Good day, ladies and gentlemen, and welcome to the First Quarter 2019 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 be given at that time.

[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kirk Feiler, Vice President of Corporate Development and Investor Relations. Sir, you may begin..

Thank you, Lauren, 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 first quarter 2019 financial results.

We will then open up the call for questions. This conference call is being webcast and a supplemental earnings presentation of 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, the economic conditions in the markets in which the 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 as detailed in our SEC filings.

And now Pat Miller with a brief company update..

first, extending our current capabilities or applying what we are good at in other attractive market segments that are less cyclical, especially in the wire harness or interior trim product categories; second, acquiring new capabilities or technologies that are aligned to attractive electronic industry trends and build upon current product capabilities or markets strength; and third, expanding our geographic footprint for global coverage with the same or similar categories.

Lastly, I would like to briefly discuss the continued traction of our lean efforts -- our lean efforts are making in the business. More than 30% of the global employee population has been certified in our Lean Six Sigma programs, including more than 70% of supervisors and above.

For the last few years, we've been giving internal president's awards to the best performing and most improved lean teams in the company. This year we raised the bar of the award program to focus on value streams that must be certified against an objective set of world-class benchmarks we developed.

We also added a third award for those in the administrative areas that are not related to production, where there are opportunities to improve processes on profitability. The level of participation was exemplary. Our winner for the best performing team was the wire harness team in our Shanghai, China plant.

The most improved was located in Agua Prieta, Mexico wire harness facility. Lastly, the non-manufacturing winner was a cross-functional team focused on ordered cash and improving our cash cycle. Congratulations to all of these employees as well as the employees who applied.

The result of these outstanding efforts are excellent improvements across the company as we continue to drive waste out.

This is an exciting time at CVG, and we are well positioned today to benefit from industry tailwinds supporting our core businesses, while at the same time pursuing growth that will set the stage for continued performance in the future. We look forward to updating you as we execute on our strategic initiatives.

With that, I will turn the call over to Tim to discuss the financials in more detail..

Thank you, Pat. First quarter 2019 consolidated revenues were $243.2 million compared to $215.7 million in the prior year period, an increase of 12.7%. The increase in revenues year-over-year reflects higher heavy-duty truck production in North America and continued strength in the global construction markets we serve.

Class 8 truck build in North America increased 20% in the first quarter of 2019 compared to the prior year period, and truck builds for Class 5-7 increased 4% compared to the prior year period. Foreign currency translation adversely impacted first quarter consolidated revenues by $4.5 million.

Consolidated operating income for the first quarter of 2019 was $19 million or 7.8% of sales compared to $15.3 million or 7.1% of sales in the prior year period.

The increase in operating income is primarily attributable to the increase in sales volume, partially offset by wage inflation driven by minimum wage, regulatory changes in Mexico and other inflationary pressures.

Notably, while we continue to make investments in our commercial and product development teams across the company, we maintained SG&A at similar levels the last year notwithstanding the 13% increase in sales. Interest and other expense increased $2.6 million in the first quarter of 2019 compared to the first quarter of 2018.

The sharp increase was due primarily to the non-cash effect of marking to market the company's interest rate swaps. Cash, interest expense was up approximately $0.3 million in the first quarter 2019 compared to the prior year period.

Consolidated net income in the first quarter of 2019 was $11.1 million or $0.36 per diluted share compared to a net income of $9.9 million or $0.33 per diluted share in the prior year period. Turning now to our segment results.

For the first quarter 2019, Electrical Systems revenues were $143.6 million compared to $122.9 million in the prior year period, an increase of 16.8%. Foreign currency translation negatively impacted Electrical Systems revenue by $1.6 million in the first quarter.

The Electrical Systems segment generated $16.5 million of operating income in the first quarter of 2019 or 11.5% of sales compared to $14 million or 11.4% of sales in the prior year period.

The operating margin for the Electrical Systems segment was negatively impacted by approximately 100 basis points in the first quarter of 2019 related to the impact of wage inflation in the North American wire harness business as a consequence of minimum wage regulatory changes in Mexico.

As you may recall, in December 2018, the Mexican government legislative increased minimum wages in an area running along and just south of the U.S. Mexico border, so called free-zone of the northern border.

As such, in the first quarter of 2019, our wire harness facility in Agua Prieta is subject to this new minimum wage and was adversely impacted by $1.4 million. We continue to take a number of actions to reduce the impact of this increase in our labor costs, including pricing adjustments on certain products in our wire harness business.

We're beginning to close the gap and continue to estimate that 2019 net financial impact of this new regulatory burden at under $3 million. Global Seating segment revenues were $104.1 million compared to $95.1 million in the prior year period, an increase of 9.4%.

Foreign currency translation negatively impacted Global Seating revenue by $2.9 million in the first quarter. Global Seating segment operating income also improved in the first quarter of 2019, generating $8.3 million or 8% of sales compared to $7.3 million or 7.7% of sales in the prior year period.

Operating income was negatively impacted by raw material price increases, mainly steel, but we are offsetting with some price increases and other cost containment and reduction efforts.

We continue to believe that the recent reorganization of the company and associated consolidation of all seating into one Global Seating organization will benefit the company and our financial results.

More specifically, we believe this action will better allow us to leverage resources and best practices in engineering, product development and manufacturing, while maintain -- eliminating redundancies and providing a global, more scalable platform for effective and efficient operations.

In addition, we are taking actions to localize elements of the supply chain in China to achieve cost efficiencies. We remain optimistic about the growth of this segment. During the first quarter of 2019, we paid down an additional $5 million of debt further improving net leverage to 1.3 times trailing EBITDA.

As of March 31, 2019, we had a liquidity of $118 million, which includes $54 million of cash and $64 million of availability from our asset base revolver. There were no borrowings under our asset base revolver at March 31, 2019. This concludes our prepared remarks. I will now turn it over to Lauren for Q&A.

Lauren?.

Thank you. [Operator Instructions] Our first question comes from Mike Shlisky, who is a private investor. Your line is open..

Good morning, guys..

Good morning..

Couple quick ones here. First, Pat, you kind of outlined a whole bunch of new investments that are coming down the pipe, have already started, will come later on in the year.

Is there any way you can kind of quantify what that might have meant to this quarter's numbers? Or it could be -- find a way to back that out to figure out what the margin might have been without some of these pretty nice looking investments?.

Mike, it's Tim. The -- for the most part, the incremental investments have come from essentially repurposing some other spend in the company, so there hasn't been a significant impact on the company's results to date including the first quarter..

Okay. You have outlined some things you've got kind of rolling out later in the year. I think you mentioned Thailand and some other places where you're making some additional investments to come.

Do you think that will require any -- again anything new as far as new cash to be put to work there or will it be again some more asset repurposing? And secondly, do you think to take down the extra debt this year as you go through the year to get those things done? Or could you, actually, in fact, due to your good operating results, hopefully, take down your debt later on in the year, which way might that go?.

Yes. Mike, again it's Tim. First of all, with respect to the capital investment, we are making some extra investments, if you will, in Eastern Europe and in Mexico in our Trim business, in our harness business.

Those investments are not so large as to get us outside of our sort of generally accepted range of, let's say, $15 million to $18 million of CapEx per year. So we might probably be at the higher end of that this year. But if -- they're not so extraordinary as to skew our results tremendously.

With respect to any investments and how they might impact the P&L, I just would point out that over the last couple years here, the company's sales has increased about 35%, and we have been able to maintain the company's SG&A expense at a number that is around $60 million-or-so a year.

And we've done some of that by repurposing spend to more value accretive activities. Having said that, as we have reorganized the company here and have increased our focus on the electrical segment and opportunities there, but also in optimizing our Global Seating operations, I do expect there to be here this year some increase in SG&A.

I don't -- it's not going to be dramatic. It might be something on the order of 5%.

But still nothing that would dramatically affect our performance, but we think expenditures that are very important to advance the company's opportunities that we have with the reorganization of the company including corporate development activities and more specifically, some -- perhaps some M&A activity..

Okay. Great. And that kind of goes on into my next question.

So if and when there is a somewhat large downturn in the global truck market or the construction market that will pass both at the same time, since you had your last downturn which must be 3 years ago now, maybe even four, can you maybe outline what's changed this time as far as your lean operation and your mix and your sort of new process kind of come out since then? Or you think that this time the operating pull through on the downside could be on the better end of the range than you've seen in previous downturns if and when it happens, assuming kind of what you've done, and what you've cut and what you've made more efficient over the last couple of years?.

Well, I would offer this. So being in a cyclical industries that we are in, we always keep an eye to the changing environment. And as we are trying to expand certain parts of our operation, we've been working hard to maintain our flexibility, so that we can adjust as needed to the top line. It's kind of one of our tenets, the way we operate.

So we will still have the flexibility on the variable side that we've maintained the last several years, and so we see that as an opportunity. We've also been increasing the amount of some of the digitalization.

When we talk about the digitalization, a lot of that is in and around how we can be more flexible and automate certain parts of our operation, which we think are going to help us in a downturn.

So I think what I would say to that is we've maintained a pretty lean infrastructure in anticipation of it some point in the future having to adjust our business. And so I think we're prepared for that. And I don't know that we will be a whole lot different as far as the downside drop is concerned.

But I think we are prepared to stay within the ranges that we have historically. I don't know if you want to add to that, Tim or....

No. I think, Pat, you did a good job of covering that. I would just echo Pat's comments about the investments we made in Lean Six Sigma and some of our operating processes. The truck build in North America, Class 8 truck build, is expected to decline a little bit starting in 2020.

That decline is not anticipated to be extremely dramatic, and there's no reason to believe that construction equipment build will vary dramatically as well. Having said that, the pass point, when our business contracts, if it does because of the cyclicality, I think we have a demonstrated ability to react appropriately.

I do not believe absence some very serious cyclical decline that we would strip out fixed expenses. So said in another way, Mike, I believe that with reasonable reductions in revenues, we would expect to stay within that 20% to 25% band..

Okay.

Can you give us a little more color also lastly on some of your new product categories you've been pursuing, things like generators or other kinds of off highway equipment that you've been looking at for a couple of years now, I would imagine? Just kind of what's been the kind of latest progress there? And then maybe kind of secondly, if 2020 is a downturn year for the broader cycle, given what you've signed more recently, both in your recreational trucking and off highway business, and some -- into new categories, do you think you might have some opportunities to see a bit of a outperformance versus the overall market next year?.

Yes, okay. So we announced, I think -- as you know, sometimes announcing the specifics on the new business is challenging as our customers have a say so in that.

But as we announced last year, we brought on a new customer which is ramping, I think still right now, or close to ramped up in Sullair, which is a industrial power generation customer, it's an area that we continue to see benefits and growth in around the globe.

And we also have been seeing recreational customers which we think have opportunities in not only wire harness, but also on the trim side. And so those categories have been some places where we're getting traction. We've announced here recently the Chinese truck domestic producers.

A couple of wins there, but we will I'm sure have further announcements this year. And what we're seen with our new product categories there that are built specifically for the domestic side of China truck is there's a lot of opportunity. And we're getting some good traction there. So we're seeing wins in those areas which are exciting.

We have had some medium duty penetration that is also going to continue to help us, not only grow the business, but also lessen the amplitude of the peaks and the valleys of some of the cyclicality in our business. So those are some of the areas that we see.

We've also developed a game plan which we've -- which we're not necessarily ready to go public with yet. But in general, we've targeted, I mentioned it a little bit in my opening remarks, we've targeted certain parts of our product portfolio that seem to have a good crossover capability.

So when you look at our wire harnesses and you look at some of these other products that we're starting to venture into in and around the wire harness space, we see applications for those in industrial markets in some of the adjacent specialty vehicle segments, trailer manufacturing, appliance industry.

There's lots of applications for both hot wire harness and also the same capabilities that we have on the interior trim side.

So we think we'll be able to convert some of our capabilities and asset utilization into balancing that with some things outside of our traditional market segments, and that's really in and around a little bit of -- that's some of the fringes of some of the strategic changes that we're making on the way that we approach the business..

Okay. Just a quick follow-up there. You have mentioned -- you mentioned that there might be some acquisition opportunities or JVs.

Can you give us a sense as to the sizing, is there are a chance that these will be debt funded or these might be just smaller cash-on-hand type of deals?.

So to be determined, Mike, I will tell you this that the folks that we have are focused on M&A, by and large, are exploring smaller companies. I would say these companies generally have sales of $50 million a year or less, most of them are even around $25 million, $30 million, $35 million something like that.

So these, to date, have not been extraordinarily large transactions. We are building our domestic cash beginning in the second quarter. We had some working capital build in the first quarter, so we used much of our domestic cash.

But as you might have read in the Q, we just brought some money, about $6 million, back from Eastern Europe, and are in the process of repatriating about $10 million from China.

So that along with just our business and our cash flow from operations, at least what I expect for the remainder of this year should cause us to have some additional domestic cash build with which to do acquisitions. Having said that, should we be so fortunate to find opportunities that would outstrip our cash on our balance sheet.

We have, as you know, been working on our leverage which is down just south of 2 times on a gross basis, 1.3 times on a net leverage basis.

The paper we put in place 2 years ago, the institutional term loans is a good piece of paper, it's flexible and it allows us to flex up just within bounds should the opportunity to present itself to do an acquisition that would require some additional debt. So I think we're reasonably well positioned to execute on any acquisitions..

All right, guys. Well, great color. I’ll pass over. Thank you very much..

Thank you..

Thanks, Mike..

Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I'd now like to turn the call back to Mr. Pat Miller for any closing remarks..

Well, as we mentioned earlier, we see this as an exciting and dynamic time for the company as we strive to move forward with our new initiatives and capitalize on opportunities we see in our space and some of the adjacent markets. I appreciate everybody joining the call, and we look forward to talking in the future. Have a good afternoon..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day..