Commercial Vehicle Group, Inc. (CVGI) Q2 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Commercial Vehicle Group Second Quarter 2015 Earnings Conference Call. At this time, all participants are on 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, this conference is being recorded. I would now like to introduce your host for today’s conference Terry Hammett, Vice President of Investor Relations. Sir, you may begin.

Thank you, Amanda, and welcome everyone to the conference call. Rich Lavin, our CEO, will provide a companywide update; and Joseph Saoud, President of our Global Construction and Agriculture segment will provide his initial thoughts and an update on his business segment. Tim Trenary, our CFO, will comment on our second quarter 2015 financial 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 also 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 detailed in our SEC filings. I would now like to turn the call over to Rich.

Thank you, Terry. Good morning and welcome to our call. We are pleased to report another strong quarter for Commercial Vehicle Group. Revenues continued to benefit from robust North American medium and heavy truck production but were adversely affected by the relative strength of the US dollar. Operating income was $11.6 million in the second quarter, a 29% increase over the $9 million of operating income in the second quarter of 2014. Operating income pull-through in the second quarter once again met our expectations. Our earnings per share for the second quarter were $0.11 as compared to $0.09 in the second quarter 2014. These results illustrate our ability to improve near term earnings and expand margins even as we invest in the talent, innovation and initiatives important to our long term strategy CVG 2020. North American medium and heavy duty truck build rates remained strong in the second quarter this year. The market forecasting services such as FTR and ACT are projecting that truck build rates will finish out the year strong. By way of example, FTR is forecasting Class 8 2015 production on the order of 334,000 units, an increase of 13% over 2014. Importantly although it appears as though production may have peaked, the order backlog remains healthy. This suggests a good 2016. FTR projects Class 8 production on the order of 290,000 units in 2016, still markedly above generally accepted normal build rates of 250,000 to 260,000 units per year. We tend to focus our commentary on the heavy truck market but we also participate in the medium duty truck and bus markets and build rates have been good in these markets. FTR is forecasting the 2015 medium duty truck and bus production volume at 194,000 units, an 8% increase compared to 2014 and 2016 production of 200,000 units. So early indications are that 2016 will be another good year for North American medium duty truck and bus OEMs and their suppliers. This forecast reflects solid truck fundamentals in North America as we consider our business plan for 2016. More specifically, I would highlight manufacturing activity conducive to continued growth are [ph] moderating the still positive growth rate for freight, aging fleets and fleet owners who generally have a favorable business outlook and the financial capability to upgrade fleets. We will have a better basis for projecting the behavior of the American heavy and medium duty truck industry in 2016 as we see order and build rates in September and October. But at this point we are reasonably optimistic about the North American truck industry in 2016. We spend considerable time developing our truck and bus business in North America and for good reason. It is currently our largest market, one in which the company is strongly positioned as a result of a long track record of delivering products and service solutions that meet and exceed our customers’ expectations. We will continue to invest in this key market and to focus on supporting our customers. At the same time we have developed plans as part of CVG 2020 to profitably grow our truck and bus business outside of North America with particular focus on Europe and Asia. Our product line managers in the global truck and bus division have developed and continue to develop product configurations that meet the unique requirements of customers in Europe and Asia, and we are strengthening our service and go to market capabilities to ensure we fully understand and meet the unique needs and expectations of customers outside of North America. This market development effort is a key part of our long-term strategy and we are confident the steps we are taking will deliver the profitable growth we're planning on. The outlook for the global construction and agriculture markets we serve is not nearly as optimistic. These two markets represent about 24% and 2% respectively of CVG's total sales. So when these two markets are weak, we are negatively impacted but the effect is not devastating to our overall financial outlook. Global market conditions in heavy construction equipment have been disappointing and will likely remain so in the near term. This is especially true of China where excavator sales, a key element of our construction equipment end market in China are down about 40% for the first five months of the year as compared to the same period last year. And recent guidance from equipment dealers and other sources is for a less than positive outlook for US construction equipment for the remainder of 2015. Furthermore we expect US agriculture equipment market to remain soft through the end of ‘15 and into ’16. But these end markets, global construction and agriculture which are about a quarter of our sales now represent a tremendous opportunity for our company notwithstanding the headwinds we’re experiencing at the moment. Our construction and agriculture product line managers are working to expand our product offerings and increase our go to market and service capabilities in all regions to better address the needs of customers in these target markets. This is a fundamental aspect of our strategy. We are committed to developing products that meet and exceed our customers’ expectations in all regions of the world and stepping up our sales and service capabilities to both support our customers and drive profitable growth in these two key global markets segments. As regards to the economic vitality of China and India, two important growth markets for us, both countries continue to develop economic policies to stimulate and accelerate growth. We are well-positioned to follow our global customers in these markets. And as regards to Chinese and Indian OEMs, we are working to deepen our relationships with these important emerging markets customers. There's no questions the OEMs based in these emerging markets appreciate the quality of our engineered products and the performance differentiation of many of our products. Having said that we recognize both India and China are price-sensitive markets and that to be successful in both the short and long-term we must develop product lines that effectively address customers’ needs at two to three different price points. Our product line managers in truck, bus, construction and agriculture are in the process of introducing product configurations that will meet customers’ price and value expectations at different levels and also create differentiation versus lawfully [ph] designed and manufactured products. There's no doubt over time the customers in China and India will move toward the premium end of our product line. It has happened in other industries and it will happen in ours. Our plan simply is to offer products that meet different price value expectations and to impress on customers the value of moving to the premium end of our product line over time. As these markets evolve and our customers increasingly appreciate the value inherent in premium engineered products, demand will certainly shift from the value to the standard and to the premium end of the marketplace. At that point we expect that these early days of the automotive OEM [ph] customer relationships will be rewarded with increased sales and the associated profits. We’re almost a year in our long-term strategic plan which was introduced in the third quarter of last year. The overarching financial goal of CVG 2020 is to deliver top quartile shareholder returns. Over the past year we’ve been keenly focused on the key initiatives to better the enablers of CVG 2020. As those of you who are familiar will recall, inherent in the strategy is the deployment of resources for product innovation, expansion of our product lines, deepening our go to market capabilities and acceleration of various margin enhancement initiatives. We’re making significant progress as exhibited by our quarter-over-quarter margin improvement. In addition, we continue our investment in equipment to upgrade key manufacturing facilities domestically and abroad and we're driving Six Sigma based operational excellence throughout our operations to deliver improved safety, productivity and efficiency. The early returns from our Six Sigma commitment have been quite encouraging and we are confident we will see the types of performance improvements we anticipated when we embarked on the Six Sigma journey six months ago. As described in introducing our long-term strategy, we intend to deliver improved earnings even while investing in the long-term profitable growth of our company. To that end, operating income margin has improved in each of the past five quarters. One year into our strategy, we remain confident in our ability to deliver CVG 2020 while at the same time meeting or exceeding our near-term profit goals. At this point, I am pleased to say that joining us today on the call is Joseph Saoud. Joseph joined Commercial Vehicle Group just last month as President of our Global Construction and Agriculture segment. Prior to joining CVG, Joseph distinguished himself from the 20-year crew [ph] with Cummins where he held a number of global operational and general management roles, including assignments in the United States, Mexico and the Middle East. He served most recently as the Vice President of Cummins, and President of its filtration business unit. Although Joseph has been with us for just a brief time, it has become clear that he will be a key contributor as a CVG leader. This morning he will comment on the construction and agriculture markets as well as provide some initial thoughts regarding CVG today and near-term needs and opportunities for long-term profitable growth. Before I hand the call over to Joseph, I want to acknowledge some exemplary achievements by some of our associates at CVG. The global construction and agriculture team in the Czech Republic was awarded the SQEP Platinum status of 2015 by a global OEM and one of our largest customers in the construction market. SQEP Platinum supplier status is their highest recognition of supplier excellence and this represents yet another year this team has achieved recognition from this very important customer. And our global truck and bus segment was recently selected to supply interior and exterior trim products for the JLG global telehandler program. CVG and JLG have partnered on the design and launch of these products. These products we supply to JLG and a number of tier 1 suppliers affiliate with JLG in locations in North America and Europe. And with that, I am happy to turn the call over to Joseph.

Thank you, Rich and good morning. As Rich described, results for the construction and agriculture segment have been adversely affected by soft markets and the comparative strength of the US dollar. Our teams have therefore worked diligently to flex on costs while maintaining the momentum to deliver CVG 2020 and the growth [ph] thereto. In this soft market environment, flexing down costs is key. The team’s action to flex costs is but one part of the business equation. Another very important element for the development of the top line. It’s clear to me in just the short time I've been with the company that we are well positioned to address the larger volume of sales. Our participation in these markets is immature as we are in the early stages of developing these two important end markets and our long-term strategy. We intend to do just that by way of product innovation, enhancements in the manner in which we go to market and other means. This will certainly lead to the market share gains and organic growth inherent in CVG 2020 thereby leveraging the cost structure we have in place to serve the market and to deliver improved financial performance results. In the short term I have been here, I’ve had the opportunity to review product line and visit our manufacturing plants in the US, Mexico and United Kingdom and Czech Republic. I met many bright, motivated and passionate business associates and learned that there are many opportunities to grow our construction and agriculture business profitably. In the next few weeks, we will explore more deeply how best to position CVG construction and agriculture segment for enhanced margin and top line growth. I am looking forward to meeting our current and prospective customers to refine my understanding of their near and long term expectations of CVG. I want to hear from them. I want to better understand how best to address their needs and to further strengthen CVG’s already strong relationships. In short, our goal is to become a preferred supplier to the construction and agriculture market by offering innovative value enhancing products and services coupled with a highly efficient cost structure and therefore competitive pricing. We have some work to do but that’s okay. We have a good foundation to build upon with clear operational excellence, well known brands, strong OEM relationships and the motivated and passionate team. I am looking forward to it. With that, I will turn the call over to Tim now for comments on our financial performance.

Thank you, Joseph. Consolidated second quarter 2015 revenues were $217.6 million compared to $216 million in the prior year period, that’s an increase of 1%. The consequence of the relative strength of the US dollar and as is the case with most US multinational corporations, foreign currency exchange rate headwinds or FX continued to burden our financial results. FX translation adversely impacted our topline in the second quarter by $5.5 million. Before giving effect to FX translation, second-quarter sales growth as compared to the prior year period was 3%. All of our topline growth was in our global truck and bus segment which continues to benefit from the robust truck production in North America. Global truck and bus revenues increased 12% over the second quarter of 2014. Conversely our global construction and agriculture segment sales reflect soft construction and agriculture markets generally globally. Furthermore our global construction and agriculture segment is more sensitive to FX impacts. Operating income in the second quarter was $11.6 million compared to operating income of $9 million in the prior year period. That’s a 29% increase. Pull-through of operating income met our expectations for the second quarter. We completed the closure of our Tigard facility and have successfully moved all production to our facilities in Saltillo, Mexico and Concord, North Carolina. Adjusted for costs associated with the closure of Tigard, our operating income margin in the second quarter was 5.6%, an improvement of 140 basis points over the second quarter of 2014 on for all intents and purposes, flat sales quarter over quarter. A profit improvement continues to benefit from SG&A cost discipline. SG&A in the second quarter of 2015 was $17.6 million compared to $18.7 million in the prior year period even as we invest in value accretive activities such as talent, operational excellence, innovation, new product development and other initiatives inherent in CVG 2020. FX translation accounts for approximately $0.3 million of the $1.1 million decrease in SG&A year-over-year. Net income was $3.2 million in the second quarter or $0.11 per diluted share compared to net income of $2.7 million or $0.09 per diluted share in the prior year period. Net income in the second quarter reflects an income tax provision of $3.3 million or an effective tax rate of 51%. For the six months ended June 30, 2015, our effective tax rate was 46% and therefore consistent with our expectation of about 45% for the year. CVG’s effective tax rate is adversely influenced by a disproportionate amount of pretax earnings arising in North America more specifically in the United States and by deferred tax asset valuation allowances in certain of our foreign subsidiaries. There is some risk that our effective tax rate could be higher than the 45% in our plan and as much as the geographic profile of our pretax earnings has shifted somewhat to North America. Depreciation for the second quarter 2015 was $4.1 million, amortization $0.3 million and capital expenditures were $4.7 million. We will make fewer capital expenditures in 2015 than we had originally planned. You may recall that our original plan was to incur $26 million in capital spending in 2015. We now project capital spending on the order of $19 million to $22 million. Some of this reduction in spend from plan reflects more efficient acquisition of capital goods and a favorable impact of foreign currency translation. But some of the reduction reflects carryover into 2016 of capital spending plan for 2015. We expect to be cash accretive in 2015 even as we increase investment in initiatives inherent in CVG 2020. Cash flows from operations, net of cash flows from investing activities for the six months ended June 30, 2015 was $20 million. We finished the quarter with $89 million of cash and $37 million of availability from our ABL facility and therefore liquidity of over $125 million. Our leverage ratios continue to improve as financial performance improves at CVG. Turning now to our segment financial results and more specifically our global truck and bus segment. Revenues in the second quarter of 2015 were $149.3 million compared to $133 million for the prior year period, that’s an increase of 12% largely as a consequence of the continued strong 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 $0.8 million. GTB operating income in the second quarter was $15.1 million and the operating income margin was 10.1%. This compares very favorably to the prior year period operating income and associated margin of $11.6 million and 8.7% respectively. This period over period improvement was somewhat affected by special items. More specifically, second quarter 2015 results include $0.5 million of costs associated with the closure of the Tigard facility. Second quarter 2014 results included severance charge of $0.1 million of the Tigard facility. Before giving effect to these special items, operating income margin for GTB improved by a little over 150 basis points period over period. Second-quarter 2015 operating income pull-through on the incremental sales met our expectations for the global truck and bus segment. As regards our global construction and agriculture segment. Revenues in the second quarter of 2015 were $68.4 million compared to $83 million in the prior year, a decrease of 18%. FX translation negatively impacted GCA sales by $4.7 million in the second quarter. Setting aside this impact on GCA’s topline, quarter-over-quarter sales decreased $9.9 million, or by 12% reflecting the softness in our construction and agriculture end markets. Operating income was $2.8 million for the second quarter of 2015 as compared to $4.7 million for the prior year period on the associated sales reduction for the quarter. Not only was our GCA segment operating income adversely affected by the softness in the end markets and FX translation, but it was also adversely affected by FX transaction costs arising from certain customer and supplier commercial agreements. To the extent practicable, we've modified these commercial arrangements and entered into currency hedges to mitigate the impact FX transaction costs may have on our financial results in the future. That concludes my comments regarding our second quarter financial results. As we 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 fifth consecutive quarter of improvement in our operating income margin. And with that we will now open the call for questions, Amanda.

[Operator Instructions] Our first question comes from Mike Shlisky of Global Hunter.

Got a bunch of questions here. I guess first of all, just broadly speaking, what gave you the confidence to tick up your Class 8 forecast – I do recognize that some of the national forecasters also have a pretty robust forecast versus a prior forecast. But you commented in the past that, that you could be seeing some constraints among other suppliers that kind of hold up the process. Are you hearing anything better now as far as how the industry is responding to pretty demanding environment for production of trucks?

Well I think we are seeing a number of indicators in the market across the supply chain that really line up with, I’d say the more robust Class 8 production forecast for the balance of 2015. So we are confident enough I think to change your thinking regarding what we are seeing for the balance of the year. As far as ‘16 is concerned, as we mentioned in our remarks, all the indications are positive, it looks like 290,000 is going to be the number that we go into 2016 with but we are going to be smarter on that score in September October, you will see some of the order activity in those months which typically would impact first quarter build rate. So we’re simply seeing things coming in line across the market to support the more robust outlook for the balance of the year.

Just kind of want to run through a few question clarifying a couple quick things here. Can you maybe comment on the SG&A run rate that you are seeing most recently this quarter? Do you feel confident that that’s going to continue for the rest of this year at least?

Michael, it’s Tim. I think if you go back and look at let’s use 2014 as a sort of benchmark of the talking point. I think last year SG&A ran about $73 million which was down a little bit from 2013 and if you sort of take our spend on SG&A in first half of this year and annualize it, it comes to a number that's pretty consistent with the spend from last year, the 73 million or so. So we expect that that level of SG&A spend to remain pretty consistent this year with 2014.

I also just wanted to clarify your JLG program. Perhaps I missed this, but when is that going to be starting and is that on a new product or product that already existed and you did a change of suppliers?

This is a new product that was developed by our teams in conjunction with JLG. I don't know, Michael, exactly on when it is launching but I think I understand it's launching in the not too distant future. These products will be supplied to JLG as well as certain other tier 1 suppliers that are affiliated with JLG and build parts for them. So it was a good outcome for our company.

And just two more if you like, first, your efforts Joseph for construction and ag, I am not sure if I took this right. Is your plan to undergo some kind of a broad restructuring program for that segment or you’re just going to be heading around the world listening to your customers and your employees, how is that – I am not sure what the exact nature of your plan, is it formal or informal?

I think it’s too early to comment on that. But I can tell you we know how to design products, we know how to build them. We want to make sure we’re designing low cost products and build on where the costs are sustainable, so that we can sell them, strike them and to make money doing that. We have a very low market share in agriculture as Rich mentioned and there is a tremendous opportunity to grow our market share there doing that right.

And then lastly here on your cash balance is the highest it’s been a couple of years. Do you need all the cash – do you have any plans for it, is there M&A in the hopper here or – we should be thinking about, is there cash burn that needs to be brought back or can be brought back, any color there, I would appreciate it.

Well addressing your question as to the location of the cash, it varies obviously a little bit from period to period but as we sit here today approximately 22 million of it is offshore, we’re happy at this point to leave it there. It’s in areas of the world in which we generally desire to make investments so that’s good. We can’t bring it back, there is cost to doing so. But -- and so since we – for the most part intend to use it, we’re sitting now, we don't intend to bring it back. As regards the total overall cash balances and I maybe our capital structure taken in conjunction with that, as I think you know we evaluated our capital structure, our liquidity, the bonds, the ABL, to make sure that it was appropriate for our strategic plan. And we've concluded that by and large it does provide us with ample liquidity and the terms of the indenture are very flexible covenants. So we’re fine with the capital structure and the liquidity as it sits right now. Having said that as you can appreciate, we -- in the ordinary course to evaluate any opportunities to enter the capital markets perhaps to refinance redeem these senior secured notes as you can appreciate there's today reasonably large cost associated with doing so, the optional redemption premium is about 400 basis points or $10 million and of course there’s other costs associated with any redemption of the notes. So the trick here is to sort of evaluate that costs in light of the future capital markets and the access that we would have to them and also the interest rate environment. So that’s sort of what we do in the ordinary course. We stay very very close to that evaluation so that we can pivot any point in time reasonably quickly as we think it's prudent to do so. Just on an absolute sense, as regards the cash balances, there's an opportunity always to bring in some of the bonds to de-lever the company a little bit if we decide that we want to do that. And notwithstanding the fact that our strategy is the organic growth strategy, we stay close to opportunities in the marketplace. We are in the deal flow. We know what's available and it’s an opportunity to deploy that cash and value creative way comes to us through some sort of an M&A activity we certainly would give very serious consideration to doing so.

[Operator Instructions] Our question comes from Mike Shlisky of Global Hunter.

Me again. I guess I have another chance to ask one more question. I just figured I’d give it also a shot. But while I still have you on the phone here, just kind of curious about how things are going thus far on CVG 2020, I mean you’ve gotten reasonably good EBITDA growth the last couple of quarters here. But then it gets harder at this point now, I mean at this point it’s still a fairly rough ag market, construction markets seem to be deteriorating on the equipment side, can you give me a sense as to kind of what your next bites are to get this plan going, maybe over the next six to 12 months period?

Mike, it’s Rich. I will take that. I think that as we reviewed with the analysts about a year ago, we’ve got some pretty specific plans across the organization to drive the revenue and profit growth that we’ve committed to as a part of CVG 2020. A large part of that growth, large part of that profit improvement comes in the area of product design, product development, product introduction and also development of sales and marketing capabilities. As we kind of perform it out, what our performance would be over the next five to six years, I mean we’ve built in some assumptions in terms of industry growth or industry contraction. So we’re confident that with the product and the marketing plans we have in place, we’re going to be in a position to drive the topline and with the margin management execution that we have in place we are confident, we’re going to be able to improve the bottom line in line with our topline growth. So I think that in the next six, 12, 18 months the growth -- the margin improvement will come in those plans, those initiatives that we established at the outset of CVG 2020 and we are staying really sharply focused on execution and driving those plans that will make the difference in the numbers.

Okay, fair enough but is there anything we should look for first, I mean would you say, you’ve got some ag wins in the hopper, I see just one JLG here, do you see more in the construction side, and kind of thoughts as to where we should be thinking you’re going to go next at least in the very near future?

I think you should expect to see – and this is really a part of our plan – you should expect to see that we are going to improve our performance across industries and across regions and across product groups. So I can’t call out one specific area that’s going to be the largest contributor. I would only say that you should expect to see improvement with programs that we are going to introduce across the board. End of Q&A

Thank you. I am showing no further questions. I would like to turn the call back to Richard Lavin, CEO, for closing remarks.

I just want to thank everybody for calling in. We were happy to share our story for the second quarter and we look forward to getting back together with you at the end of the third quarter. Thanks everybody.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.