Commercial Vehicle Group Inc (CVGI) 2004 Q3 法說會逐字稿

Welcome to the Commercial Vehicle Group third-quarter earnings conference call. At this time, all lines are in a listen only mode. You'll have the opportunity to ask questions at the end of today's conference and instructions will be given to you at that time. I thank you for your attention and now I turn the conference over to Mr. Scott Rued.

Thank you. We've got Merv Dunn, the CEO, who is going to talk about the industry, the operations and the business I think just after I get done, and then Chad Utrup, our CFO, is going to walk through the detail numbers.

I think, clearly, everybody sees that the performance during the third quarter, which is what we are going to focus on, has been very good. We're very pleased -- higher-than-expected revenues and higher-than-expected operating earnings despite the impact of steel increases, which Merv will walk through and walk through our strategy with our customers and so forth. Also, higher-than-expected earnings per share numbers despite the greater number of shares outstanding from, I think, what the analysts had expected because of the greenshoe coming to the Company.

With that, I think I'm going to turn it over to Chad, who is just going to give a brief statement and then Merv will talk about the industry.

Thank you, Scott.

Before we begin the formal portion of today's call, I need to first read through our Safe Harbor language. I'll then pass the call over to Merv for his comments and then I'll take you through our financial results for the quarter and our outlook for the fourth quarter of this year. We'll then take time to answer your questions.

I'd just like to remind everyone that this conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties. These include 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 currencies and countries, and other risks detailed in our SEC filings.

With that, I'll pass the call over to Merv Dunn.

Thanks, Chad, and good morning to everyone.

Today, I'll start out by commenting on our third-quarter financial performance. For the third quarter of 2004, revenues came in at 98.7 million, representing a 38 percent increase over this quarter last year. This increase results from an increased build rate, increased construction production and organic growth.

Class 8 unit production is up 45 percent above last year. The Q3 run rate in 2004 was 68,000 units and Q3 2003 was 46,000 units. Annualized run rate for 2004 is 270,000 units versus 186,000 units in 2003. We see this run rate continuing for the remainder of 2004 due to the impact of chassis (ph) and engine supply upon -- and the worldwide steel supply. Additionally, production rates for 2005 are expected to fall between 270,000 and 300,000 units as a result of customer and supplier indications along with the supply base issues mentioned earlier. This is in line with our current guidance for 2005, as we have assumed a production build of 275,000 units for the year.

Construction production volumes also remain strong in Europe, Asia, and North America, slightly above our plan for the third quarter versus the same period last year. Operating income was 11.3 million, representing a 55 percent increase from 2003 despite absorbing approximately 2 million in steel surcharges. In less than four months, steel cost have increased for some grades of steel by over 70 percent. Although there are some indications that these price escalations have begun to stabilize and reverse, they will continue to have impact upon our financials for the immediate future.

Our strategy has been to work with our customers to start absorbing a portion of the steel surcharges and we have made progress. We feel the impact will be less in the fourth quarter. We have also worked very hard with internal operations to diminish the impact of these raw material charges, which I will further discuss in a moment. I think the financials Chad will share will illustrate how all of our current negotiations have been conducted in a manner that does not impact potential new business from the current customers.

We continue with the implementation of our total quality production system, which is our lean manufacturing process. We are approximately 40 percent implemented and this has allowed us to support increased production rates without adding brick and mortar and we will be able to do so until the truck build rate for Class 8 reaches 320,000 units with current products.

We have shipped 100 percent on time for the last six months with quality better than customer requirements. We have continued success with our sales strategy and strong operational performance, which has resulted in conquest business from our customers at Paccar, Freightliner and Volvo. We will be --operation our China (indiscernible) plant during November of this year. Resources have been hired and trained. This plant will supply construction feeding to the Asian market to our existing customers.

With TQPS, our Total Quality Production System, as our driver, this is how we were able to take the raw material price increases, launch new programs, and achieve the results we have. Income for the quarter resulted in 42 cents per diluted share. That's better than the guidance we have given.

Let me summarize my comments and then I'll hand things over to Chad. We had another solid quarter, our first as a public company, and continue to be ahead of planning quality, manufacturing efficiency, and most importantly, growth. While still pricing premiums when impacting earnings in our sector for the short term, our main thrust across the organization will continue to be focused on new innovations in customer intimacy that fuels profitable, new business. We truly create a positive momentum and I will update you further on our progress in upcoming calls.

I like to turn it over to Chad now, who will provide a detailed review of our financial results and outlook. Thanks again.

Thanks, Merv.

I think you can tell, from Merv's opening comments, we are extremely excited about the progress we've made during the quarter and throughout the year thus far. Our third-quarter results were solid as revenues, operating profit, EBITDA, and net income were all above our guidance for the quarter, especially during a ramp-up period with increased steel costs.

From a financial standpoint, as Merv indicated, our EPS came in at 42 cents per diluted share based on 16.4 million common share equivalents for the quarter. This is, again, above both our guidance and the average mean expectation of 41 cents per share.

We had certain non-cash expenses of approximately 1.6 million related to the IPO transaction during the quarter, and these are included in our EPS figure for the quarter. Excluding such expenses during the quarter would have increased our EPS by approximately 6 cents, up to 48 cents per diluted share.

Now, I'll review the specifics for the third quarter of 2004. Revenue came in at 98.7 million, which is up 38 percent versus the 71.7 million reported in the prior year for the same period. This increase resulted primarily from a 45 percent increase in the North American production of heavy truck and organic growth equating to approximately 21 million of increased revenues for both of those combined. Higher OEM sales in the European and Asian CD markets accounted for approximately 3 million and increased revenue while favorable foreign exchange fluctuation has resulted in an additional 3 million of revenue increase.

Operating income was 11.3 million or 11.4 percent. This is an increase of 55 percent from the 7.3 million or 10.1 percent recorded in the third quarter of last year. Yet this is still mitigated by the impact of our increased steel costs during the quarter. The elevated steel prices negatively impacted us by about $2 million for the quarter.

SG&A for the quarter was 6.9 million, or 7 percent of sales. This is consistent with our guidance in dollars, however is improved as a percentage of sales when compared to the prior year as we continue to focus on cost reductions in maintaining our fix costs, as we have always indicated.

Depreciation was 1.7 million and amortization was 22,000 for the quarter while capital spending was 1.7 million. We had marked-to-market of our foreign exchange contracts during the quarter, which resulted in a non-cash expense of $1.2 million during the quarter. While currency fluctuations can at any time impact our reportable income, we continue to monitor the currencies in which we conduct business to minimize the impact on shareholder value.

Interest expense was 1.6 million, which is higher than our guidance due to the timing of the IPO transaction but is down versus the prior year due to the overall debt reduction.

Our effective tax rate for the quarter was low at 1.1 percent. However, this was after giving effect to previously unrecognized benefits of certain net operating loss carryforwards. As expected, our cash position continues to improve through the generation of operations and working capital management. Our net debt position at the end of the third quarter, which includes $17.8 million of cash on hand, was approximately $60.5 million. Our net debt to EBITDA as of the end of the quarter was approximately 1.4 times and our net debt to total book capitalization is approximately 34 percent.

EBITDA for the quarter was 13 million, as Merv indicated, or 13.2 percent. This is up 41 percent from 9.3 million for the same period in 2003. I think the important thing to note here is, excluding negative steel impacts during the quarter of approximately $2 million and the currency translation impacts, our EBITDA would have been 14.7 million, or 15.4 percent, again excluding those factors.

Now, I'll take you through our outlook for the fourth quarter. Our guidance is based on 2004 North American Class 8 production volumes of 250,000 units. These plans are consistent with the current production run rates we run today through the remainder of the year, however are slightly higher than our guidance for the year. Given these volume assumptions and our expectation for steel pricing to remain at current levels, we believe that our revenues for the fourth quarter will be in the range of 90 to 95 million. EBITDA is expected to be in the range of 12 to 13 million, and our EPS expectation is between 27 and 30 cents per share. This is assuming 18.2 million diluted shares.

We're excited about the progress we've made during the first three quarters of the year in pursuing our growth strategies and achieving our operating efficiencies. Although steel remains a challenge, we feel that we have a solid plan in place to further mitigate its impact through the remainder of the year. We remain committed to our strategy and will continue to focus on enhancing our competitive position, growing sales and earnings and increasing shareholder value.

With that, I would like to open up the call for any questions.

(Operator Instructions). Our first question is from Joel Tiss. Please go ahead.

Hi guys. How are you doing? Can you give us a better sense of what the current run rate is in the industry on the truck builds and where the constraints may be to take that a lot higher in 2005?

The current run rate we're seeing around 275,000 units. The constraints really have been what we've seen in the powertrain sector towards our customers. It's more the engine and axle and drivetrain.

Okay. Can you talk about a little bit about 2005 -- just give us a sense of if those constraints that are currently in place could be worked out, that we could get toward the upper end, you know, closer to 300,000 units in '05 or is that sort of unrealistic?

I think that's very realistic, Joel. I think if some of the supply constraints -- clearly the orders are there to get up in the 300,000 unit level and maybe even above. I think if the constraints stay in play and we end up in the 270, 275,000 unit level, that's fine as far as we're concerned; that's where our guidance has been and we would expect that those sales aren't going away. They go into to 2006 and so forth.

So Merv, you may want to comment more, but I think we're comfortable that the demand is clearly there. the order rate is clearly there. The issue is going to be can some of the suppliers continue to ramp up to meet a 300,000 unit level or above.

Okay, thank you.

Thank you. Our next question is from David Leutger (ph). Please go ahead.

A couple of things here -- the guidance of 90 to 95 million for Q4, is that based on a 250,000 annualized build or 275?

That based on 250, David.

So if we continue at the current run rate, those members are low? Correct? Or is that a 250 to 275 that goes into that 90 to 95?

Yes, that's -- we were running at 275, which takes us out through the rest of the year and then we will have, you know, certain days out in the fourth quarter for certain holidays, but based on where we were in the first, second, and third quarter and running out where we are today and including those holidays out, that should put us around 250, 255, somewhere in that range.

So that is a full-year number, that 250 to 255?

That's correct.

Okay, I misunderstood that. I thought that was fourth-quarter run rate.

No, that's for the full year. I apologize.

I understand. Currency was 3 million in revenue. You kind of embedded it with the steel number in the profit line. What impact did that have on profit? Either down or up or -- (Multiple Speakers)?

That currency impact, it's roughly about 10 percent of the sales numbers, so you can equate that to about 300 on an EBITDA basis.

Do you have any other cash flow numbers -- cash from operations numbers, something like that, for the rest of the quarter?

For the nine months -- for what I have in front of me, David, for the nine months, cash from operations is about $22 million.

That will be good. Lastly, if we look at debt revenue lines, at least two different pieces of it -- is content helping you? Are we seeing a richer mix of trucks being built that's helping you? The second piece of it -- that $21 million from volume in new business -- if there's a way you can some way give us a sense of how much of it is incremental business versus all volume.

Well, I think that the organic growth in the 21 million is consistent with the guidance that we gave in terms up our goals for roughly 5 percent -- 4 to5 percent organic growth per year, so it's consistent with that.

In terms of additional breakout of the sales, I think if you look at the total truck production versus the construction side of things, we're still at about a third of the revenue related to sales outside of the U.S. Is that what you are looking for, for the breakdown on the revenues?

So would it be fair to say, of that 29 percent increase from volume and new business, 4 or 5 of it -- (technical difficulty) -- the balance is volume (indiscernible) -- (Multiple Speakers)?

What's our total new business for the year, Chad? Isn't it about 15 million, right?

It's about 15 million. That's correct.

So the new business impact for the quarter would have been roughly a quarter of that.

That's right.

Okay, I understand. What about this mix of what you're seeing built in terms of the content you're supplying? Is that swinging positive? Is that neutral? Is there a slight drag on that?

It's a positive swing on it. We're seeing more over the road versus less daycabs (ph).

Okay.

But that is normal for this time of year also.

But it does have an impact on that balance, David, that 21 million backing out the organic growth of a quarter of the goal, say 3 million to 4 million. A balance of that truly would represent a pick-up in the mix.

Okay, great. Thank you.

Thank you. Our next question is from John McGinty. Please go ahead.

Good morning. I just want to get a couple of clarifications. The 1.2 million foreign exchange marked-to-market -- is that then -- does that go in the fourth quarter the other way if the dollar keeps going with whatever currency it goes? Does it get worse? In other words, what built into your guidance for the fourth quarter for that number?

John, this is Chad. There is obviously no way to predict where that's going to be in the fourth quarter. What we've attempted to do for the fourth quarter is take a look and negate any impact that we've had for the year. To the extent we've had an impact in the first quarter in our guidance, we would have taken (indiscernible) to back out that impact from foreign exchange for the balance of the year. If you look at 4X (ph) contract impact historically and out into the future theoretically, I mean, everything should balance out. That should be a net impact of zero over time.

But in the quarter, it cost you 1.2 million.

Correct. In the first quarter of this year, we had a $3 million gain, if you recall.

Right. But the point is, in your expectations for the fourth quarter as you've given the guidance, are you assuming it's zero or are you assuming it's a positive? In other words, the 27 to 30 cents, what is assumed in there?

No, we have not assumed that there's a positive in the fourth quarter for foreign exchange.

So you are assuming it's zero?

We're assuming actually a slight negative impact from taking a look at when we put the guidance together from where we were in the first quarter, so we have assumed a slight negative impact.

A couple hundred thousand sort of thing?

Slightly higher than that, yes.

Okay. The second question, the tax rate, the NOL -- in other words, the tax rate -- the tax rate was -- am I wrong on this -- the tax rate was supposed to be about 25, 30 percent?

That's correct. It was. What occurred in the third quarter is we had NOLs in existence from certain entities of the business which previously were thought not to be able to be utilized due to revenue recognition out into the future. As we merge the companies together in the third quarter, what took place is that we can indeed utilize those because of the profitability of those entities and the companies. So per GAAP, an adjustment was made to be able to realize those NOLs that were in existence.

Is that a one-time? In other words, are there -- will the fourth quarter -- will next year have any NOL benefits or was it all done in the third quarter?

That should be the final change that we have, which was done in the third quarter.

Okay, so for all practical purposes, the NOL and the marked-to-market didn't quite cancel out? What was the NOL. Was it what, 1.8 million?

Well yes, the tax adjustments were 1.8. However, if you back out that, you back out the foreign exchange impact and you back out the non-cash impact of the IPO transactions.

The 1.6?

1.6. -- (multiple speakers).

(Multiple Speakers) -- what I'm trying to do -- in other words, relative to expectations, we knew about the 1.6. We didn't know about to marked-to-market. We didn't know about the use of the NOLs.

Right. And you didn't know about the interest is the other factor. I think if you take the -- if you look at the operating earnings, should be above -- the operating earnings are above where they are supposed to be. So then the impact of the interest costs, the impact of the non-cash marked-to-market and the impact of the NOLs basically balance out.

Yes, no, I'm not saying it isn't but there's just so many -- but when we look at the fourth quarter, here's what I'm trying to understand, no NOLs, no marks -- there's about $.5 million of negative marked-to--market hid in there -- (multiple speakers) -- I'm sorry?

Interest should be in line.

But relative to expectations, what you're saying is the sales are going to be the same, as you were in essence indicating, but the tax rate is going to be the same, but you're going to take a hit of $.5 million of the marked-to-market, at least in your plan, and you're taking a hit of the steel costs. So where's the offset in coming in more or less in line with where guidance was? Do you see what I mean?

Yes, improved operating efficiencies. I think that's the thing that you don't see.

Yes, okay. Clearly we're dropping -- if you exclude everything, clearly were dropping more to the bottom-line on incremental revenue than what we had given guidance originally.

That's correct. If I can -- John, if I could add to that, also if you look at the guidance I gave for sales should be slightly higher than that, which helps offset as well.

Yes, when Chad took you through the impact on EBITDA, when you exclude the negative steel impacts and the impact of currency translation, not the marked-to-market, EBITDA for the quarter would have been 14.7 million or 15.4 percent, which would be significantly above where the expectations were. Okay, now, enough with the crap! Into the real stuff, which is when you look at '05, what kind of new business do you have built in? In other words, you're not --somebody is not just going to call you up and say I want you to give you new business. You guys -- you're out there, you're bidding, you've been working on it for a long time. What kind of a new business is built into your 2005?

Well, the guidance is still the same. We're still looking at that, I believe it was 15, $16 million of organic growth and I think Merv touched on kind of the new business that we've been working on and actually has been awarded with three of the major OEs on the truck side since August. That plays into it . We've been working on things on the marine side. We've been working on things on some other things outside of the truck business to help us diversify a little bit, so all of those play into it.

When you're going out -- could you talk to us a little bit about -- you've got the steel. What are the OEs saying when you're going out to them and saying we'd like -- I mean, we'd like some price release. How is that working? What's going on there?

I think we are being well received. I mean, look, they're getting hit at it by every supplier. It's not -- we're sort of a small player when it comes to the steel price increases compared to anybody else because most of ours has been in other raw materials. So, it's been well received and it has been well received that we've held off this long. That the reason we are getting conquest business too.

Merv, you might want to explain the strategy. I mean, John, as you recall, we've got some significant opportunities on model changeovers that we're looking at now, quoting on when you look at 2006 and 2007 with some of the customers. What we're doing is being very careful in terms of how we're passing on these steel increases in relation to the negotiates on that business too. So we might be able to get more passed on currently but we are being extremely careful in terms of how we do that just to protect the longer-term exactly. We've got the ability to do that and also, hopefully, increase our market share on existing products because other people can't withstand the steel increases to the same extent we can and they are not able to offset them to the same extent we've been able to in this quarter and in the coming quarters too.

The final question and I'll get back in queue. Just to make sure because the pieces move around -- your assumptions for a full year 2004 are a build of 250?

The assumptions in our guidance, I believe if you recall, was 240. But given where the build rate through the third quarter and where we estimate it to be, it's looking to be around 250, 255, somewhere in that range.

Okay, and you're -- the guidance that you had given before for '05 was -- is based on 275?

For 2005? Yes. Correct.

Okay. All right. I just wanted to get a picture of the upside and everything else. Thanks very much.

Thank you. Our next question is from Shereen Quatri (ph). Please go ahead.

Thanks. I'm fairly new to the story and I was just hoping you could explain, in the third quarter and going forward, the relationship between your revenue growth rate and that of the Class 8 truck market.

If you look at the revenue growth rate versus the truck, keep in mind that the North American Class really 7 and 8 percentage of our total revenues if you look back historically in 2003 was approximately 53 percent. So roughly half of our sales are only related to the North American.

Okay.

Truck build.

Yes, the balance is construction and then aftermarket principally.

I see, Okay. So generally the drivers are -- I mean, it sounds like you're gaining -- obviously the truck market is (indiscernible) and you're gaining share. You're, I guess to some extent, I don't know what your share is per truck. I mean, the amount of equipment you sell in the truck. Then, can you explain the growth rate of construction and aftermarket?

Well, construction, as you know, especially in the Asian market, is growing fairly rapidly right now. What we are seeing in the products that we provide is a growth rate of approximately 5 to 7 percent annually.

Okay. Should that -- that's for you?

That's for the products and customers that we support in the Asian market today. I think that the market rate may be growing faster than that but again, that's only basically on the products that we provide. If you look at the total construction market, it's probably in the 10 to 12 percent growth rate or higher on an annual basis, which may be slowing down here in the next 12 months or so with Asia slowing down slightly, but our products that we provide, again, are 5 to 7 percent. That is what our assumption is.

And then --.

The aftermarket and service business is a very steady business that I think we're experiencing growth -- what -- in the 4 percent range approximately.

Yes, that's correct.

How does this revenue split out between construction and aftermarket? It's like 25/25 roughly or 22 --?

Construction and aftermarket?

Yes, percentage of your total.

Percentage of the total?

We put OE service and the aftermarket in the other 23 percent.

23 percent aftermarket?

23 percent OE service and aftermarket, which we keep together.

Yes, and then the balance is going to be construction ag (ph); construction's the bulk of it -- agriculture and marine, and military products.

I got you. So the aftermarket piece of it -- I assume that's going to pick just because of the growth you have already seen but not for like two years or three years? I don't know how that works in terms of replacement and repair.

The aftermarket will be picking up but it's because we're moving into more aftermarket channels and servicing those channels. Distribution.

Okay.

It's historically not been a big aftermarket player in seats and we're starting to move into that now.

I got you, so that should pick up now not just because you're -- because the installed base is bigger? In addition, that will be another driver in a couple of years, I guess?

Yes.

Sheen Quatri Then if we take your revenues and adjust from the 53 percent that's Class 7 and North America and compare that to the growth rate of the truck, I mean, I'm assuming you're going a lot faster than the actual market just because of all these other things you've laid out.

That's correct. We've got organic growth laid out, some of the things that we're pursuing in market penetration, not only in the next 12 months and 24 months but out into the model changeover years -- (Multiple Speakers) -- '07 and '08.

How much faster are you growing I guess is what I'm trying to get at -- when you put it all together and how should that change, going forward? If at all?

It's about 5 to 8 percent organic growth roughly, maybe 5 to 10 if you look out over the next two or three years. For (inaudible).

Thank you.

Thank you. Our next question is Marty Pollack. Please go ahead.

Yes, just on this last question actually, looking at the release itself, it just seems to raise a lot of questions about just the mix of the business. Is there any reason why you're not providing more detail at this point, just even on a quarterly basis on the mix of what the different segments are? Because I can't get a sense and I'm trying to understanding the nature of the profitability would be helpful this way, if we could have a little bit more transparency vis-a-vis the segments that way. That's one. Clearly one of the things that I just want to -- (indiscernible) a little better understanding it that, for that third quarter, the variable profit margin here -- when we are adjusting for currency and for the higher cost of raw materials, you only specifically point to steel. What about resin and other costs that are affecting you? So in a sense, what would be kind of adjusting the number and trying to get a more correct or true incremental profit margin for the quarter? Is there a way to get a little bit better look at that?

If you look at the third quarter '04 versus 2003 and you back out those things that you just mentioned in terms of the currency impacts, just the currency impacts and the steel impact, you're looking at an incremental basis of about 24 percent year-over-year. If you look at just a quick comparison to the quarter performance versus our guidance -- that is on an EBITDA basis, I'm sorry. If you look at the quarter versus where our guidance was on an EBITDA basis and back out the steel impact, currency didn't have much of an impact because we had it fairly in line. In terms of translation, you're looking at a 33 percent incremental margin on an EBITDA basis. A piece of that is operational improvements and a piece of that is partly mix content. I think that's certainly above where we had given our guidance in terms of incremental margins.

Is there -- what about resin impact as far as the other raw materials? Have you got any indication of what those costs were or are they already in the 1.4 million mostly steel? Is that what you're saying?

The 2 million of impacts or 1.4 versus our projection is 100 percent solely steel impact.

Is there any additional impact by other -- you look at your -- at what the business tales -- there seems to be a lot of other material besides steel. Is that correct?

Yes, and we have long-term agreements that do not include any pastors on part of the business. The other part -- on the other supply base, we have consolidated supply base, put more business into one, which is offset any price increases. We've done a very good job of managing price increases in the foam and vinyl.

So you're saying that -- is there some number you could give us and what is that (indiscernible) that headwind on those costs?

Well, our internal objective each year is to have a 1 percent of raw material purchases reduction. I think with -- maybe more to Merv's point, we're constantly facing pricing pressures from resins and films and things of that nature, and we always have historically. However, our goal is to work with our suppliers and set up long-term agreements and other arrangements and consolidating the supply basis helps too. So basically, what we're saying is any increases that we may have had in resins and those other areas that get mentioned have either been offset favorably or to a net no loss position.

So that would go forward towards fourth quarter as well you're saying? Any projections you're comfortable -- because you don't need to emphasize that particular impact?

Yes, if we have knowledge of any raw material price increases other than steel, we would be talking about them today.

That's correct.

Thank you.

Thank you. Our next question is from Joel Tiss. Please go ahead.

Yes, I just wondered if you could -- two things. One, it seemed, in your commentary, that you had sort of implied constraints of about 320,000 units. Is that the right impression? Then can you give us a sense of your focus? Are you focused on trying to get that number higher or you think that's sort of the right guess for this cycle and as you said, you're focusing more on diversifying?

We're focusing on every day with our total quality production system with increasing our capacity. Our capacity for all the current plants that we have today is about 320,000 for the same products that we're producing today. We think that that will be sufficient to accommodate the market for Class 7 and 8. What we also see is that we are daily improving our capacity just through the classes that we do on a weekly basis with our employees. Every employee in our company goes to a 40-hour class. We get the improvements out of there and they are implemented on Fridays.

To sum it up, I think our goal is to continue to increase our capacity availability and if the market goes to 350,000 units, for example, I mean, our goal would be at that time to be able to accommodate that. We can't commit to that today, but that would be our goal. If we had to open up a new facility to accommodate that, we certainly would do that if that would be -- I mean the 320,000, Merv, is that -- can you -- that's really based upon the current configuration and limited overtime, right?

Right.

We wanted to go to more -- we can flex to get to a higher number by the time that happens, I think.

That's what could shift in most plants. If some miracle happened where we could get the 350,000 or more, I don't think we will be -- I know we will not be the constrained. We just met with our customers as recently as a few weeks ago at the Los Vegas show for transportation and each one of them sat down and went with us and the big comment was we wish all of our meetings were this slick, where we didn't have to worry about allocations or delivery of product.

Okay, and I don't know if I missed it or not. Can you give us some help thinking about the tax rate for 2005 also? That's it. Thank you.

Well, the tax rate I think stays the same as in our guidance, which is the 35, 37 percent rate. The NOLs in 2004, as I mentioned before, I think were adjusted in Q3 and throughout the year and should be in place and I think the right guidance for you to use is around the 35, 37 percent tax rate.

Thank you.

Thank you. Our next question is from David Leutger (ph). Please go ahead.

A couple of things hereto follow-up on -- are you saying that you expect the incremental steel costs here in the fourth quarter (indiscernible) offset, absorb those relative to what we were originally looking at?

Yes, the estimate for the EPS in the fourth quarter, David, that includes, or obviously includes our absorbing the steel costs.

Right.

I think it's still in line with -- or where our guidance was for the fourth quarter. So, again, somewhat fourth-quarter sales should be slightly higher and operationally efficiently we are above were we have predicted to be (sic), so those two things really offset where we think we'd be.

If I adjust -- and to confuse matters here just a bit, but you adjust revenues and gross profit for currency and steel, it looks like you generated close to a 30 percent contribution margin at the gross profit line. Is that in a number that you would expect to be sustainable, going forward?

It should've been about 33.

He's talking gross profit line. Yes, we're putting things in place to grow and to be able to support that organic growth line out into the future. Those are costs that we have to add now, and we have been adding those. But as I think we'd said all along, the 25 to 30 percent -- I'm talking on an EBITDA basis -- the 25 to 30 percent is something that we have sustained and we sit here today. I don't think there is any reason why we wouldn't be able to sustain those, going forward.

Then taking it to the EBITDA line, how much flex is there in the SG&A with revenue? How much is that driven by what the volume numbers are versus administrative and marketing and things like that that aren't volume related?

Well, we've historically looked at our G&A as pretty well a fixed cost -- or excuse me, a variable cost, but I think we look at it today in terms of fixed at this point with the incremental -- roughly maybe 5 percent growth as we look out over the next two, three years.

Yes, we're going to continue to add engineering people and engineering services and so forth, but that's probably the primary driver in the SG&A area. But you recall, David, we ramped those up pretty heavily in the last couple of years. So the impact, going forward, should be within what Chad is talking about.

Right. The tax rate -- I was distracted, Chad -- that tax rate number you threw out, was that for next year or for fourth quarter?

That was for next year, David.

What about fourth quarter?

Fourth quarter should be slightly less than that -- just for offsets, probably around 30, 31.

That's consistent with -- so that's a little bit higher also, yet you're maintaining the original numbers we've talked about?

That's correct.

Lastly, the cash flow here is very strong. I think you're probably ahead of what we were thinking for the end of the year. Fourth-quarter cash flow probably is still a pretty strong quarter for you. One, what would you expect debt to be reduced here in the fourth quarter?

Then secondly, with the balance sheet getting to where it is this quickly, where are you on the thoughts of acquisitions?

Well, I'll take the balance sheet question. I think, in the fourth quarter, operationally, we will generate some cash. I think, with sort of where we end of every year, I think we will have some adjustments in working capital. I would expect cash to be generated in probably a couple million dollars in the fourth quarter from where we are at the end of the third quarter. Merv or Scott, do you want to touch on this?

As far as acquisitions, we are still the same strategy that we had when we did roadshows. We will do acquisitions as they make sense, as they fit into our strategy of either being on the cab, in the cab, or the cab itself. Yes, we are looking, but we were also looking during the process of the roadshow and we will, during this time when we buy the company, will buy them at the multiples that make sense for our company.

(indiscernible) in terms of the probability of something happening, has that moved forward or is it pretty -- I'm just trying to get a sense of timing -- if that s something that's more -- (Multiple Speakers)?

That's an unfair question, David. You know that.

But, Scott, I'm putting it in the context of your balance sheet is better at this point than what we would've thought it would be.

Yes, I think the balance sheet is in great shape and we certainly have the flexibility to move forward on our acquisition strategy, but you can't -- you know, number one, our policy is you can't comment on any acquisitions or specifics, which you know and you just never know. I mean, we are always looking for companies that clearly fit, and --.

Even with the great balance sheet, we are not going to do anything that deviates from our strategy.

Okay, thank you.

Thank you. Our next question is from John McGinty.

Yes, Scott, it was an unfair question but I think it's fair in that you're not doing the roadshow, you're not doing the offering, and as much as you say that we continue to look during then, it would have been pretty hard to do it. So, doesn't logic indicate that something would be more likely, going forward, as we move into next year, given the balance sheet and given the fact that senior management can focus on it?

I think that is a fair comment, John.

Just two questions, one on China. The Japanese and Korean production in China -- in other words, the excavators that were being made by all of the Japanese and the caterpillars and the Kamadzus (ph) and everything -- that production has fallen 60, 70 percent in the middle of the year. The indigenous construction equipment in China seems to be going kind of unphased by that. When you're opening up your new plant over there, what population are you really serving with those seats?

We're serving the current customers in China. We're supplying some to Japan, and we have not seen the fall-off in our products in Japan. The only place we've seen a fall-off of our products has been in Korea. That's still -- but given the increase in the other has negated the fall-off that we've seen in Korea.

But you haven't seen the Chinese production with basically Japanese value-added; that's the thing that's fallen sharply since April. Are you serving those guys or are you serving the local Chinese producers?

We're serving the Volvos and Kumatzu (ph) primarily in China.

In China, okay. You have not seen that fall off?

No, we have not. We have seen the production of South Korea fall off.

Okay, then final question -- with regard to the new business -- the organic growth -- 15 million and everything, that's fine, but some of the things you were talking about on some of the captures in '06, maybe even 2007, would've, I thought, been much, much more substantial on a couple of major truck customers where you were working on programs when they have new models and so on. I assume those things are still on track.

They're are still on track, but we will not put them in plan until we have an award.

Absolutely. I just wanted to make sure that they hadn't shrunk. In other words, that that had the potential to be a lot larger than the 15 million.

It's got much greater potential and that's part of a reason we have not pushed the steel price increases through is to take advantage of that, and we're already starting to see, like I mentioned when I was talking, the strategy is working because we've already taken conquest business from three of the top four manufacturers in North America.

Exactly. Thank you very much.

Thank you. We have no further questions in queue.

Okay, Sarah, we'd like to thank you for facilitating this for us. I thank all of you for calling in. If there's no further questions, we'll end today's call. Once again, thank you, and we're very excited about how our third-quarter performance was and we're certainly even more excited about the growth opportunities before us and the future of our company.

This concludes today's conference call. Thank you for your participation.