May 7, 2010
Executives
Chad M. Utrup – Chief Financial Officer, Executive Vice President & Secretary Mervin Dunn – President, Chief Executive Officer & Director
Analysts
Ann Duignan – JP Morgan Craig Berenson – Berenson Loshak Asset Management Analyst for David Leiker – Robert W. Baird & Co.
Derrick Wagner – Jefferies & Company Kirk Ludtke – CRT Capital Group [Rohan Shetty – Alaclap Capital]
Operator
Welcome to the first quarter 2010 Commercial Vehicle Group conference call. At this time all participants are in a listen only mode.
We will be conducting a question and answer session towards the end of today’s conference. (Operator Instructions) I would like to now hand the call over to your host for today Chad Utrup.
Chad M. Utrup
As usual, let me read a few things here first before we begin the formal portion of the call today. I’ll first read through our Safe Harbor language and then Merv will give a brief company update and then we’ll walk through our results for the first quarter 2010 and then open it up to Q&A.
With that, I’d like to remind you that the conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties.
These may include but are not limited to the economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign currencies and other risks detailed in our SEC filings. With that, I’ll turn the call over to Merv.
Mervin Dunn
This is Merv. Chad and I will get to the answer session.
We’ll try not to step on each other answering. We’re not together this morning, I’m in Mexico with customers.
I’d like to thank everyone for joining our call today. Overall, the first quarter has progressed very well and we feel the economy may be starting to move forward.
We experienced decent Class 8 builds here in the first quarter as we expected which likely is due to the OEMs continuing to manufacturer the pre-2010 emission vehicle orders using existing inventories of over [inaudible] engines. We are seeing an uptick in construction orders on a global basis and continue to strengthen in military sales.
While our military business was exceptionally strong in Q1 we see this as a spike rather than a start of a trend given the random order patterns for these vehicles. That said, we believe we now have the leadership position in harnesses and wipers for wheeled tactical vehicles.
Until this week we had continued to feel that 2010 build rates will only be slightly ahead of 2009 production levels until the end of the year when we may see the beginning of a return to normal volume levels. We don’t believe that we will see the meaningful recovery of Class 8 OEM vehicles in 2011.
Currently we believe Class 8 North American vehicle rates will be in the 130,000 to 135,000 units for 2010 but as the news has come out now we have seen higher orders sooner than thought and some of our customer are saying that they will not see a downward motion in second quarter, third or fourth. They believe it has taken off on Class 8 North America.
Regardless, during the fourth quarter we continue to focus on positioning CVG for a rebound in the overall economy and our end markets. In March we were pleased to complete a public offering of common stock at $6.25 per share.
This offering resulted in total sale of 4.37 million shares of newly issued CVGI common stock for which we received approximately $25.4 million after fees and discounts. We feel the proceeds from this offering and the $21.4 million tax return we previously discussed along with our ABL borrowing capacity provides CVG with a strong balance sheet and excellent liquidity.
As we mentioned before, one of our main goals is to be a global partner to our customers. This includes customers such as UD Trucks, formally known as Nissan Diesel and [Volvo AB] and Daimler which are heavy players in both heavy truck and with Volvo construction vehicle markets as well as US based global construction customers such as Caterpillar to name a few.
As we look to continue growing with our customers on a global scale, we believe there are opportunities to utilize some of the proceeds from our recent stock offering for new business purposes including expansion in China, India and Mexico. In China we began operations in 2004 with a wholly owned foreign entity in Shanghai.
Since then we have experienced significant growth in that facility. We began production in the facility with only $4 million in sales and today we are very close to $40 million in sales with expectations of continued growth.
In addition to serving US based OEM partners in Japan and other Asia markets, we have also gained domestic business in Chinese markets. In Mexico we have established a presence and we intend to extend and explore new potential opportunities to grow with our global OEM customers there.
Likewise, India is a market that interests us and we are looking at prospects and opportunities to expand our global footprint and participate in that market. As you know, ours is a fragmented industry with many smaller non-public competitors and suppliers.
The current economic situation has been difficult for all of us and especially for many of these companies and we feel that also presents opportunities for us. Keep in mind that even during the down turn for ’07, ’08 and ’09, we have continued to move our company down our chosen strategy path including a world class tech center and the equipment needed plus a high level of capable people.
During the quarter we announced our national seating brand has been selected by Hino Motors Manufacturing USA, a Toyota Group Company, as the seat supplier of choice for Hino’s North American produced medium duty trucks. Under this new agreement we will provide both suspension and static seats for Hino.
This is a testament to the quality, technology and value of our national seating products. Hino is recognized as one of the fastest growing medium duty truck manufacturers in North America and we feel that this business presents a nice opportunity for CVG to grow with them.
In March we were pleased to unveil a new line of heavy truck seating at the 2010 Mid America Truck Show in Louisville Kentucky. This new seat line covers owner operator fleets and OEM needs from the basic economy line products to the highly engineered premium seats that offer the ultimate in operator comfort and safety.
Part of the new product line includes our innovative Ensign seat that offers an economical choice but still provides a high level of quality and comfort. At the other end of CVG’s seating spectrum are the Admiral and Commodore seats.
These are premium units built from national seating high performance base. These new seats were developed with customer input that ensures they meet the needs of the different kinds of operators and our different market segments.
They demonstrate how our research and development capabilities along with our engineering expertise combines to offer real value across the broad spectrum of customers needs and market conditions. I’m also pleased to announce that CVG electrical systems business earned recognition as partner level status for 2009 in the John Deere achieving excellence program.
Partner level status is Deere’s highest supplier rating. CVG is a supplier of electrical and electronic distribution systems at John Deere construction and forestry operations.
We have been a supplier to Deere for more than 25 years and we have participated in the achieving excellence program since 1990. We are very proud that our employees in Mexico and Iowa excelled in all of John Deere’s rating categories for this distinction.
Overall, the first quarter of 2010 was very productive for CVG. We continued to achieve business gains, to develop new products and to solidify our financial position.
We believe we are continuing to properly position CVG to be a strong supplier and recognized industry leader as the economy improves and the recessionary forces we currently face come to an end. At this point I’d like to turn it over to Chad to talk a little bit about our financial overview.
Chad M. Utrup
Our revenues for this past quarter were $146.4 million which is an increase of $37.9 million or 35% from the first quarter of 2009. This increase is not only the result of an estimated 23% increase in the North American Class 8 build rate from the prior year but also reflects an increase in our global OEM construction revenues which were up more than 50% from the prior year period as well as our military revenues which were up more than 70% from the prior year period.
Obviously we’re very pleased with the incremental revenue base this quarter both in comparison to the prior year quarter as well as sequentially when compared to the fourth quarter of last year. Most notably our global construction markets which continue to show signs of improvement as well as our military markets which is indicative of our efforts to continue to grow within these markets.
We continue to remain heavily focused on cost reductions and cash management, our operating income was $3.6 million for the quarter or 2.5% which is an improvement of approximately $22 million over the prior year period. This represents a 58% contribution margin on the incremental revenues of $37.9 million and this is a testament to the cost realignment and margin enhancement efforts we’ve been discussing and taking action on for the past 12 to 18 months.
Depreciation was approximately $3.3 million for the quarter, amortization was $60,000 and capital spending was about $.7 million for the quarter or .5% of revenues. We did record a gain of approximately $1.5 million as other income which is primarily related to the mark-to-market of our foreign exchange contracts for the quarter.
Our effective tax rate for the quarter was -19.4% and as we mentioned in the previous quarter call we were expecting a tax refund in the range of $18 to $21 million in the second quarter of this year and I’m happy to report that we did in fact receive this refund in the final amount of $21.4 million. As mentioned in the press release, this refund was received in late April and therefore is not yet reflected in our first quarter balance sheet.
As of the end of the past quarter we had approximately $25.3 million cash balance and the capability to borrow and additional $22.5 million under our ABL without financial covenant requirements. Adding this to the $21.4 million tax refund and we have nearly $70 million of funding capability without financial covenants on a pro forma basis.
This flexibility is a direct result of our debt modification during 2009, our focus on working capital, operational and cost improvements and the benefit from our equity offering and tax refund. This puts CVG in a very good position as our markets return and allows us to continue to focus on our strategic growth plans beyond market recovery.
Merv touched on a few of these strategic objectives such as our opportunities within Asia and Mexico. In addition to these opportunities we are also aware that we will have a need for working capital as we enter in to the market recovery period for our end markets.
With the financial flexibility we have created over the past year, we believe we are in a strong position to absorb these working capital needs as well as pursue key areas of growth. With that said, we currently do not expect to have to comply with any financial maintenance covenants for 2010.
I think I’ll end it here just indicating that we believe our results for the quarter speak for themselves and we look forward to continuing our focus on improvements as well as our long term growth strategy. Operator, with that I think we’ll open the call up for some questions.
Operator
(Operator Instructions) Your first question comes from Ann Duignan – JP Morgan.
Ann Duignan – JP Morgan
Just a couple of questions on the comments you made about Class 8 builds. The build came in at roughly 35,000 in the first quarter and I think you said you’d expect them to be roughly at that level each of the upcoming quarters?
Did I catch that correctly?
Mervin Dunn
I think that was the way we were feeling when we put our plan together the first of the year. Obviously, with some of the news that has be coming out with right at 15,000 orders a month, it’s kind of go people thinking more in the 170,000 range.
We’re not willing to make that leap but they see it in commitment. We will keep right on our plan and if it goes above that we’ll be happy and we’ll build all the truck seats, interiors and wiring harnesses they need.
Chad M. Utrup
I think to add to that Ann, we originally started the year with about 125,000 units was our thought for the year. With where Q1 is up in the 35,000 unit range I think Merv mentioned we’re in probably the 130,000 to 135,000 range and maybe on the higher side of that with some recent orders that Merv mentioned.
So, if you annualize Q1 you’re in the 135,000 to 140,000 range. That’s probably where our thoughts are at this point.
Ann Duignan – JP Morgan
It is interesting we had expected a decline in Q2 builds as people transition out of ’09 and then in to 2010. I thought your comment was interesting that you have at least one OEM customer that’s saying that Q2 may not be down versus Q1 now.
We were expecting kind of a dip and then an acceleration in the back half. Certainly the orders have been coming in stronger than any of us had anticipated so I think it’s kind of encouraging.
On the flip side, on the military side we understand that the content you have is on some of the MATV platforms. Can you talk about your expectation on the military side this year and next and how much visibility you have?
I know orders are lumpy but what are your expectations on the military front?
Chad M. Utrup
Well Q1 military for us was exceptionally strong. I think Merv mentioned earlier too we don’t expect that type of level for military to continue but I will say military for us for Q1 was the highest level that we’ve ever had in military business even going back to the MRAP days.
We had a spike, we don’t expect that to continue. As far as the outlook and what visibility we have, it’s pretty small.
I think everyone knows the way these orders come in are in 1,000 to maybe 1,500 units at a time. When those orders come out and hit the press that’s kind of when we see them too.
The visibility is fairly small but Q1 was exceptionally strong for us.
Ann Duignan – JP Morgan
So overall if I put all the pieces of the puzzle together would you expect Q2 revenues to be as strong as Q1?
Chad M. Utrup
For military?
Ann Duignan – JP Morgan
No, total when I put all the different end markets together?
Mervin Dunn
On the Class 8 trucks we’re hearing a lot that Q2 is going to be as strong as Q1 but we’re still sticking with our guidance on where we’re at. We are seeing that April didn’t drop off.
We kind of expected not a dip in April like you suggested but more of a cliff fall and we’re not seeing that yet.
Chad M. Utrup
Since we’re not giving estimates I’ll answer this as vaguely as possible as I am sure you would expect. Military was strong in Q1, that likely may not continue in Q2.
We’re working on some things to hopefully where it does but that may not continue. That would be one pull back.
The only other pull back would be obviously our [iTech] business that’s been progressing down to [iTech’s] facility down in Mexico. We don’t expect that to impact our bottom line but from a revenue standpoint I think it’s fair to point it out.
Ann Duignan – JP Morgan
I appreciate that you don’t give guidance but I do think there are some moving parts that are kind of changing around here so I’m just trying to get a sense.
Chad M. Utrup
Those are the two that I would point out that are probably the anomalies if you go Q1 to Q2.
Ann Duignan – JP Morgan
Finally, on Hino, when does that really become material? When do you really see those revenues start to kick in?
Mervin Dunn
Well, we’ve already seen the costs start to kick in. That’s the thing we try and look at as well as anything else before a program starts bringing in money we are spending money.
That’s with all the programs we do. Right now we can tell you the costs are hitting.
I would guess it’s probably 16 months out.
Operator
Your next question comes from Craig Berenson – Berenson Loshak Asset Management.
Craig Berenson – Berenson Loshak Asset Management
Regarding share, it’s nice to hear about the share gains on the military side. How do you feel you’re positioned for this year market share wise with your Class 8 customers?
Mervin Dunn
This year with the customers other than the one that has moved some product to Mexico which we’ve covered in the past we’re seeing still pretty strong market share. We’re gaining business in product lines such as flooring and hard plastics which the hard plastic trim is a lot of the direction the interiors are going.
We’ve gained business in electrical, we’ve gained business in wipers so if you give me a little bit more detail of what you’re looking for I might be able to answer better.
Craig Berenson – Berenson Loshak Asset Management
I was just looking for general tone on share, I was just looking for any additional color or detail. It was just something that I was frankly just looking for from your company this year and I’m glad to be seeing it already.
I was just looking for general color that’s all.
Mervin Dunn
Well, I think the color is green that we’re looking for for the rest of the year.
Operator
Your next question comes from Analyst for David Leiker – Robert W. Baird & Co.
Analyst for David Leiker – Robert W. Baird & Co.
Just a few quick questions, following up on the question on Hino, as you’re growing with them do you expect maybe higher content? What’s maybe the full potential of that business?
Mervin Dunn
We’ve been to Japan meeting with them and Chad has been there with me. Frankly, we think that the door is wide open for us there on any product that we have the capability of making.
But, the typical with one of the Toyota companies is we make the first product and you show your capability and then the door gets even wider open. We think the opportunity for many other products that we make is wide open there but we do have to prove ourselves first on the one product.
That is just the normal methodology there.
Analyst for David Leiker – Robert W. Baird & Co.
I think, if I remember the press release correctly, that business is around $4 million annualized when it comes on line?
Mervin Dunn
Well, with Hino you don’t know how much the business is going to grow before they ever make the first one. So, based upon the things that they have told us at this point that is kind of what we figured.
Analyst for David Leiker – Robert W. Baird & Co.
Then just in terms of mix, is that a higher content seats or kind of a mid range that you’re starting out with?
Mervin Dunn
We’re starting out on the mid range for all their seats the static and suspension seats. The suspension seats are on the higher end but it’s for a medium duty truck.
Analyst for David Leiker – Robert W. Baird & Co.
I think the big surprise is just on how costs were managed and really strong gross profits. Looking forward, what’s kind of a good way to think about the incremental margin you can drive?
Is maybe a sequential quarter comparison quarter-over-quarter throughout the year a better way to look at it based on your cost structure and how you’re operating?
Chad M. Utrup
We’re still pretty comfortable sticking with that 25% at this point. Q1 was compared to last year and even sequentially from Q4 was pretty strong for us.
There’s part of that is an increase in some aftermarket business and part of that that is an increase in the military business and some other mix things going there. I think looking forward we’re still going to be comfortable with that 25%.
We continue to look at ways to take out costs and further improve but as far as looking forward I wouldn’t shy away from what’s worked for us and that’s kind of targeting that 25%. If we exceed it like we did this quarter great, but as a general rule I’d still use 25%.
Operator
Your next question comes from Derrick Wagner – Jefferies & Company.
Derrick Wagner – Jefferies & Company
I missed the depreciation and amortization figure you gave. Then, if you could review your total revolver facility, you said you had $22.5 million available under the ABL.
I thought you had a $37.5 million facility and what letter of credits have been drawn against it? Lastly, the capital expenditure outlook for 2010 entirely?
Chad M. Utrup
Sure. Let me take those three pieces here.
Amortization was $60,000 for the quarter, depreciation was $3.3 million. Let me take cap ex, cap ex was $.7 million about $720,000 for the quarter.
Outlook for the rest of the year, I just still think we’re probably going to be in that 1.5% to 2% range. Q1 was a little bit low, some of that is timing but we are still watching it very closely so we may be just 1.5% barring any significant growth or major projects.
Lastly, walking through the ABL, the ABL is a $37.5 million. The reason I use the $22.5 million is because that’s the threshold we can borrow up to without financial covenants.
So $37.5 less a $15 million block if we have at least $15 million of availability of that $37.5 million which gives you $22.5 million. We can borrow up to $22.5 million without financial covenants so that’s why we use that number.
That’s really one of the key points we put in place with our amendment last year along with the modification with the bonds was an ABL revolving structure without financial covenants especially in this environment. As far as letters of credit, it hasn’t changed we’re still at $1.7 million, pretty small.
Derrick Wagner – Jefferies & Company
Could you just refresh me on when the block of $15 million would be lifted? With what kind of covenant level?
Chad M. Utrup
There’s a permanent $10 million block unless we have a trailing 12 months fixed charge of 1.1 to 1 I believe it is. Then it just moves to a $7.5 block so it’s got some level of block to it at all times.
Operator
Your next question comes from Kirk Ludtke – CRT Capital Group.
Kirk Ludtke – CRT Capital Group
I’m sorry if you’ve already quantified this, I might have missed it, but I think you mentioned that working capital will be a cash requirement during 2010. I missed the number and I’m just curious if you’re offering that?
Chad M. Utrup
Well, I think the general rule for us – let me see if I can answer it this way, if market or revenues go up say $200 million for whatever reason on an annual basis, our typical working capital is probably in that 10% to 12% range of the annualized revenue increase. It’s kind of a general rule of thumb to use for us.
So if markets increase and our revenues as a result would pick up say $200 million we’d probably be in that $20 million, $23 to $24 million range need for working capital. We haven’t really given any other numbers other than that but that’s fairly typical for us with where our metrics are.
Kirk Ludtke – CRT Capital Group
I might have missed this as well but do you provide a cash effective tax rate?
Chad M. Utrup
No, we don’t. We’ve got valuation allowances against all of our deferred tax assets right now so trying to get a rate, a normalized rate is very difficult to provide.
I would expect we’d be very low to zero cash tax payer here in the short term. It all goes back to the carry back against our impairments from the last couple of years.
So we’ve got to overcome those impairments from like ’08 for an example before you get in to probably a more normalized rate structure.
Kirk Ludtke – CRT Capital Group
Is it possible that you could get more tax refunds?
Chad M. Utrup
We have a few things that we’re chasing that may come for us, R&D credits and things like that. I like your attitude in terms of $21.4 million in the last month can we get more.
There’s a few things out there but this one is definitely a big one.
Kirk Ludtke – CRT Capital Group
Then lastly, do you have any pension funding requirements or anything like that?
Chad M. Utrup
Nothing outside of normal course. We have and will continue to fund a couple of million a year to our pension plans.
We have done that since inception and that’s nothing out of the normal.
Operator
Your next question comes from [Rohan Shetty – Alaclap Capital].
[Rohan Shetty – Alaclap Capital]
I was wondering if you guys could comment on the status of your outstanding debt and if you plan to issue any new notes in 2010?
Chad M. Utrup
The status of our existing debt, well we’ve got our revolver there’s nothing borrowed on it. We’ve got our second lien term loan which expires in November of 2012 and a third lien note which expires in February of 2013 and our 8% notes expire in July 2013.
Are we going to issue anything in 2010? We may look at planning and seeing what makes sense for us but all that will come in to play on that is where premiums for early retirement are and where interest rates are and what we may be able to get.
We’ll start planning but it’s hard to comment whether we’d do anything in 2010. If we saw an opportunity to do something that made a lot of sense we would consider it but we’ll definitely at least start planning for a strategy.
Mervin Dunn
I hope you can tell from what’s happened in Q1 and what happened last year when many, many were going bankrupt and we didn’t that this management group tries to turnover every rock every day. A lot of the ideas you guys have got and are great and they’re ideas that we are working on or have worked on and if it pans out than we do it.
Operator
Your next question comes from Derrick Wagner – Jefferies & Company.
Derrick Wagner – Jefferies & Company
I believe at the end of the fourth quarter you had said that you expected an organic growth rate of about 5% to 6% and about $28 million of new business. Can you refine those?
Mervin Dunn
The new business is spread across electrical, interior and at this time I’m obviously involved in many negotiations that are going on but at this time we’re not willing to break down the amount of sales and most of the guys are dealing with their business units, the president of electrical and the president of interior is here with me in Mexico.
Derrick Wagner – Jefferies & Company
I was just wondering if you could comment on the growth rate and the level of new business?
Mervin Dunn
Our growth rate is typically always in the 4% to 6% and even in down times we’ve continued to march forward with that.
Chad M. Utrup
I would add to that that we’re comfortable we will meet or exceed that number that we gave towards the end of last year. Q1 is pretty strong, a lot of that is military which is new business for us so I think the best way to say it along with what Merv said is we’re comfortable with that number.
Derrick Wagner – Jefferies & Company
Would it be too aggressive to kind of annualize the first quarter sales level?
Chad M. Utrup
For what? The full year?
Derrick Wagner – Jefferies & Company
Yes.
Chad M. Utrup
I’m not going to get in to kind of getting there. I talked to Ann’s questions earlier about military being spiked up, very limited visibility on that and that’s a big factor for Q1 and there’s a few other things so it’s a little hard to comment on it.
Mervin Dunn
Plus we’re seeing construction and heavy truck taking off. None of us are willing to gamble [inaudible] what it’s going to be Q2, Q3 and Q4 is just not in our realm of knowledge.
Our guess is going to be no better than yours so why don’t you go with yours.
Operator
Your next question comes from Ann Duignan – JP Morgan.
Ann Duignan – JP Morgan
Just a quick follow up on the mark-to-market gain from fx, given what we’ve seen happen with the dollar versus the euro, what’s your best guess as to what happens to that line item as we move forward if we were to say that today’s exchange rates were to prevail?
Chad M. Utrup
Well, the way that that valuation comes about Ann is based on the March 31 valuations. So, it depends how much it moves from where it was at the end of the first quarter.
Ann Duignan – JP Morgan
So if exchange rates remain at the March 31 level we would expect something similar in Q2?
Chad M. Utrup
No. If it remains exactly where it is today I would expect that number to be smaller.
It’s a point in time it’s not an average. Maybe that helps explain it a little better.
Ann Duignan – JP Morgan
Then you made some comments earlier, I know it was kind of off the cuff but you said something about being green for the rest of the year. Am I reading too much in to that if I take that that you would expect to be profitable for the rest of the year?
Mervin Dunn
That’s always our goal.
Ann Duignan – JP Morgan
So it remains a goal?
Chad M. Utrup
I think the comment that Merv made on green was in respect to market share gains not necessarily the whole rest of the year.
Mervin Dunn
We intend to stay in the green area when it comes to winning business.
Operator
At this time you have no further questions. I’d like to hand the call back over to management for closing remarks.
Mervin Dunn
Again, thank you very much for putting up with some of our phone problems. Sometimes the greatest landlines in Mexico and the US don’t always connect together quite well.
Again, thank you very much for your time and I look forward to talking to you next quarter.
Operator
Ladies and gentlemen thank you for your participation in today’s conference call. You may now disconnect.
Have a wonderful day.