Commercial Vehicle Group, Inc. (CVGI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q1 2017 Commercial Vehicle Group Earnings Conference Call. At this time, all participants are in 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 like to introduce your host for today's conference, Terry Hammett, Vice President of Investor Relations. You may begin.

Thank you, Glenda and welcome to our 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 first quarter 2017 financial results. We will then open the call up for questions. 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 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. And now Pat Miller with a brief company update.

Thank you Terry. Good morning, welcome everyone. The good news is that we are seeing some positive indicators in the marketplace. Back in 2016 our truck and bus segment in North America was down significantly from the previous year especially in the back half of last year. Our global construction business which is stabilizing from multiple years in very tough market conditions. What we are seeing so far this year is that the North America Class 8 truck order backlog is increasing driven by unexpectedly consistent OEM orders for the last six months. Typically in the Class 8 market, the OEMs received orders for new vehicles approximately four to six months in advance, scheduling those orders for production. These higher orders are spurring the OEMs to increase their production plants. While the year-over-year comparisons for Q1 OEM North American truck production shows a decline of approximately 20%, the new truck order levels year-over-year in Q1 are higher by 31% and likely indicate increases in near-term production levels. CVG's truck related sales reflected about a 13% increase in 2017 Q1 when compared sequentially to 2016 Q4. Accordingly we are updating our expectation for the 2017 build rates to finish the year between 215,000 to 235,000 units up from our earlier guidance of 200,000 to 220,000. ACT and FTR both publishers of industry data had 2017 North America Class 8 build rate projected at 217,000 and 230,000 respectively. In 2016 the North American build rate was 228,000. The industry outlook for 2018 and beyond continues to be positive with forecasts indicating year-over-year improvement in North American Class 8 production up to an estimated 295,000 units in 2020. Turning to the global construction market conditions, we're seeing significant increases in customer orders year-to-date and for the near-term but we do not have public indices that is readily comparable to our sales impact as in our truck and bus business. We would point to the recent announcements by large OEMs specializing in construction equipment that reflected year-over-year sales improvements and increased projections for 2017. Our sales in the construction and Ag segment are showing year-over-year increases by 12% in Q1. We are seeing the improvement in Asia, Europe, and North America all of the markets in which we participate. The heavy duty construction equipment growth is driven by significant inventory reductions over the past years. Infrastructure activity and aging fleet with delayed replacement and an increasing rental utilization rate. Our internal projections estimate the larger construction machinery were more prevalent including earthmoving, mining, and paving are up more than 25% early in the year. We expect this to moderate to about 15% year-over-year. I recently was honored to attend a supplier recognition of Deere & Company, one of our top customers. Deere awarded our North America wire harness team a special award recognizing global supplier excellence for partnering to drive mutual cost improvements in the supply chain. We've also been earning other customer awards around the globe. Our India team helped develop and launch new uniquely designed school bus seats for Ashok Leyland. In conjunction with this new product Ashok Leyland recognized CVG as best debutant at the 2017 Supplier Summit. The new bus seat program started ramping up early in 2017. Along similar lines I'd like to congratulate our wire harness team in Europe as Caterpillar recently awarded them Platinum status which is the highest of five performance award for the third year in a row. Caterpillar also recognized our Shanghai, China team with an award of Gold status and Mexico won Bronze status. I want to thank all of our colleagues in these operations who worked diligently supporting our customers and demonstrating our belief that customer service is our top priority. Switching gears I would like to touch on this restructuring projects that we previously announced. These actions are targeted to help ensure we position our company for better profitability throughout this cycle. More than half of these initiatives are completed while others are still in process. I would like to reaffirm at this time that we continue to expect to realize 8 million to 12 million in reduced annual operating costs once restructuring actions are fully implemented. Part of the restructuring action included footprint changes in our North American wire harness business. We previously announced the plan to transfer all wire harness production in two facilities Edgewood, Iowa and Monona, Iowa to our Agua Prieta Mexico campus. We completed the transfer and closure of the Edgewood facility and we're on track with the Monona closure which was targeted for late 2017. The Monona closure has been placed on hold and is being reevaluated at this time. This is a result of the operational challenges we are experiencing at our Agua Prieta facility which I will detail in a few minutes. This change to the Monona project is not expected to affect the guidance on annual operating cost reductions we have just reaffirmed. We are achieving above expectations in the other projects and will still be well within the range of the savings committed. Our issues in Agua Prieta are mostly related to some unexpected regional labor shortages. The Agua Prieta operation has been growing substantially the past year with new business launches, business transfers, and peak and seasonal orders all compounded in the need to increase the labor force. Lack of available labor has driven operating efficiencies including mostly premium free and overtime to support our customers. In response we've launched the new operating location outside of Agua Prieta, deeper in the smaller region as well as our utilizing Monona, Iowa to supplement production capacity. These production inefficiencies impacted the first quarter of 2017 by approximately $4 million. We are still developing the longer range production strategy for the North American wire harness business but the changes we've put in place are helping to alleviate the extraordinary operating expenses and our target is to subside by the end of the second quarter. I want to reiterate that this problem is expected to be a short term impact only and we believe it has not impacted our ability to achieve our restructuring cost savings projections as previously stated. Recently we announced the long-term debt refinancing action with a 275 million term loan facility. This transaction allowed us to use some of the cash we've been generating to reduce our overall debt as well as our annual interest expense obligation. This not only increases our earnings for the shareholders, it improves our financial foundation for the future. We are excited to have this completed and Tim will provide some additional details on this in a moment. We discussed in the past the elevated amount of launch activity related to the truck and bus business in North America. Many of the truck OEMs have recently unveiled new truck platforms which we're supporting in various combinations of our product portfolio. Volvo, Daimler, and Navistar all recently announced new on highway platforms launching in 2017. We are supporting all of these new trucks for the North American market. We are not yet able to specify details on our level of product involvement but rest assured we're maintaining our strong presence in this market segment. In summary we're excited to see market improvements in our core segments. We are responding to customer needs on current projects and also as they ramp up their new product programs and we're looking forward to realize the benefits of the actions we are taking to improve our cost structure, increase our competitive position, and grow our participation in target markets. We look forward to providing you with updates on the progress being made across our global enterprise. Tim will now cover the quarter's financial results. Tim.

Good morning. When we announced this past March our intent to refinance the senior secured notes we provided guidance as regards selected financial measurements for first quarter 2017 including sales and operating income. We are happy to report that we beat this guidance, more specifically sales were 7% better and operating income 12% better than the midpoint of guidance. For the consolidated first quarter 2017 revenues were 173.4 million compared to 180.3 million in the prior year period, off by 4% period-over-period but up 16% from fourth quarter 2016. This sequential improvement in sales performance reflects improving heavy duty truck production in North America as well as improving the global construction equipment build our two largest end markets. The strength of the U.S. dollar remains a burden on the top line but less in the recent past. Foreign currency translation negatively impacted first quarter revenues by 2.8 million or 1.5% as compared to the first quarter of 2016. Selling, general, and administrative expense in the first quarter was burdened by 2.4 million of cost for the settlement of a consultant contract dispute resulting in SG&A expense of 16.6 million in the first quarter compared to 16.8 million in the prior year period. As previously disclosed, this dispute is a longstanding legacy issue and we're happy to have it behind us. Before giving the effect of the settlement SG&A was in line with recent quarters and 15% less than a year ago. This reduction in SG&A period-over-period reflects the impact of the many actions taken beginning about a year and a half ago to manage down our cost structure in a declining sales environment. Before giving the effect of the special items arising from the litigation settlement and facility restructuring, adjusted operating income in the first quarter was 8 million compared to 9.5 million in the prior year period and consistent with our expected operating income conversion rate notwithstanding the operational challenges we are experiencing in our North American wire harness business. This ability to achieve our expected period-over-period operating leverage compensated the burden the aforementioned operating challenges have placed on operating income as a reflection of the benefit of the manufacturing cost reductions and SG&A reductions resulting from our various restructuring and cost reduction efforts. Adjusted operating income margin was 4.6% for the quarter compared to 5.3% in the prior year period. As adjusted for the special items, net income was 2.5 million in the first quarter or $0.08 per diluted share compared to 3.1 million or $0.10 per diluted share in the prior year period. Net income for the quarter includes a tax benefit of 0.6 million due primarily to the litigation settlement. The company's effective tax rate is sensitive to the geographic profile of our pretax income, more specifically the mix of pretax, domestic, and international income, having said that we model a 30% to 40% effective tax rate for 2017. Depreciation expense for the first quarter 2017 was 3.6 million, amortization 0.3 million, and capital expenditures were 4.7 million. Quarterly capital expenditures were higher than we had experienced recently but we still expect CAPEX for the year to come in at 15 million to 18 million. Capital spending will likely be higher in 2017 than in 2016 due in large part to projects initiated in the latter part of 2016 and carrying over into 2017. Turning now to our segment financial results, global truck and bus revenues in the first quarter of 2017 were 102.1 million compared to 116.5 million the prior year period, that is a decrease of 12%. More than all of this decrease is attributable to the 20% decline in North American heavy duty truck production year-over-year. Operating income for the first quarter was 8.3 million compared operating income of 11 million for the prior year period, a decrease in operating income at the low end of the range of what we expect for a decline in sales. Operating income in the first quarter of 2017 and 2016 was impacted by facility restructuring and other associated charges of 1 million and 0.1 million respectively. As for the global construction and agricultural segment, revenues in the first quarter of 2017 were 73.5 million compared to 65.8 million in the prior year period, an increase of 12% due primarily to improvement in global construction equipment build. While the currency translation adversely impacted first quarter revenues by 2.9 million over 4.4% as compared to the first quarter of 2016. Operating income was 3.3 million in the first quarter of 2017 compared to 3.8 million in the prior year period. More than all of this decrease in operating income is attributable to the operational challenges in our North American wire harness business. Although we are not completely out of the woods, we believe the worst is behind us and that this burden on our financial performance will have subsided by the end of the second quarter. Importantly, the financial impact of the operational challenges on our consolidated financial results is largely mitigated by the benefit of the company's cost reduction and restructuring actions. GCA operating income in the first quarter 2017 and first quarter 2016 both include 0.1 million of charges associated with restructuring actions. The company has refinanced to 235 million in senior secured notes on the balance sheet at quarter-end. As previously mentioned sales were up sequentially in the first quarter of 2017 by 16% reflecting improving heavy duty truck production in North America as well improvement in global construction equipment build. This improvement in our two largest markets when taken together with our operational improvement and restructuring efforts and cash bill on the balance sheet positioned us to refinance the notes. Last month we closed a 175 million institutional term-loan facility maturing in April 2023. This transaction delevers the company somewhat and positions us to reduce the annual interest expense burden on the company by as much as about $6 million. We also took this opportunity to upsize our revolving credit facility to 65 million and to extend the facility to 2022. We're happy to have completed this refinancing and expect it to contribute to value creation for our shareholders in the future. After given effect to the refinancing and on a pro forma basis, the company had about 103 million of liquidity, 41 million of cash, and 62 million of availability from the ADL facility. To wrap up and setting aside for the moment the litigation settlement and the operational challenge in the North American wire harness business. We're happy with our first quarter 2017 financial performance. Our two largest end markets are improving and we've made a lot of progress in cost containment and right sizing the organization. Overall the costs and projected annual benefits of our facility restructuring and cost reduction efforts remain consistent with what we've advertised and we have the company refinanced. Accordingly we feel good about CVG's future. That concludes our prepared remarks. Thank you for joining us this morning. It's a pleasure to be with you today and we'd be happy to take any questions you may have. Glenda?

Thank you. [Operator Instructions]. And our first question comes from the line of Mike Shlisky from Seaport Global. Your line is now open.

Good morning guys.

Hi Mike.

So Class 8 projection was down 20% in the first quarter in the industry, your segment was down only about 12% to 13% here. Could you just help me bridge the difference overall and I guess the facility was up -- was down about 3% so that's certainly helped the growth on the year end. But beyond that are there any additional markets that you are seeing growth in internationally future investments make a positive or are you seeing market share growth in the core Class 8 market?

So, Mike it is Tim. Thank you for your question. Valid point, all things being equal one would expect the truck segment sales to have performed a little bit worse given that the 20% build -- the reduction of 20% in the build rates. So to your point there's been other elements of our business that have been improving. There's nothing you know terribly specific. I mean as I think we've discussed in the past we've made some improvements in our market share in some respects in India, we have some elements of our truck segment here in North America, they are continuing to improve. So it's a pool of a number of small things that has allowed us to offset the decline in truck build somewhat year-over-year.

And kind of few other things. So Mike we are not just in the Class 8 truck market in that truck and bus segment. Some of that's rest of world so there's a little bit Tim mentioned we've got truck business in other parts of the world that obviously is not affected by the North American swings. We are in the five to seven segments and we've also got an aftermarket business which is a pretty good chunk of the segment and that business is going to see the same fluctuations as the OEM trucks cycle. You add those things together and I think we've got segmentation out there, probably you can take a look at. Those numbers probably correlate when you look at what actually is OEM Class 8 on a percentage basis.

Okay, got it and then looking at some of the OEM comment out there in the Class 8 world, given that Class 8 will be down in Q2 year-over-year but perhaps not much to the same degree we saw in Q1 and then the second half of the year for the industry will actually be producing growth for Class 8 and I guess by extension for your truck and bus segment?

So the question is what to do in the second quarter.

Sounds like -- yeah, it sounds like we looked at some of the forecasts from -- other places it's still might be down year-over-year the industry in Q2 but you think you're setting up an easy comps for some growth year-over-year in Q3 and Q4, just for the industry as a whole not necessarily for your truck and bus segment?

Yeah, so I don't know have I got the numbers on the tip of my tongue for each quarter but I would tell you on an aggregate basis we are seeing a lot of positive indicators. From the built and the production planning from the customers in the North American truck market. And what we see multiplying in those activities has led us to increase our build projection. And I think that you'll see -- FTR is already add to our 30 in their projection and I believe with some of the strong activities going on the order side, my guess is you'll see ACT make some adjustments in their full year number in the not so distant future. So we've got a lot of positive indicators and data accumulated that's given us some confidence in making the changes and projections that we have made.

Interesting, that's great color and then moving on to construction and Ag you had somewhat easy call for Q1 with the statement down 15% of Q1 last year, the contract is really is closer to flat for the other three quarters of the year but you still feel you can get growth in each of the last three quarters here compared to the prior year?

So I think where we see the growth is in some of these medium duty and heavy duty programs which were -- which we have a better product on. So, right now we've not -- we're not given indicators for the total segment from a reporting standpoint at least from the public standpoint. So our visibility goes into through second quarter and part of third quarter and right now at least on a sequential basis we are seeing positive indicators.

Great, but I kind of was talking about in a different way. In the first quarter you saw $32 million in that segment, you have not seen that revenue level in like two years. Was that being a good run rate going forward given what you've got ramping up and given the end market backdrop or seasonality this year or maybe Q3 and Q4 are a few million below Q1 and Q2 due to the build schedules that your customers generally have each year or is this a bit more than up off the trough kind of ramp going forward to the run rate?

I think that's kind of the same question you asked in a different frame. Well, I'm not going to give direct guidance I think on this segment at least not this time but I will tell you though is there is seasonality typically in the construction segment and the first and second quarters tend to be a little higher than the third and fourth quarters. And what we're seeing on the gross side may push some of the some of that order backlog out. So, I don't know how that's all going to shake out yet. Mike, it depends on how fast everybody in the industry can ramp up. So we're seeing from a supply side pretty expedited order increases and that can result in some in some backlog right. So, it could drag again but seasonally usually we see Q1, Q2 are better quarters for construction. As you can imagine that is the build season, right.

Of course, of course, and then getting the award from Deere for your wire harness, I think it was great, could you give us your thoughts about increasing engagements in the Ag world in 2017 or 2018. I'm not sure I'm looking at growth in that market overall for the market but how do you feel about your penetration in AG in the near to medium term?

Well I think it's still -- it's still early days so we're doing a lot of work in AG not just in North America but also around the globe and we've got things out in the field with some of our new products. On the SCIOX product line which we've talked about in previous calls and previous meetings and some of the press releases, so we've got products out there on Ag machines in the field in testing and at this point we're feeling very optimistic that we'll be able to bring some of those home. But I think from a magnitude standpoint we don't know the answers to those yet.

Alright, and just one more from me, know that the debt refinancing and debt reduction is behind you, what does that have to do you think on the balance sheet here going forward or are you going to more be focused on just good day to day management especially on your working capital?

Nothing unusual at this point. Michael, as anticipated there is a -- as we have articulated in the past we pay close attention to our operating working capital and we've done I think a good job of managing that especially through these various swings and what continued to be there. I guess the best way to maybe think about this is if you think about the company's capital allocation strategy liquidity number one, capital for growth number two, deleveraging the business number three, and number four returning capital to shareholders. We're at that third step now and as evidenced by the transaction that we closed last month on the new line, we delevered the company certainly on a gross leverage basis and reduced the company's interest burden by about $6 million. So right now we're focused on the operating working capital in our business and the further deleveraging of the company.

Alright, well that's great color. I'll leave it there guys. Thank you very much.

Thank you. [Operator Instructions]. And our next question comes from the line of Ted Wheeler from Wheeler Capital. Your line is now open.

Yes, thank you, good morning everyone. You mentioned some startup costs and production inefficiencies at wire harness, I think you mentioned a $4 million impact in the quarter. I'm wondering when you think that might kind of get back to more normal situation and when you get there what kind of a profit you might expect from that operation?

It is Tim. I'll let Pat speak if he wishes to the causes and the fixes to the issue in the North America wire harness business but what we really anticipate is that here in the second quarter that is a burden on our financial results of those challenges will decline and will subside and is coming down and we don't expect it to wash over much into the third quarter at this point at all. So we think that we have the worst behind us and it's coming down here in the second quarter maybe a little bit of an impact after the second quarter. In terms of the profitability for that segment you can take a look at the segment's financial results as you can appreciate in the first quarter it's burdened by 4 million. So adding that back might give you some sense of where the settlement would be absent those charges.

Well yeah, and I guess presumably you would expect to earn some money in that facility, it was kind of what I was questioning, that's all.

Alright, in terms of the facility, yeah, no we don't think that this is going to have any dramatic impact on our restructuring efforts and our savings of having the rest of the team that are currently looking at how we might reconfigure our operations. To some extent down there I think you spoke a moment ago about a satellite facility not too far from the facility there. We have some reduction of capacity but it's a little early to say but at this point we don't anticipate any dramatic change.

Okay, great. One other question if you care to comment. You had several weeks in really dramatic increase in volume, do you have any color there or perhaps comment on that?

No, I don't. I can't explain it and it's inexplicable as far as I'm concerned, yeah.

This is Pat. We don't, we can't ever tell what the motivation is on some of the investor activity but when you look at the amount of positive news and reports and some of the orders which are made public through these forecasting services around the North American truck build and some of the positivity going on there. I would hazard that that's probably some of the activity.

Yeah, that makes sense. This space is done fairly well and great to see you participating. Thank you very much.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back over to Patrick Miller for closing remarks.

Yeah, I just want to thank everybody for joining the call today and listening to us go through kind of our current status. We believe we're going to get some of the things that we talked about behind this and a lot of the positive things we have going on in the future. So we look forward to talking about those on the next call. Thanks for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.