilities, equipment and technology for sales growth, operational excellence and other activities, some of which are specific to CVG 2020. In the first quarter of 2015, cash flow from operations approximated $16 million. We finished the quarter with $81 million of cash and $37 million of availability from our ABL facility and, therefore, liquidity of over $150 million. Our leverage ratios continue to improve as financial performance improved at CVG. As regards our segment financial results, revenue from Global Truck and Bus segment in the first quarter of 2015 were $145.8 million, compared to $121.7 million for the prior year period, an increase of 20% largely as a consequence of the medium and heavy duty truck production in North America. Because GTB’s operations are by and large domestic, FX translation negatively impacted GTB sales by only $0.6 million. GTB operating income in the first quarter was $14.1 million and the operating income margin was 9.7%. This compares favorably to the prior year period operating income associated margin of $8.3 million and 6.8%, respectively. That’s almost 300 basis points of year-over-year margin improvement. This improvement was, however, favorably impacted somewhat by special items in the first quarters of 2014 and 2015. More specifically, first quarter 2015 results include $0.7 million of costs associated with the impending closure of our Tigard, Oregon facility. First quarter 2014 results included severance charge of $0.5 million at the Tigard facility and an asset impairment charge of $0.8 million from the sale of our Norwalk, Ohio facility. Before giving effect of these special items, operating income margin for GTB improved by a little over 200 basis points, year-over-year. First quarter 2015 GTB operating income pull-through on the incremental sales was 24%, notwithstanding the aforementioned $5.7 million in closure cost at the Tigard facility. This pull-through is at the upper end of the range we expect for Global Truck and Bus. Shifting now to global construction and agriculture segment, revenues in the first quarter 2015 were $74.5 million, compared to $76.4 million in the prior year, a decrease of 2%. FX translation negatively impacted GCA sales by $4.4 million in the first quarter. Setting aside this burden on GCA’s top line quarter-over-quarter sales increased $2.5 million or by 3%. Operating income was $3.6 million for the current and prior year periods, not only was GCA’s segment operating income adversely affected by FX translation, but it was also adversely affected by FX transaction costs, arising from certain customer and supplier commercial arrangements. To the extent practicable, we are modifying these commercial arrangements to mitigate the impact transaction costs may have on our financial results in the future. That concludes my comments today regarding our first quarter financial results. As we have highlighted in the past, our objective is to grow earnings even as we bring CVG 2020 to life. To that end, and as Rich has pointed out, this was the fourth quarter consecutive quarter of improved operating income margin for CVG. We will now open the call for questions.

Thank you. [Operator Instructions] And your first question comes from Mike Shlisky from Global Hunter Securities. Please go ahead. You are live in the call. Mike Shlisky, please go ahead. You are live in the call.

Good morning, guys. Sorry about that.

Good morning.

Hi, Mike.

Hey. Just wanted to touch first briefly on something I noticed at [indiscernible] back in March. I got the sense that some of the OEMs out there are shifting or some customers are shifting to more comfort and luxury within the cabin as they try to entice more drivers to join their fleets, I guess, given the tight market out there to find people to actually operate trucks. So I was kind of wondering if have seen any kind of increase in your ASP or any shift up in the types of seats – I guess the kind of seats are being ordered for your trucks in the last few months and in the next few months.

Well, this is Pat Miller. So I will take a stab at that. I don’t actually have a quantifiable number that I can give you today on that dynamic. We have certainly seen anecdotally feedback from the fleet owners and fleet maintenance directors. That speaks specifically to what you are saying. They look at the cost of bringing new drivers in and the turnover and training cost and it’s a very easy method to attempt. So I have seen some specific examples that benefited us, but I don’t know that I can really quantify that for you. So we’ve heard the same thing that you’ve heard and we’ve heard that directly from some of the sources.

Perhaps a little more broadly then, there is some kind of noise in your truck and bus numbers given that you do sell outside the U.S., throughout this peak, are you seeing any increase in content per vehicle over the last few months. It appears though your growth rates have outpaced the market by a little bit. So, I just want to see how that’s going for you?

Well, I think I have mentioned some of the new programs that we’ve added to our portfolio during my part of the discussion, part of that helps us of course when in the growth rates. As far as content per vehicle, I think a lot of that tends to be driven by the sleeper day cab mix, which has been a beneficial for us in the first part of the year. So well, we’re seeing a – if you think about it when we’ve got all of the sleeper and bunks and larger flooring, larger headliners, interior panels in a sleeper truck, they also tend to get better higher featured C components. And so, sleeper day cab mix for us is a big driver of contemporary vehicle.

Got it. And then I wanted to also touch on, I think you had mentioned, you had some new programs in Asia, I think it’s a carrier Japan and China if not mistaken, its anyway to get a little more color as to what types of products those are or perhaps if you can, the kinds of components you’re providing there, is it in very low margins seed, high margin products. Seen, I call you from get us – seen those contracts over the next few quarters I would appreciate

Yeah. This is Rich Lavin. The wins were largely in the construction industry as spread across a couple of Asia-Pacific multi-national OEMs and these were largely seed sales. As I mentioned, they are comparatively small deals, but strategically they were very important wins for us because they enable us to strengthen our relationship with those OEMs. So, relatively minor sales, but strategically very important for us going forward.

Okay. And then probably one more from me if you wouldn’t mind. just want to get your thoughts on 2016 for the truck markets. If we’re running our build slots in 2015 do you feel good about how things might look for next year just based on extra demand from this year alone. And are the truck OEMs asking you to make any kind of investments or changes for next year’s trucks that are going to be important?

Okay. I have to be honest we’ve not really done any sort of formal forecasting for 2016 at this stage in the year. We are waiting to see how the year plays out and if the OEMs will build all the planned orders. The build slots are filling up as has been mentioned by several other groups. We concur with that we can see the numbers. I think to tailing issue for us would be when the order season starts back up in the fall that will help us determine what 2016 is going to look like, as well as if there is any supply disruption. So, we’ve mentioned some things about supply disruptions on some of the critical type sub-systems that we don’t supply. But those in the past have been limiting factors as whether the OEMs can achieve levels that they would like to achieve in the timeframe they would like to achieve them. So, if they are able to achieve their build, don’t get as much carry over into 2016. And we haven’t really put any numbers to 2016 yet. So, we’re working hard on making 2015 a good year.

So then is it safe to say that if your forecast is right and there is even more demand in 2016 because there is carry over production is that how it’s going to play out possibly?

Good I suppose.

Okay, great. Well guys I will it there. Thank you so much for all your color. Appreciate it.

Thank you.

Okay. Thank you. So you have no more questions at this time. [Operator Instructions]

From the CVG and this is Rich Lavin again. I’d just like to thank everybody once again for calling in. And we look forward to sharing our second quarter results and developments in our business with you in a couple of months. Thanks very much.

Okay. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.