Q2 2019 Earnings Call
This time all participants are in a listen only mode. Following management's prepared remarks, we will host a question answer session and our instructions to be given at that time. After your comps are you acquire operator assistance Press Star then zero and it will be happy to assist you.
As a reminder, this conference call maybe recorded for replay purposes.
It is now my pleasure hand, the conference over Mr., Kirk Filer, Vice President of corporate development Investor Relations, Sir you may begin.
Thank you Brendan and welcome to our conference call joining me on the call today are Patrick Miller.
President and Chief Executive Officer of commercial vehicle group, and Tim Trenary, Chief Financial Officer.
They will provide a brief company update as well as commentary regarding our second quarter 2019 financial results.
Well then open the call up for questions.
This conference call is being webcast then a supplemental earnings presentation is available on our website.
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 economic conditions in the markets in which CVG operates.
Fluctuations in production volumes of vehicles for which CVG as a supplier.
Financial Covenant compliance and liquidity.
Risks associated with conducting business in foreign countries and currencies and other risks as detailed in our FCC filings and now Pat Miller with a brief company update.
Thank you Kurt good morning, everyone.
Ongoing momentum in the North American heavy and medium duty truck markets drove year over year sales growth of 4% in the second quarter.
The North American truck market continues to generate strong built based on the backlog.
Additionally, we are continuing to make strategic investments in the business, including our manufacturing capacity expansion and electrical systems as well as corporate development activities associated with the recent recent strategic reorganization of the business.
These investments coupled with cost challenges resulted in a decrease in operating income as compared to the second quarter of 2018.
Some of the challenges are short term.
But the more systemic issues, we've identified and implemented a number of cost control and recovery actions to potentially mitigate the impact going forward.
Jim will provide additional detail in his prepared remarks.
Turning to our segments.
Revenue for the electrical systems segment was up 7.4 million or 5.5% versus the second quarter 2018.
Due primarily to continued strength in the North American heavy and medium duty truck market. However, operating income declined $2.1 million year over year due primarily to the capacity investments and previously mentioned headwinds.
The cost challenges, we experienced in the second quarter predominantly impacted the electrical systems segment.
We have maintained our focus on positioning this segment for long term growth.
Our capacity expansion in our global wire harness business and North American trim business allows us to more efficiently meet increasing demand levels and diversify into new end markets and applications.
While these initial costs, including facilitation training and other expenses negatively impacted our operating income for the quarter. We expect these costs to moderate in the second half of the year.
We have three new expansions underway, including wireless capacity in Mexico wireless capacity in Ukraine, and new dedicated facility for large trim molding also in Mexico.
These investments for the most part are targeted to allow sharing of overhead cost structures in existing operations, while providing more efficient production and growth capacity for new and existing customers.
We currently have a level of production already underway in various stages at all three sites and will be ramping up into mid 2020.
The Mexico harness capacity also provides a hedge against some of the labor issues. We experienced in recent years as it is located in a different state than our other harnessed plants in Mexico.
We are pleased to announce that we have been awarded the design and production of the total cap body structure solution for auto cars, New DC 64 are a new truck being introduced to the North American market target for severe duty refuse applications. This project engaged multiple engineering teams across EPG to provide full cap design for the structure and other components.
Production is expected to begin late in 2019 with full ramp up by mid 2020.
Another new market share awards for the electrical segment, we've been awarded projects onto New North American truck platforms. The first project launches in 2020 and includes trim ceding wipers and body structures.
The second project is trim related and launches in 2023.
Additional component opportunities are still in development on the second platform.
Taken together these two new projects total approximately $32 million per year and increased revenues for CVG.
We plan to share more specific details as the project to mature.
Turning to the global seating segment revenue was up $3.1 million or 3% and operating income was up 6% compared to the prior year.
Strength in the North American heavy and medium duty truck market drove higher revenues, but was partially offset by softness in Asia Pacific construction equipment markets.
In addition, we had other important new customer product wins in the global seating segment during the quarter.
First CVG was awarded the seat business for major truck for major truck OEM next generation truck business launching in 2023 at full volume. This business represents approximately $30 million of revenue annually.
This was predominately replacement volume for existing business and solidifies, our core business out into the future.
The award also represents the opportunity to bring our new common seat architecture to the North American truck market.
This architecture derives from efforts standardized technology globally across the new seating organization and is evidence of our enhanced strategy.
Additionally, CVG, India was awarded multiple projects with two domestic Oems for bus and truck applications.
Leasing programs begin ramping in 2019 and reach mature volumes in 2022.
These wins demonstrate continued traction in the APAC region growing partnerships with domestic market leaders.
Overall, our growth actions and product investments in Asia Pacific are paying off as demand for competitively priced higher performance fee is increasing.
We believe we remain well positioned to capture continued growth in this region in spite of some market uncertainties.
Turning turning to our industry and market discussion.
Class eight truck production was up 17% in Q2 2019 versus Q2 2018.
Total billings for the quarter were 92000 units.
The June AC rig research report continues to estimate the 2019 class eight production rate at approximately 342000 units.
An increase of 5% over the 2018 build rate.
Class eight order backlog decreased in July to just under 200000 units.
The backlog remains approximately six months.
Still in the healthy range, but the retail order rate has been lower signaling a potential return to more replacement levels over the next six to 18 months.
We're being diligent to keep the potential market cycles in our forward planning effort.
The full year 2019 class five through seven production rate is expected to total 286000 units substantially flat versus full year 2018 builds.
The medium duty rate is projected to remain at these stable levels for the near term benefiting from the macro trends with medium duty freight growing but at a moderate pace.
Overall, the global construction and off road markets remain mixed North America continues with robust builds. However, we are seeing softening in Asia Pacific, which mostly impacts our global seating segment.
Lastly, Europe construction has moderated the economic and trade uncertainties seeming to have an effect.
Based on current visibility we've upgraded our 2019 class eight production outlook slightly to be in the range of 345000 355000 units.
We expect 2019 full year revenues to be slightly above 2018.
Looking ahead, our strategy is to position CPG as a more focused and increasingly valued supplier growing markets with differentiated offerings, which we expect will accelerate long term profitable growth.
As we've discussed secular growth themes point to the proliferation of electrical components electronics connectivity and power in both current and adjacent markets.
With this in mind, we are investing both organically and through M&A and our core capabilities and our next generation products to improve our ability to compete and target markets.
We believe these investments will not only diversify our customers and geographic footprint, but also drive more consistent performance through cycle.
From an inorganic perspective, these investments could take the form of acquisitions or joint ventures, but would focus on applying our current capabilities into faster growing adjacent segments or new regions, mainly with our electrical and trim products.
Additionally, we are looking to extend our electrical product offerings to align better with the mega trends in our industry by increasing our participation related to electronic components and controls in and around the vehicle architecture.
We are being thoughtful and disciplined in our pursuit of any external investments to ensure we are allocating capital to the highest return opportunities for the business.
Despite some of the headwind headwinds we faced during the quarter, we are committed to effectively managing the business and profitability, while we better position the business to deliver deliver long term performance for CVG.
We look forward to updating you as we execute on our strategic initiatives.
With that I will turn the call over to Tim is going to go through the financials in more detail.
Thank you Pat and good morning.
Second quarter 2019 consolidated revenues.
Well $243.2 million compared to $233.4 million in the prior year period.
An increase of 4%.
As Pat mentioned this increase reflects the continued strength in the medium and heavy duty truck markets, we serve in North America.
Foreign currency translation adversely impacted second quarter.
Consolidated revenues by 3.5 million.
Consolidated operating income for the second quarter 2019 was 17.2 million.
Were 7.1% of sales.
Compared to 20.9 million or 8.9% of sales in the prior year period.
The new border minimum wage in Mexico.
Costs associated with the troubled supplier.
And costs associated with establishing additional manufacturing capacity are largely responsible for the decrease in operating income.
More specifically the operating performance of the electrical segment.
More on this in a moment.
Cost control and cost recovery actions reduce the impact of these cost pressures on gross profit.
Costs associated with the strategic reorganization of the company.
To among other things develop a platform from which to pursue business and corporate development activities amounted to approximately $1 million in the quarter.
We fully expect this investment of corporate resources to pay dividends in the future.
Interest and other expense increased $4.3 million in the second quarter of 2019.
Compared to the second quarter of 2018.
The increase reflects the impact of marking to market interest rate swap agreements, which resulted in a 1.1 million non cash charge in the three months ended June Thirtyth 2019.
As compared to a half a million dollar gain in the prior year period.
In addition, the second quarter results include a 2.5 million noncash charge associated with the voluntary lump sum settlement of $7.8 million in pension liabilities.
For a portion of our term vested participants.
Thereby reducing the future financial risk of our pension plan.
Following the transaction you must pension plan is essentially fully funded.
And we have transitioned the asset allocation for the plan to more closely match our liabilities.
Consolidated net income in the second quarter of 2019 was 7.2 million or 23 cents per diluted share.
Compared to net income of 13.2 million or 43 cents per diluted share in the prior year period.
Turning to our segment results for the second quarter 2019, electrical system revenues were $141.9 million compared to $134.6 million in the prior year period.
That's an increase of 5.5%.
Foreign currency translation negatively impacted electrical systems revenue by $1.1 million in the second quarter.
The electrical system segment generated $15.3 million of operating income in the second quarter of 2019.
Or 10.8% of sales.
Compared to $17.4 million or 12.9% of sales in the prior year period.
More than all or 2.9 million of the $2.1 million decrease in operating income is attributable to three items.
You may recall in December 2018 that the Mexican government legislated an increase in the minimum wage in an area running along and just south of the Us Mexico border.
The border minimum wage.
Our wire harness facility inaugural Korea is subject to the border minimum wage.
A number of actions, including price adjustments on certain products are underway to reduce the impact of the law.
The net impact to the second quarter results was approximately $8.7 million.
The net impact of the border minimum wage on the year is likely to approximate $2 million to $3 million.
A supplier of fabricated metal components sought relief pursuant to chapter 11 of the United States bankruptcy code during the second quarter.
This supplier is adversely impacting costs, including the cost of purchased components and is contributing the manufacturing inefficiencies in one of our facilities.
The impact the impact on the second quarter approximated $1.2 million.
We expect the impact of this troubled supply on our financial results to moderate in the back half of the year.
We are making investments in additional manufacturing capacity for our global wire harness in North American truck businesses.
Cost associated with the installation of this capacity were approximately $1 million in the second quarter.
These costs are expected to yield benefits to the company over time.
North American trim business is expected to benefit from cost savings and some material insourcing and certain manufacturing efficiencies.
We expect both businesses the benefit from incremental sales associated with this manufacturing capacity.
Moving on to the global seating segment revenues were $105.3 million compared to $102.2 million in the prior year period, an increase of 3%.
Foreign currency translation negatively impacted global CDN revenue by $2.4 million in the second quarter.
Global Sea in segment operating income increased during the second quarter of 2019.
To 9.4 million or 8.9% of sales.
Compared to 8.8 million or 8.6% of sales in the prior year period.
The increase in operating income is primarily attributable to the increase in sales volume.
Partially offset by material and labor inflationary pressures.
As regards the company's tax provision.
The third quarter will benefit from an amendment of certain federal tax returns to reflect foreign tax credits.
The tax rate is expected to be in the range of 10% to 15% in the third quarter.
For the full year 2019.
Remodel the company's effective tax rate to be in the range of 19% to 23%.
Thats comparable to the 20% to 25% percent, we expected a normal course.
For the six months ended June Thirtyth 2019 capital expenditures totaled 12.7 million.
Higher than recent historical spend primarily because of capital spending for the additional manufacturing capacity.
We expect capital expenditures to be in the range of 19% to $21 million for the year.
At June Thirtyth, 2019 liquidity was 123.9 million.
60.5 million of cash and $63.4 million of availability from our asset based revolver.
There were no borrowings under the asset based revolver at June Thirtyth 2019.
That concludes our prepared remarks, I will now turn it over to Brian for Q on a Brian . Thank you, Sir ladies and gentlemen at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered or you wish and look for something you simply press the pound key.
Once again to our audience over the phone, but as star and then one.
And our first question will come from the line of Mike Shlisky with Dougherty and company. Your line is now open.
Good morning, guys.
Hi, Mike.
Can we just maybe quickly touch first on some housekeeping.
And you will see it broken out in the release can you detail for us.
What would the earnings have been without sort of that onetime mark to market and without the pension.
Well it was a total of.
Almost 6 million pre tax.
Mike I Havent tax affected that so I don't have that number.
Maybe we can calculate.
I see kirker, he's got his calculator out so we'll calculate that for you.
Great and just just perhaps perhaps I was doing that just speaking very broad numbers here. If you take those two and then sort of some of the onetime costs around kind of wrapping up a business unit of the company.
You would have had probably twice the operating income.
The earnings had you not had those.
One time items, that's what it sounds like you're headed towards correct.
Well the to be clear the investment, we're making in business and corporate development isn't isn't onetime it's on a run rate basis.
Annually.
About a two and a half to 3 million dollar investment in our future.
So now that was.
A little higher it was $1 million in the in the second quarter there were.
One or two sort of one offs associated with the reorganization of the company.
That affected it in the second quarter, but on a run rate basis. It's on the order of two and a half to $3 million. We think it's it's money very well spent.
Sure course done.
And Mike coming back to you if you assumed adjustment of 6 million in the other income expense tax affected at roughly 25%.
EPS would have been about 38 cents.
Okay.
Got it.
Alright.
So guys I also want to ask about some of these brand new platforms, you've been you've been you've been specked into your great work on obviously all of them and it sounds like if you add.
Anup once youve.
The quantify that's at least maybe 10% to 15% tailwind from the current annualized run rate today, maybe in that ballpark.
Can you tell me if other platforms are going to be.
Kind of ramping down during this period or are you.
And to be giving you a brand new platforms auto car, the one and 2023 et cetera.
Yes, so I'm sorry, we can't do specific names on all of them you know how our business works looks.
So in general there was.
The announced new business there was really only one that was a replacement business.
And Thats the one I mentioned as replacement in the seating group the $30 million. So that's a that's a current platform that that will swap out for a new platform in 2023, all the rest of them are incremental to our our current book.
Okay.
And just on that same topic of brand new business can you update us on your efforts in.
Adjacent markets like in powergen, or the appliance market trailers et cetera.
Well I think we've continued to grow in what we consider to be powergen thats, both we lump.
Industrial and vehicle power generation in so that tends to be engines and harnesses. So.
We're not prepared to announce anything new today, but we definitely have some things in the pipeline that.
We hope we'll be able to announce in the near term in that regard.
Okay.
Our IR ramping you mentioned one other thing we are ramping up.
One power generation.
Related item and part of the expansion in the Ukraine is related to some new book business along that regard. So I don't have the exact numbers.
Off the top of my head, but.
Part of the justification for that expansion was new booked business in regards to power generation and also some off highway business that we've booked with some existing customers in Europe .
Okay.
Got it.
Just touching on Mexico briefly.
There was a time way back when everyone. So do not working in Mexico, you're missing out now it seems like some of the costs of equalized between the two countries in certain parts of Mexico.
Can you give some sense.
Are you changing any of your.
Production.
Outside of Mexico, and other whether you're going to.
Is your plan to kind of move any other work from Mexico into the United States or other countries are going to go from one state to a different state within Mexico.
Well the two two out of the three.
Announcements, we made today on things.
Capacity expansion are in Mexico.
One of them the interior trim campus.
With now five facilities and so we're able to add that capacity and still utilize mostly the same overhead management structure.
To to manage that business. So it's advantageous to us to be in that same region.
The second expansion is not only capacity, but also to mitigate some of the risk is as you're well aware in 2017, there were some issues with.
A lack of availability of labor in the area, where most of our wire harness manufacturing is and so this helps us mitigate that risk.
You asked about are we looking outside of there is something that we're constantly evaluating whether we can be cost competitive with our customer base.
But it's not it's not equivalent to the U.S. So it's still in it.
Probably a 30% landed cost.
Comparison improvement over being in the us at least for the labor intensive.
Activities.
And so most of our products are large and complex and so we tend to freight matters and so if that's a disadvantage where to be offset by freight and then we would look to do what you suggest but right now it doesn't.
Okay.
And just trying to trying to trying to combine a few different comments you made on your prepared remarks.
On the one hand, you said, there's a good chance that the U.S.
Okay truck market might turn back to more normalized levels next year, which I think is and why we hope you buy a CTO and others.
But then you're also adding capacity in certain parts of the world and across North America.
A sense as to.
Can you sense as to like what we're doing.
Okay.
Alright.
Are you doing anything.
You repeat that could you repeat that.
Im hearing you guys to hold on one second.
Hi, Doug.
Sorry, guys it was a little bit better.
Yes. Thank you Okay, just wanted to to try to give some comments you made earlier.
You you you said that some of the big forecasters are saying that.
We could see a.
Hey returned to a more normalized truck market in 2020, which is up I think it's pretty widely held view at this point, yes, you're also bring on new facilities in Mexico, excuse given sort of a sense as to how you're gonna be trying to manage your cost overhead during a time, we might see a pretty big decline in the market when you're trying to expand or change your your current footprint for them. So.
Other color around how you can imagine you're up your cost during that time.
It's a good it's a good question show.
I think with the order levels that we're seeing we certainly are preparing and planning for a potential.
Reduction in some of the truck volumes the capacity that we put in a in Mexico for the interior trim first of all part of that business is business. We already have our business Weve had outsourced and we're in sourcing into a purpose built facility and moving some existing assets in in addition to new assets. So.
Part of that capacity is is already.
Spoken for if you will the other part of the capacity is targeted at non truck applications and so it gives us the opportunity to compete in those segments.
Thirdly, I think I would add this the way that the truck Oems tend to manage their capacity is.
When there is some downturn in the market. They don't take all their operations in North America down equally to the Mexico operations tend to stay at a much more full.
Fully capacitized production levels in comparison to the us operations. So.
We believe that capacity down there makes a lot of sense for us not only for the existing business that we're moving into there but also.
The future business, which we think helps us have a little bit more of a diverse customer mix.
On a on the other hand, the other capacity, we're adding is tied to non truck. So most of our.
With the exception of some of the engine harness business most of the parts businesses in off highway and other segments. So.
That's really what it's targeted at.
Got it so it's fair to say that if we see a big.
Class eight reduction next year.
Ill give you some extra breathing room to kind of those wins elsewhere.
Well, it's very early Easter is there is plan business awarded business. That's in line with this new capacity already.
That's certainly been on which I installation, you're talking about that's correct.
Okay.
Alright, guys I will pass along thanks, so much for the help.
Good to hear from you Mike.
Thank you and our next question will come from the line of Barry Haimes with Sage asset management. Your line is now open.
Thanks, So much I had a couple of questions too first just following up on on a on a couple of Maxim and the comment you just made about the.
Mexico facility generally holding up better in a down classic volume environment.
Is there any.
Order of magnitude you could share. So you know if if class eight build is down ex you know would you expect that the Mexican volumes to be down you know half of X two thirds of X.
So in any sort of order of magnitude there and then what sort of decremental margins should we expect a you know on that reduced our classic business. That's the first question.
Okay I'll take the first part and then I'll, let Tim talk to the decremental piece I can't give you an exact number what I will just tell you is going from previous historical experience the Mexico, Oh OEM operations tended to stay up pretty consistently full they today, they're running you know at a at a at a.
Peak at peak volumes I would imagine they will take them down a few percentage points to try to get out of overtime and some of the extraneous costs. This is speculation on my part okay, but when we look at what they've done in the past they have different cost profiles and their different operations and they have they made efforts in the last three years to dual tool almost all of their platforms and those facilities located south of the border and so they have a lot of flexibility and and I will I would imagine that their plans will be to leave those operations running relatively full.
And and they'll take they'll adjust the other operations too.
To align with the with those sales orders drops if there are some.
Our various it's Tim with respect to your question on the.
On the variable contribution margin.
The company.
As a variable contribution margin that suggests that we convert sales.
Absent extraneous factors add between 20% to 25%.
Historically again absent extraneous factors. The company has has the experience of doing that if you look back.
You would see that in 2016, we actually converted in a down market much better than in that range. It was in the single or low double digits, but thats because of some extra fixed costs that we were taking out.
Having said that looking forward just to be very direct about your question I look.
For conversion of 20% to 25% probably early on into good Cline.
Conversion will be at the upper end of that range, just because it takes a little bit of time to get out of some of the costs.
But as as we move through any decline in the top line I would expect that conversion to start to move down towards 20%.
Great. That's very helpful. Thanks, and then one other question I had for you guys was.
It sounded like the North American construction market.
Still feels pretty good to you, but I'm wondering if you could talk about any change in incoming order rates as you move through the quarter and maybe through July .
There have been a couple of other companies that have reported that.
Our kind of pointing to weakening.
CE markets. So just curious what you're seeing in North America. Thanks.
And you know specific to North America, it's sometimes a little bit difficult for us to tell whether it's coming directly from construction or whether it's coming from.
Mining, which has been up as well.
And some of these other off highway so we kind of lump them together, because we can't always.
Separate them from where our customers are landing there their equipment, so but for US North Americas has remained relatively strong and.
They only softness we've seen and been in.
Predominantly in Japan, and Korea on the off highway side, Europe's a little bit soft, but but.
But but not the same as what we've seen in a back.
So I'd say that's about the best color I can offer you right now.
Great sounds good thanks, so much.
Okay.
Okay, well appears we were where we are done with the questions. Thank you very much for.
Joining the call today. This is Pat Miller and we we appreciate your support as we work to drive.
Better future for our company and we look forward to talking to you in the near term.
Take care.
Yeah.