Commercial Vehicle Group, Inc. (CVGI) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Commercial Vehicle Group Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today’s conference, Mr. Terry Hammett, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Liz and welcome everyone to the conference call. Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group will provide a brief company update and Tim Trenary our Chief Financial Officer will provide commentary regarding our fourth quarter and full year 2015 financial results. Following the financial update we will open the call for questions. We 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 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 and markets in which CVG operates, fluctuation 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 will now turn the call over to Pat Miller.

Thank you, Terry. Good morning and welcome to our call everyone. In regards to our consolidated results for 2015, revenues were down for the full year of 2015 as compared to 2014 by 2%. Our global truck and bus segment revenues were up 6% versus prior year, while our global construction and agricultural segment revenues were down 14%. 2015 North American heavy duty production levels were near record high around 323,000 class 8 units. However consolidated results were negatively impacted by difficult market conditions for our global construction and Ag segments, and by the strength of the U.S. dollar and therefore unfavourable foreign currency translation. Net income for 2015 was 7.1 million down slightly compared to 2014 primarily as a result of an increase in the 2015 income tax provision compared to the prior year. Full year earnings per share as adjusted for special items was $0.29 in 2015 as compared to $0.30 in 2014. We are pleased with our cost discipline and therefore operating income pulled through in 2015 as adjusted for special items our operating income margins for 2015 was 4.9% up from 4.3% in 2014 that is an improvement of 60 basis points on lower year-over-year consolidated sales. Although our year-over-year top line performance was significantly down for our global construction and agricultural segment, we were pleased with the improved operating income year-over-year for GCA, primarily driven by focus cost reduction and operation improvement efforts. We started last year our focused effort to improve profitability and reverse losses in our operations in China and the UK. These operations required increased support targeted to improve quality, productivity and cost discipline. The changes started with bringing in Joseph Saoud, as the President of our GCA segment and have been bolstered by improved clarity of responsibility and short-term goals. We are seeing positive trends for both operations and these efforts will likely continue throughout 2016. 2015 was an eventful for CVG we completed the build out of our product line management infrastructure and organizational structure important to the development of the new and innovative products we intend to bring to market. The PLM organization has been developing and landing next-gen programs on existing platforms and also position us in new regions and with new customers to improve the top line. Additionally we put in place a global procurement and logistics function. We are seeing benefits for optimizing our buy across regions and improving the discipline of driving cost down in the supply chain with a focus on total landed cost. Lastly, we continue to roll out of our lean manufacturing initiative which we call operational excellence. Operational excellence is becoming embedded in our facilities and we now have 28 trained Black belt and Greenbelt employees deploying projects and developing local workforce skills in various locations. We realized savings in the first year that more than offset the initial development cost of the program and we expect to double the number of graduates in 2016. We are seeing the benefits of these new organizational changes in our margins and indications are that we are early in the learning curve reflecting more upside potential. Looking to 2016 in the Global Truck and Bus segment, first of all we have new leadership. Shortly after the CEO transition our intent was to name a new President of Global Truck and Bus soon, the position I previously held. We decided that in lieu of naming a President we can manage the segment more efficiently by separating GTB’s management into two pieces. Accordingly recently we named Greg Boese, for Senior Vice President and Managing Director for GTB Seats and Dale McKillop, for Senior Vice President Managing Director for GTB Trim & Structures. This flattens our senior organizational structure and should increase the responsiveness and flexibility in the management of those businesses. Greg and Dale are capable proven leaders at CVG with over 50 years of combined experience, who understand the business and we look forward to including them in future earnings calls. North American market for heavy duty trucks in 2016 is going to come off the near historic high of 323,000 units in 2015. Market forecasters such as ACT and FTR projecting a normalization of heavy duty truck build in North America. Class 8 truck build could be down 20% to 25% in 2016 compared to the near record build in 2015. More specifically ACT for example is projecting North America Class 8 truck build on the order of 250,000 in 2016, a level at or near the generally accepted annual replacement level. Additionally North American medium-duty production was up moderately in 2015 compared to 2014. ACT forecast the class five to seven truck build in North America to be flat in 2016 at about 233,000 units. Our expanding India business has been growing by launching products designed and sourced locally and should benefit from expected market growth as the Indian economy is generally expected to improve. Turning to our global construction and agricultural segment, we size the decline in the North American construction market in 2015 at about 15%, due impart to sharp reductions in capital spending related to the energy industry. We anticipate this downward pressure to continue in 2016. Although our agriculture equipment seat and Wire Harness businesses represent only about 3% of the revenues of our GCA segment. Revenues improved by 9% primarily due to increased market penetration of our Wire Harness business. We continue to believe that sales of seat and wire harness system, makers of agriculture equipment is the potential opportunity for CVG globally. The markets we serve in Europe were generally flat in 2015, but we believe European construction and equipment market is positioned for modest growth in 2016. Demand in Asia Pacific was down significantly year-over-year with the exception of India. We size the decline in the construction and equipment market in China is about 35% in 2015 year-over-year but believe that production is near the trough, although we expect continued relative softness in Chinese economy in 2016 in the near-term. We continue to view Asia Pacific as a key market for us over the long-term. We have a new development in our Wire Harness business, we announced recently. We just broke ground on our new 140,000 square foot facility in Agua Prieta, Mexico. It will be adjacent to our existing operations in Agua Prieta, and we expect to complete it by the end of the year. This facility will allow us to further enhance and expand our capabilities in building Wire Harnesses competitively. We have had some business wins off late across multiple product lines, including Wire Harnesses, Wiper Systems and thermoformed headliners & roof canopies in our trim business. These wins represent 10 million to 12 million of incremental business annually when fully implemented. We look forward to sharing more details regarding new business wins in the coming months. As regards to our restructuring and cost reduction actions announced this past November, you will recall that these actions are being undertaken in anticipation of the reduced truck build in North America, continued softness in the construction and agriculture equipment markets we reserve and a desire to more efficiently match our manufacturing footprint to our customer's needs. These actions began in the fourth quarter of 2015 with the executive realignment and the announcement of the closure of our Edgewood, Iowa facility. In short the actions are proceeding as planned and meeting our expectations, including our expectation that 8 million to 12 million annually will come out of our cost structure. We now believe we will be able to accomplish these undertakings at considerably less cost to CVG. We initially sized the cost of our restructuring and cost reduction actions at 12 million to 19 million when fully implemented in late 2017. We now size the cost at 10 million to 14 million. Majority of the decreased results from fewer non-cash charges for asset impairments. We will have more news on this front as the year progresses. Organic growth is the foundation of our long-term strategy which guides our resource allocation by product, geographic region and end market. It also established some of our published expectations with respect to the top line growth. It was of course developed from a set of assumptions at the time regarding our competitive position and right to win, the global economy and access to capital and other resources. Among other considerations macroeconomic conditions have changed remarkably over this past year or so. Accordingly we intend to revisit our long-term strategy later in the year and refinements that we likely arise from that process. However, throughout the restructuring we have been undertaking. We have been diligent in maintaining resources and investments to continue the product programs that are underlying our original thoughts to increase our penetration in targeted segments and regions. Growth and innovation is still critical to our future and we are working to ensure we balance our long-term plans with our near-term need to realign our business to the current market dynamics. Before I turn the call over to Tim for his remarks regarding our financial performance, please know that I'm confident in our ability to manage our cost structure down in response to near-term market declines, even as we invest in the development of new and innovative products for our customers. As evidenced by the facility restructuring and other cost reduction access we have taken and we will continue to take we are committed over the longer term to further streamlining our cost structure to improve our competitive position. These actions when taken together should protect our margins in the near-term to be extent practicable. Over the long-term they should improve our ability to capitalize on the growth opportunities available to us and to leverage our cost structure for higher earnings when the market cycle turns favorable. Tim?

Good morning. As Pat mentioned 2015 heavy duty truck production in North America was at near record levels. North American medium duty truck production was also good, improving about 5% from the prior year. Our fiscal year 2015 financial results benefited from this. However North American heavy duty truck OEMs in the fourth quarter adjusted production schedules down to reflect softening orders and outside inventory levels. Our business is serving the global construction and agriculture end markets were adversely affected in 2015 by the generally soft demand in these markets, as well as foreign currency translation. Consolidated fourth quarter 2015 revenues were 184.7 million compared to 211.9 million in the prior period, a decrease of 12.8% primarily resulting from the aforementioned market conditions in the quarter. Operating income in the fourth quarter was 5.3 million compared to operating income of 9.5 million in the prior year period. This decrease in operating income reflects the decreased sales from the prior year period offset somewhat by an improvement in our gross profit margin from 12.6% to 13.2%. SG&A for the fourth quarter was 18.7 million compared to 16.9 million in the prior year period. We initiated in the fourth quarter restructuring and cost reduction actions to more closely align our business with the changing demand as a consequence of these actions we expect SG&A to decline in the first quarter of 2016 to $16 million to $17 million. Net loss was 2.3 million in the fourth quarter or $0.08 per diluted share compared to net income of 4.2 million or $0.15 per diluted share in the prior year period. Net loss in the fourth quarter reflects an income tax provision of 1.7 million notwithstanding the pre-tax loss for the quarter. Our cash provisioning and therefore our earnings in the fourth quarter were adversely affected by pre-tax losses in certain foreign affiliates where deferred tax assets are subject to valuation allowances. Conversely in the fourth quarter of the prior year, we implemented tax planning that gave rise to a tax benefit for the quarter. The comparability therefore of our period-over-period earnings was adversely affected by extraordinary tax circumstances in each of 2014 and 2015. Shifting now to full year 2015 consolidated financial results, revenues for fiscal year 2015 were 825.3 million compared to 839.7 million for the prior year. It represents a decrease of 14.4 million or 1.7%. Foreign currency translation negatively impacted 2015 revenues by 18.3 million or by 2.2%. Before giving effect to foreign currency translation 2015 revenues increased by 3.9 million. Period-over-period revenue growth in our Global Truck and Bus segment was largely offset with a revenue decline in our Global Construction and Agricultural segment thereby reflecting my aforementioned comments regarding the state of our Global Truck and Bus and Construction and Agricultural end markets. Operating income for the full year was 38 million compared to operating income of 33.7 million in the prior year that's an increase of 4.3 million. This improvement in 2015 operating income on fewer sales reflects an improvement in gross profit margin to 13.4% in 2015 from 12.8% in Q4 2014 and also less SG&A about $1 million less SG&A in 2015 than in 2014. Net income was 7.1 million for 2015 or $0.24 per diluted share compared to net income of 7.6 million or 0.26 per diluted share in 2014. On an adjusted basis adjusted earnings per share were $0.29 in ’15 and $0.30 in 2014. An income tax provision of 9.8 million was recorded for 2015 compared to an income tax provision of 5.1 million for 2014. Effective tax rate in 2015 was therefore 58%, we model an effective tax rate of 45% to 55% in 2016. Depreciation expense for 2015 was 16.4 million, amortization expense 1.3 million and capital expenditures were 15.6 million. Our business plan contemplates capital expenditures of 15 million to 18 million next year. In 2016, we do anticipate being cash accretive even as we incur cash charges for our restructuring and cost reduction initiatives and increase investment in our facilities, equipment and technology for sales growth, operational excellence and other activities. We're pleased with cash build during the year, net cash provided by operating activities in fiscal year 2015 was 55.3 million. We finished the year with 92.2 million of cash and that's 22.1 million more than a year ago. This cash build allowed us to redeem 15 million of our senior secured notes in the fourth quarter 2015, thereby the leverage in our balance sheet. We had 37.5 million of availability from our ABL at year-end and therefore liquidity of almost $130 million at year-end. As regard to our segment financial results, revenues for the global truck and bus segment for the fourth quarter of 2015 were 127.1 million compared to 140.1 million for the prior year period, a decrease of 9.3%, primarily resulting from the decline in fourth quarter heavy duty truck production in North America compared to the fourth quarter of 2014. Operating income for the fourth quarter was 13.7 million compared to operating income of 16.2 million for the prior year period. This decrease in operating income period-over-period resulted from the decrease in sales. Fiscal year 2015 revenues, for the GTB segment were 565.3 million compared to 534.1 million in the prior year an increase of 5.8%, primarily resulting from the higher truck production in North America in 2015 than in 2014. Operating income was 59.3 million compared to operating income of 51.2 million in the prior year. This increase in operating income primarily resulted from the increase in sales. Operating income in 2015 and 2014 was also impacted by restructuring charges of 1.8 million and 2.1 million respectively. Shifting now to the global construction and agricultural segment, revenues in the fourth quarter of 2015 were 60.4 million compared to 74.8 million in the prior year, a decrease of 19.3%, primarily reflecting the challenging marketplace and these end markets and foreign currency translation. Operating income in the fourth quarter was 0.7 million compared to an operating loss of 1.6 million for the prior year period. We were pleased to swing the operating income in 2015 in our GCA segment on lower sales from an operating loss in the prior year period. This improvement in operating income reflects the improvement in gross profit margin in the segment. Facility restructuring cost in the fourth quarter of 2015 were 0.5 million. Fiscal year 2015, revenues for the GCA segment were 271.6 million compared to 317.2 million in the prior year, a decrease of 14.4%, primarily reflecting the aforementioned challenging marketplace to these end markets and foreign currency translation. Foreign currency translation negatively impacted 2015 revenue by 15.8 million or by 5%. Operating income was 8 million compared to operating income of 7.5 million in the prior year. This increase in operating income resulted primarily from the improvement in gross profit margin. Fiscal year 2015 results included restructuring costs, totalling $0.5 million. And that concludes my comments on our fourth quarter and full year 2015 financial results. Liz we'll now turn the call over to you for questions.

[Operator Instructions] Our first question is comes from the line of Mike Shlisky with Seaport Global. Your line is open.

I'm going to start off with a quick one about your top line. It sounds like what you're saying on the truck side [indiscernible] we could be somewhere down in the vicinity of 20% this year, maybe a little bit worse in North America, a little bit better elsewhere, in fact 5 to 7. I guess first, is that fair? And then on the construction and Ag side, it could also be down. But you do have some interesting-looking, brand-new programs. I was curious if you could give us maybe -- could that be down less than 10% in 2016, given some of the new stuff you have won?

Yes I don't, so we're looking at the top line for the year, I think the market forces and the various areas are probably going to overshadow some of the growth activities that we have, and so we've not come out publically I think with any direction on that on a specific nature but what we're seeing is as we launch these new programs. Many of them are ramping up in 2016 and then get to their full potential by 2017.

Okay, okay. Can you at least discuss some of your comments you made about protecting growth or protecting margins? You said that -- you mentioned these also in your comments today. Do you still anticipate on the downside here -- you have had a great performance, and it was down by a couple percent last few quarters, and, on the last decent upswing, getting some good operating leverage. On the downside here, do you think you can keep the operating leverage, the downside, to perhaps about 25% in 2015 just on your process, or might it get a little bit more dramatic, given some of the dramatic declines in some of the end markets? Thanks.

Mike, it is Tim. Let me answer your question impart by using 2015 as some context within which to maybe think about 2016. First of all with respect to the truck and bus segment, if you look back historically, at least sort over the period of time that I've been here. That group has done an exemplary job of leveraging the cost structure on the way up and maintaining that band, frankly staying at the upper end of that band and on the way down leveraging and staying within the band and generally at the lower end of that band. And as results regards to construction and agricultural [indiscernible] and to my comments a few moments ago, my prepared comments notwithstanding the reduced sales in construction and agriculture year over year in '15 compared to '14. Joseph and the team were actually able to deliver operating income, an improvement in operating income and swung to an operating income compared to an operating loss in the fourth quarter of '15 compared to '14 and taken together, if you think of truck and bus and Con-Ag for 2015 compared to '14 we had lower sales, somewhat lower sales in '15 and delivered about $4 million extra operating. So I think that that sort of behaviour in '15 compared to '14 and our ability to flex the cost structure in response to the sales [indiscernible] of what one might expect for 2016. And let me if I may go one step further and add to that that you know, the fact that we now we have in place our centrally light global procurement and logistics organization our lean manufacturing which we refer to as operational excellence is now up and running. We're starting to see the fruits of those labours and I think that's reflected in our margins last year. That will enhance our ability to reflect the changing marketplaces, but also the restructuring that Pat mentioned that we announced this past November of the facility restructuring and the executive realignment also. I mentioned facilitate the company's ability to react to the marketplaces and changes in 2016. So from my perspective the company has demonstrated in the history -- in history in the past to adjust to the changing marketplace, adjust its cost structure, flex within this band and so I think that you know you and the others might use that as guidance as what you might expect in 2016.

That's great color. Thank you. Maybe early, just want to confirm, you mentioned you will be cash-accretive in 2016. I wanted to confirm with you that that would be not the result of saying there's no borrowing. And then also, can you maybe just give us an overview of your covenants again? It sounds like you don't have any covenants on -- if you don't have anything borrowed on your revolver. If you could just give everybody a flavour as to how you plan to be from a net debt perspective as you exit 2016? Thank you.

Yes, to my comments we do in fact intend to be, project cash accretion in 2016, it's solely from operations, okay so no -- as we sit here today we don't intend to borrow any additional sums as regards our capital structure and more specifically our covenants, so Terry, as you know Terry Hammett is our Investor Relations Director but he's also our Treasurer, Terry could you give some color as to the covenants.

Sure absolutely Mike, I mean as you note we currently don't have any borrowings under any of our credit or debt facility, so although we have some reporting requirements, there aren’t any specific financial covenants that we're required to report on currently.

[Operator Instructions] I am not showing any further questions in queue at this time. I would like to turn the call back to Patrick Miller, Chief Executive Officer for closing remarks.

Well, I think I just want to thank everybody for joining us on the call, our investors and other affiliates. I think I would also like to reiterate that CVG has demonstrated capability of being able to manage our cost structure and line appropriate when we have got market changes and market swings. And we are doing that, I think we have demonstrated with the results that we have announced and the results we plan to achieve that we will continue to be proactive in how mange ourselves in the near-term. And as I mentioned earlier our intension is to still continue to keep our focus on our long-term targets and goals, which include growing our top line and developing innovative products and driving into the markets and new segments. So we are excited to be able to talk about more those things in the future. And we look forward to the next time we get a chance to talk. And I think I’ll -- thank you very much for your time. Have a good day.

So ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great weekend.