Feb 11, 2009
Executives
Chad M. Utrup - Chief Financial Officer Merv Dunn - President and Chief Executive Officer
Analysts
Analyst for David Leiker - Robert W. Baird & Co.
Chip Miller – JP Morgan Alan Weber - Robotti & Co
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2008 Commercial Vehicle Group earnings conference call. My name is Clarissa and I will be your coordinator for today.
(Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Chad Utrup.
Chad M. Utrup
Thank you and welcome everybody to the conference call. As usual before we begin the formal portion of today’s call I will first read through our Safe Harbor language then I’ll pass the call over to Merv for a company update, then I’ll take you to our results for the fourth quarter of ’08 and a brief overview of our restructuring and cost-cutting initiatives as well as our pending impairment impacts and then we’ll take time to answer your questions.
With that, I’d like to remind you that this 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 the production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings. With that, I’ll turn the call over to Merv.
Merv Dunn
Good morning, everyone. Thank you, Chad, and thank you to everyone who has dialed in this morning.
It’s not really news that the industry downturns that impacted us in 2007 continued into 2008. As we look back, the fourth quarter and frankly the whole year was certainly challenging.
As we went through the year and the fourth quarter, we continued to address volume declines by reducing our hourly and temporary workforce and overtime to meet the dropping market demands and customer order requirements. We also reduced capital expenditures and controlled inventory which can be tough when the volumes drop this rapidly.
We also kept a strong emphasis on managing logistics and transportation costs. Because approximately 75% of our costs are variable, we can make these kinds of changes quickly which allows us to remain in line with our contribution expectations on operating income for the fourth quarter despite our revenues being down further than our initial estimates.
As you saw from the press release, we had extended our cost reduction initiatives into the beginning of 2009 and are further addressing our fixed costs by instituting a hiring freeze, eliminating the merit increases for the year, and suspending the company’s match on employee contributions to the 401 (k) and other retirement programs outside the US for 2009. We have also started a 15% salaried workforce reduction and have plans in place to reduce our manufacturing footprint costs by consolidating and closing 5 of our smaller manufacturing assembly and sequencing facilities.
Our facility closures approximate more than 200,000 square feet of manufacturing footprint reduction. While this is small in comparison to our overall size for the local company, these actions can have quicker returns on the closure costs as we keep our eye on profitability and cash.
Of course as our market dictates, we will also continue to monitor further our variable costs as well as fixed costs and our workforce and manufacturing cost reductions the business may need and we will be ready for the challenges ahead. As you know, the economic downturn has not just impacted CVG but our competitors also.
A number of them have not fared as well in this extended downtime that represents potential business opportunities for us which we have talked about in the past. Each day seems to bring new opportunities and we’re prepared to move into those as soon as the customers [and move the] business and also as soon as they start production back up.
Despite tackling short term issues, we have kept our eye on the long term ball too. As the end of December we restructured the management team.
We did this because the company has changed over the past couple of years. Our recent acquisitions along with the addition of new talent to our team made it necessary to re-align our operations and our management.
We anticipate that over the long run it will result in a flatter, more cost-effective and efficient organization. Although 2008 was a very difficult year, we continue to make strategic investment in new products.
An excellent example is our GSX 3000 Global Truck Seat which we introduced at the IAA truck show in Hanover, Germany in September. This design for truck and bus original equipment manufacturers and was well-received by the customers and distributors.
It has a common structure that is easily adaptable to different end customers and end market needs, which makes it a very flexible product in today’s global marketplace. It is part of our long-term strategy to expand our product offering and increase our participation in non-US markets.
Also in January we announced an international seating coach bus passenger seat at the United Motorcoach Association in Orlando, Florida. This new seat was specifically designed for the global motor coach industry.
It has a three point integral seat belt design that meets European motorcoach safety standards and will be available across national seating full line of coach bus passenger seats beginning in the second quarter of 2009. As I mentioned in last quarter’s call, we are continuing to see significant new opportunities for CVG China in the short time since we’ve opened CVG Shanghai.
We have made meaningful gains in the local Chinese original equipment manufacturing markets and during 2008 we began expanding for CVG’s Chinese products to include wiring harnesses and not just seating. As we balance changing energy costs and also shipping expenses, strengthening or softening the value of the dollar and other factors, we may look to Stateside production to address cost savings and inventory issues.
This is a delicate balance that we will continue to monitor and manage going forward. The fact of the matter is that global production and sourcing costs are dramatically different than those of three or four years ago.
Given that we are in a recession, the analysts are predicting low production volumes for 2009 for [inaudible] trucks in North America. They are also predicting weak construction markets in Europe and Asia.
Everyone is expecting tight credit markets to diminish commercial vehicle purchasing around the world. Looking forward, we expect 2009 will present an even more challenging year than ’08.
We are prepared to continue to control our costs and realign our business as necessary. While we are not providing 2009 estimates at this time due to the volatility of our global market environments, we do currently estimate North America Class eight production levels to be in the range of 130,000 to 150,000 units, considerably down from 2008 levels.
In addition, our global construction customers continue to refine their production volume projections on a daily basis. In some cases they are currently indicating a 40% to 50% reduction.
They do expect this to pick up in the third and fourth quarter. These are primary reasons why CVG has taken all the actions deemed necessary at this time to ensure that we align our costs as quickly as possible.
Fortunately for us, our variable cost structure does provide us an advantage to react quickly and take costs out effectively. Overall, our primary goal in 2009 would be a continuing strategy of protecting our company against the effects of the economic downturn while taking actions necessary to keep CVG competitive in the long term.
At this point I’d like to turn the call over to Chad for a brief financial interview.
Chad M. Utrup
Thanks, Merv. As noted in the press release, we have provided only preliminary revenue and operating results at this time.
It’s probably no surprise but like many companies today, we are in the midst of finalizing our goodwill and intangible asset impairment valuations which will impact our final results as well as our tax provision rates and certainly balance sheet values. Therefore, today we will only be discussing key operating results and balance sheet items for the fourth quarter and full year and all results remain subject to change.
Our preliminary revenues for this past quarter were $164.4 million which is down about $14 million from our 8% from the fourth quarter of last year, of which approximately half of the decline was due to currency translation of our foreign operations. While the Class Eight production levels were relatively flat year-over-year for the fourth quarter, we did experience volume declines in our other end markets over the prior year with the notable exception of our military orders which remain strong over ’07.
SG&A expense continued to improve for the third consecutive quarter as a result of our ongoing cost reduction efforts and came in at approximately $15 million compared to $16 million in the third quarter of ’08 and $6.8 million in the second quarter of ’08. Depreciation and amortization was approximately $4.9 million for the quarter and capital spending was approximately $3.5 million for the quarter.
As we look at our full year 2008 results, our revenues were up $66.7 million over 2007 of which approximately $50 million was related to our acquisitions in late 2007. Preliminary operating income for the full year was approximately $16.1 million compared to $18.8 million in 2007.
Depreciation and amortization was $19.1 million for the year and capital spending was $14.4 million for the year, or 1.9% of revenues. While the revenues were down compared to our estimates for the fourth quarter, we are pleased with our ability to reduce our cost structure and help minimize the rapid volume impacts towards the end of the year.
Net debt in this case defined as total debt less cash and cash equivalents was approximately $157.6 million at the end of 2008 consisting of our $150 million 8% senior notes which aren’t due until 2013 and $14.9 million outstanding revolver balance with approximately $7.3 million of cash on hand. We continue to focus on cash and working capital management to ensure we achieve the highest level of cash generation as possible.
This covers the extent of our preliminary results which we will be discussing today as we expect to finalize our results and file our full financial statements upon completion of our impairment impacts over the coming weeks. There has been a lot of recent discussion regarding company pension and post-retirement plans and unfunded status and all those scenarios given the weak returns in the overall global markets so I wanted to touch base a little bit on it today.
I’m actually very pleased to report that through our contribution efforts and management of our plan assets, our unfunded liability of these plans only increased a modest 7.8% from approximately $19 million at the end of ’07 to about $20 million at the end of ’08. We take very seriously the management of our plans and ensuring the long-term viability and are very pleased with the performance throughout this past year despite the marketplace.
As Merv mentioned, e announced today certain restructuring and cost reduction initiatives with annualized cost savings of $10 million including the 15% salary workforce reduction, the freezing of our company match to our certain retirement plans, and the freezing of merit increases for 2009. What is important to note is that while we focus more on our media fixed cost reduction efforts, we have taken similar actions in regards to our variable labor costs by reducing our overtime and temporary and hourly staffing within our operations in connection with our volume declines.
As Merv said this is of course one of the primary benefits of our variable cost structure, having the ability to reduce our costs rapidly has definitely proven beneficial with the declines throughout the fourth quarter and into the first part of ’09. Finally, in response to recent stock price, the market value declines as well as the impact of current and potential market conditions, we like many other companies are in the middle of finalizing our valuation for impairment of our goodwill, intangible, and certain other assets.
That said, the pending outcome is of course non-cash and does not impact the underlying operations and strategy of the company. We do not have an estimate to provide at this time but certainly expect to finalize that over the next coming weeks and our expectation is that we will likely impair substantially all or all of our goodwill intangible assets and expect to do that on or before our Form 10-K filing deadline of March 16.
As of the end of 2008, we had approximately $143 million of goodwill and $87 million of intangible assets for reference. In conclusion, again as Merv said, we’re not providing guidance for 2009 at this time.
With that said, again, we currently expect the North American Class Eight market to be in the range of 130,000 to 150,000 units for ’09 and we have seen indicators that the Global Construction market could decline up to 40% to 50% in the first half of ’09 from ’08 levels. It’s no surprise that our primary focus will remain on these market conditions and should volumes in these markets or other markets continue to deteriorate, we will be prepared to take further actions as needed to ensure we achieve the highest return possible for our shareholders.
With that, we’d like to open up the call for any questions.
Operator
(Operator Instructions) Your first question comes from David Leiker.
Analyst for David Leiker - Robert W. Baird & Co.
This is Keith Schicker on the line for Dave. Chad, I think we can probably back into this number from the information you provided but can you offer a gross profit number for the quarter ex items that you haven’t quite determined?
Chad M. Utrup
$13.1 million.
Analyst for David Leiker - Robert W. Baird & Co.
Okay, that’s great and if we look at the restructuring program that you guys announced, can we assume that it contemplates... when you’re talking you may need to take additional action, can we assume that will be needed if we’re below 130 to 150 in the Class Eight and Global Construction is worse than the numbers you provided?
Chad M. Utrup
Yes, that’s right.
Analyst for David Leiker - Robert W. Baird & Co.
When did the savings reach the $10 million annualized run rate?
Chad M. Utrup
It’s pretty close. We’re taking all those actions here in the first quarter so we’ll be substantially complete.
Of the $10 million, obviously we have some costs with that which we mentioned so for ’09 it’s probably in the $7 million to $8 million range year-over-year.
Analyst for David Leiker - Robert W. Baird & Co.
And the $2.5 million, is that all cash?
Chad M. Utrup
Yes it is.
Analyst for David Leiker - Robert W. Baird & Co.
Is that net of any proceeds from the sale of the land and the facilities that you’re going to be closing?
Chad M. Utrup
They’re all primariliy leases so there won’t be any of that activity for this.
Analyst for David Leiker - Robert W. Baird & Co.
Okay. Are the savings primarily concentrated in SG&A or gross profit?
Chad M. Utrup
It’s throughout. The salaried workforce reduction is both in SG&A as well as in our operations.
Analyst for David Leiker - Robert W. Baird & Co.
Is it maybe 50-50?
Chad M. Utrup
I don’t have a split for you. It impacts both.
Analyst for David Leiker - Robert W. Baird & Co.
Then if we look at D&A roughly about $20 million this year. Is that number going to be lower next year, is that a safe assumption to make?
Chad M. Utrup
D&A this year was $19 million or so. Our CapEx is something we’ll definitely be taking a look at for next year so probably something similar or maybe a little bit higher as really depends what may roll off but I wouldn’t expect a substantial change.
Analyst for David Leiker - Robert W. Baird & Co.
Okay, and then lastly, can you just comment on market conditions that you’re seeing thus far in Q1 relative to Q4?
Chad M. Utrup
[inaudible]
Operator
Your next question comes from Chip Miller.
Chip Miller – JP Morgan
First off, point of clarification on the operating income. Does that include the $6.1 million gain in the first quarter?
For Q4 the loss was about $2.2 million at the operating line?
Chad M. Utrup
That’s correct.
Chip Miller – JP Morgan
Is that a clean number or are there any one-timers in there that we should be aware of?
Chad M. Utrup
No. That’s a relatively clean number.
Chip Miller – JP Morgan
So if I look at the net debt in the quarter, net debt went up by about $6 million. It appears that CapEx was in line with your guidance.
What was the driver there? Was working capital a source or use of cash in the quarter or was there something else driving that need to increased debt?
Chad M. Utrup
I think a lot of it is timing. We’ve talked about it before.
Our numbers can change $5 million to $10 million from Friday to Monday, so a lot of it can be that, but a lot of the challenges that we had at the end of the year with volumes being down even further was getting our inventory out because there was certainly less opportunity to use that inventory so that’s a piece of it, and the other piece, a lot of it is timing.
Chip Miller – JP Morgan
I know it can be very difficult to manage inventory when you’re closing down facilities and the industry is ramping down as well, so do you think working capital is going to be source or use of cash in the first and second quarter?
Chad M. Utrup
I can speak to it generally. When volumes go down, you typically get a use of cash.
Inventory is going to be a big piece of that depending on how much of our raw [inaudible] that we have at the end of the year, how much we can really use based on where our volumes come out, so it’s kind of can’t answer it directly but that’s going to be probably the biggest key is inventory.
Merv Dunn
Certainly it’s something that we’re very focused on.
Chip Miller – JP Morgan
Have you received any concessions from your customers as far as are they paying you faster, are you getting any price increases, have any of your customers been working with you through this downturn?
Chad M. Utrup
That’s something that we’re going to pass on answering.
Chip Miller – JP Morgan
Just the last one then I’ll get back in line. On your new credit facility you have covenants with respect to minimum levels of EBITDA for each quarter.
Are you currently given the downturns that you’re talking about in the first half, do you run any risk of violating those in the first quarter?
Chad M. Utrup
With the volume declines it’s something that we’ll obviously be paying attention to and working with our banks. I don’t want to give any further color since we’re not giving estimates for either Q1 or ’09.
Operator
Your next question comes from Alan Weber.
Alan Weber - Robotti & Co
First, Merv, you made a comment like on previous calls where you talked about the competition, potentially new business, and I know on one of the calls, a presentation you made, you talked about not I think closing some facilities because you might be in the process of bidding on business. Can you just elaborate more in terms of where that really stands today with potentially getting some new business with your customers due to the competitors; problems?
Merv Dunn
Frankly one of the things that has slowed down the movement of this business is frankly they’re not building any trucks so they don’t need the parts yet. But that will be made in a public announcement as soon as possibly can.
At this point we will not be closing either one of the factories that I had alluded to.
Alan Weber - Robotti & Co
Okay, so you’re still in this when the industry does turn, you still think you’re going to be positioned to win some of that business?
Merv Dunn
We will probably win business before the industry turns but the industry to use the parts has to start back up building the product.
Alan Weber - Robotti & Co
Right, okay, fair enough. On the recent credit facility, Chad, your bonds traded at like $0.50 on the dollar.
Under the credit facility you have, do you have to repurchase those bonds?
Chad M. Utrup
No. The ABL we have is capped at 47.5.
We’re obviously going to work with our banks to at some point when it makes sense to maybe upsize that and take a look at it for more of a long term approach, but right now while it is attractive, no question, that’s not something that we’re focused on at this point.
Alan Weber - Robotti & Co
I understand, I wasn’t sure if you’ve been allowed. The last question for now is can you talk about by the products which product lines were most impacted and had losses for the quarter or for the year?
Chad M. Utrup
We don’t get into product profitability but with the truck and construction markets being down and virtually a lot of our end markets with the exception of military for the fourth quarter it was pretty well spread across all of our products because of the construction and truck markets really being impacted.
Operator
Your next question is a follow up from Chip Miller.
Chip Miller – JP Morgan
Just asking for a little bit more detail on the restructuring actions that you took. So the five facilities it looked like they were primarily concentrated in [seat].
Can you give any kind of a rough number as to how much capacity you took out overall for the company and then [seats] the ticket early?
Chad M. Utrup
My guess is we have about $2 million historically. We took out $200,000 so far.
Chip Miller – JP Morgan
So about 10%.
Chad M. Utrup
Yes.
Chip Miller – JP Morgan
Am I correct in guessing that most of that was [seats]?
Chad M. Utrup
Yes, a good portion of that was seats with Kent and Belgium and our States bill seating assembly, those three in particular were most... Those three included [seats] as well as some other products but those three in particular did have seats, yes.
Chip Miller – JP Morgan
Although it’s private you didn’t take more out of Europe and if I heard Merv correctly, any future actions would be concentrated stateside, is that just due to the fact that it costs a lot more to take capacity out of your European operations or are you seeing something in the market over there that I’m not?
Chad M. Utrup
With our businesses that we have over there, we’ve got them pretty well concentrated in areas where I think in Sweden also which [inaudible] so there’s basically two plants there that are closed but the [inaudible] for the mother ship is in the UK and we supply out of there so anything that we would close other than the UK basically [inaudible] aligned sequencing facility. That is more manufacturing so I think that the downturns that we see right now in the market obviously we don’t have a bunch of business in Europe in the market, a substantial amount anyway, and most of our business in Europe is construction.
That has gone down that we’ve seen so we are taking it down through a very enhanced risk or reduction in force both in the hourly and in the salaried area.
Merv Dunn
And as far as locations go for Europe, we really only have, we’re only located in two locations in Czech. Of course our location in the UK so with the closure of our Belgium operation, that’s really all we have.
Chip Miller – JP Morgan
Just a follow up on the asset impairment that you’re going to take. Is that going to impact any of your current covenants either on the new revolver or the senior debt?
Chad M. Utrup
No, it’s all non-cash based so there’s an exclusion for that.
Chip Miller – JP Morgan
Did I read the new revolver correctly that the fixed charge coverage ratio doesn’t kick in until 2010?
Chad M. Utrup
That’s correct.
Operator
There are no further questions at this time.
Chad M. Utrup
Once again thank you all for joining us and we certainly have a lot of work to do a head of us so we certainly are up for it and I think we’re taking the right steps each day to make the company the kind of company that we all want to be associated with.
Merv Dunn
Thank you everybody for joining.
Operator
Thank you for your participation in today's’ conference. This concludes the presentation.
You may now disconnect. Good day.