Commercial Vehicle Group Inc (CVGI) 2005 Q1 法說會逐字稿

Good afternoon, my name is Kimberly and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Commercial Vehicle Group first quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Scott Rued, Chairman of the Board of Commercial Vehicle Group. Sir, you may proceed.

Thank you very much and thanks for attending the conference call, everyone. Before I turn it over to Merv and Chad to walk through the business in the quarter, I would like to just make a couple of points.

Obviously, the quarter was extremely strong for the Company. To make a major acquisition like they did with the Mayflower acquisition, which is substantially accretive, and to have the quarter go on and print results as smoothly as they did, I think the team has done an excellent job.

If you look at the incremental margin on the volume increases -- is about 24%, in that range. And excluding the impact of raw material increases, if you took that out, the incremental drop on EBITDA was about 32%. And that is quite an accomplishment given the Sarbanes-Oxley costs and some of the new costs the Company's incurring right now over and above the raw material increases.

The Mayflower acquisition, I think Merv walked through -- that has exceeded our expectations in terms of the smoothness of the transition and the integration. And that all rounds out to I think, obviously, an excellent first quarter.

Notwithstanding that, I think I need to make a comment that we are extraordinarily disappointed with the performance of our stock price, which we obviously don't have a whole lot of control over. There's some things going on in the overall market, clearly, and I think there's some things going on with respect to another company that is becoming public in the marketplace that you can speculate on, what the impact that is on our stock price, which you never really know.

But notwithstanding all that, I think we're very disappointed given the performance of the Company, the future that we have, the fact that we are a low capital intensity Company with a very high return on invested capital compared to anybody within our industry and basically any other industrial company out there. And we clearly have the financial flexibility to move forward with the growth initiatives that we pointed out in the past.

So the point of all this is that we're not happy with it. And well, you can only do so much other than perform. We're going to make sure that we tell our story very consistently to the marketplace, and make an effort to bring the value in our stock commensurate with the performance of the Company. And that is going to be our pledge to you.

With that, I'm going to turn in over to Chad Utrup, who is going to go through the Safe Harbor routine and then Merv will talk about the business, and Chad the financial section.

Before we begin the formal portion of today's call, again I would just like to read through our Safe Harbor language. I will then pass the call over to Merv, who will take you through our companywide overview. Then I will take you through our financial results for the first quarter of this year and our outlook for the second quarter and full year of 2005. And then we'll take time to answer questions.

I would now 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 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. And with that, I would like to turn the call over to Merv.

This is an exciting time for us with our Company. We really have a good story of growth and value. Our growth is not only the market, but through our acquisition and through organic growth.

On the operations of CVG, we saw the Class A heavy truck segment hit a quarter build rate of 81,000 units. Our guidance was for 71,000 units, so we saw about 14% in units above the guidance, while our international or global operating volumes were in line with the guidance given. Chad will discuss our guidance for the next quarter shortly.

In our last call we talked about our strategy answer relates to commercial vehicle market, the continued growth with more products, either in the cab, outside the cab or the cab itself. I reviewed the Mayflower acquisition with you. Now I would like to update you in the progress made in integration of Mayflower.

We have signed a three-year contract with the union -- it's Shady Side, Ohio plant, which was expired before we bought the Company. The contract allows the plant to continue to improve and become more competitive. We have signed two long-term contracts with key customers and continue to increase the quote volume of the business coming in.

Mayflower is into implementation of bond (ph), which is our enterprise system, and is expected to be completed by the end of the first quarter in '06. This is just one example of the steps we're taking to fully integrate Mayflower Vehicle Systems into the CVG culture.

CVG of the Americas is seeing an increased quote activity in recognition by customers of our global capability. Most of our customers have a global presence, and desire suppliers that can support such a global structure. We are starting to see recognition from some key customers that we can be that supplier.

Our China operation is ramping up with 2600 seats produced in March, up from 900 in February. This is behind schedule due to supplier issues that we have in China. We have added engineering and purchasing people that have relocated to China to smooth out any issues and to gain speed to get this back on track. And that is some of the impact that we are seeing in Q1 also.

Operationally our metrics in all of our groups, our safety, quality, delivery and cost -- we measure all of our operations with the same criteria. All operations are equal or better than industry standards in safety, and many locations are said in the standard for quality by being better than the customer expectations and best in product.

Delivery is running at 99.9% on time for the quarter, meaning we had no delivery issues at any time for any key customer with our product line. From a cost perspective, all of our operations are on track for cost reduction targets set forth for the year.

Purchasing cost reduction has been under extreme pressure due to steel and petroleum-based product increases. Some relief has been given by our customers. We have absorbed some of the costs during the quarter, but continue to work with our customers and suppliers to further reduce the ongoing impact.

To summarize it, operations have handled the volume increase with relative ease. Purchasing and operations have worked in unison to lessen the impact of steel and petroleum-based products on our customers' costs and our costs, and both continue to work on engineering and supplier changes to help offset the impacts.

All businesses are handling increased amounts of quoting activities in all regions. Organic growth has strong potential in current and new markets. The integration of Mayflower is right on target, and we continue to review acquisitions that fit our overall strategy. As we said when we started out with this mission 5 years ago, our strategy is to stay inside the cab, outside the cab or the cab itself.

Now I would like to turn the call over to Chad for our financial update and outlook on Q2 and the rest of '05.

As we review our results for the first quarter, please just remember that these results include the effects of the Mayflower operations only from the date of the acquisition and not on a pro forma basis unless otherwise noted.

Our first quarter results were solid as revenues, operating profit, EBITDA and net income were all above our guidance for the quarter. From a financial standpoint, EPS came in at $0.59 per diluted share, based on 18.3 million common share equivalents for the quarter. This is approximately 44% better than our guidance of $0.41 per share, and about 40% better than the average mean expectation of $0.42 per share.

Excluding a favorable non-cash GAAP adjustment for marking to market our foreign currency contracts, our EPS for the quarter would have been $0.49 per share, which is about 20% above guidance and 17% above the average mean expectation.

On a pro forma basis, we estimate that had Mayflower been part of the reporting period for the full quarter, our EPS would have increased by approximately $0.03 per share up to $0.62 on a reporting basis, and up to $0.52 per share excluding the impact of the mark-to-market adjustment.

Revenue came in at 152.4 million, which is up 77% versus the 86 million recorded in the prior year period. This increase is obviously resulted primarily from the addition of the Mayflower Vehicle Systems operations, which accounted for approximately 40 million of the increased sales over the prior year period.

In addition, approximately 51% increase in the North American heavy truck production, combined with organic growth, equated to approximately 23 million of increased revenues. Higher OEM sales in the European and Asian seating markets accounted for increased revenues of approximately 2.5 million, while favorable foreign exchange fluctuations resulted in about $1 million of revenue increase over the prior year period.

When comparing revenues to our guidance for the first quarter, actual revenues were about $5.8 million higher. This is a result of the Class 8 production volumes equating to about 81,000 units for the quarter, versus our guidance of 71,000, or as Merv said, about a 14% increase. This increase, combined with changes in other markets served, equated to approximately $9.5 million of increased revenue, but was partially offset by the timing of the Mayflower acquisition which negatively impacted our revenues by about 4.6 million.

In the European and Asian markets, as Merv indicated, we are right on target with our guidance. But that, along with currency fluctuations, accounted for about a $1 million change from our guidance.

On a pro forma basis, we estimate that had Mayflower been part of the reporting period for the full quarter, our revenues would have increased by about 23.6 million, taking the quarter up to 176 million for the quarter.

Operating income was 16.7 million, or 10.9%. This is an increase of 110% from the 8 million or 9.2% reported in the first quarter of last year, yet is still mitigated by the impact of increased steel cost during this year as opposed to 2004 first quarter, when costs were just beginning to increase on a global basis. The elevated steel and petroleum prices negatively impacted us this quarter by about $3 million.

SG&A for the quarter was 9.5 million, or 6.3% of sales, as compared to 7.5 million or about 8.7% sales from last year. This increase is due primarily to staffing requirements for future growth and development needs, the addition of public company-related costs, Sarbanes-Oxley compliance costs, and the addition of Mayflower.

This was higher than our guidance as a result of several of the same reasons I just mentioned, and while some of these costs were included in our guidance for the quarter and for the year, many costs have been pulled ahead or simply proven higher than originally anticipated. But we are still confident we are making the correct decisions regarding these impacts and the impact to the future growth of the Company.

Depreciation was 2.7 million and amortization was 24,000 for the quarter, while capital spending was a approximately 2.9 million for the quarter. As I stated before, our mark-to-market of foreign exchange contracts was a positive $2.9 million pretax impact during the quarter, and while currency fluctuations can at anytime impact our reportable income, we continue to monitor all of the currencies in which we conduct business to minimize the impact on shareholder value.

Interest expense was 2.2 million for the first quarter of this year after giving effect to the increased debt from the Mayflower transaction in February. This is in line with the prior year and was slightly better than our expectations.

Our effective tax rate for the quarter was 37.4%, which is in line with our guidance. And as expected, our balance sheet continues to improve through operations and working capital management, as the Company generated approximately $7 million of free cash flow during the quarter.

Our net deposition at the end of the first quarter, which includes 1.5 million of cash on hand and excludes letters of credit, was approximately $152 million. Our net debt to EBITDA at the end of the quarter, excluding non-cash option charges recorded last year, is approximately 1.95 times, and our net debt to book capitalization is approximately 56%.

EBITDA for the quarter was 19.4 million, or 12.8%. This is up 94% from 10 million for the same period in last year, and up approximately 1.4 million or 8% above our guidance of $18 million. Excluding negative steel and petroleum impacts, which I already discussed, of about $3 million, our EBITDA would have been $22.4 million or about 14.7% of sales.

Just as a final note on the quarter, please remember when you're comparing operating performance to the prior year, that Mayflower financials are not included in the prior year figures shown in today's press release. Therefore, you cannot truly compare the contribution margin on the change in sales from last year to this year, because you'll ultimately be reflecting the full sales and margin of MVS in Q1 of this year as incremental, when in fact it is merely the true sales and margin levels achieved for the quarter.

That said, if you exclude the Mayflower results for the first quarter of this year, and the incremental raw material impact of $3 million for this year, as Scott stated our contribution margin on EBITDA compared to the first quarter of last year is over 30%. We're obviously extremely please report that a comparative basis.

As we look towards our outlook for the second quarter and full year of 2005, our guidance is based on 81,000 units during the first quarter of this year, 75,000 units in the second quarter, and 292,000 units for the full year. We have given no effect, positive or negative, in the second quarter or the remainder of the year for any impact of mark-to-market of foreign exchange contracts.

Our tax rate assumption is approximately 38% for the remainder of year, and approximately 7.25% interest rate on funded debt. Given these assumptions and our expectations for steel and petroleum pricing to remain at current levels, we believe that our revenues for the second quarter will be in the range of 174 million. EBITDA is expected to be in the range of 24.5 million, and our EPS expectation is approximately $0.60 per share, and that is assuming 18.3 million diluted shares.

Our expectation for full year 2005 for revenues is in the range of 653 million. EBITDA is expected to be in the range of 92.5 million, and our EPS expectation is approximately $2.35 per share, again, assuming 18.3 million diluted shares.

If you exclude the positive effect of the mark-to-market of our Forex contracts in the first quarter, and after giving effect for taxes, our EPS expectation for the year would thus be in the range of $2.25.

With that said, we are obviously excited about the progress we have made during the most recent quarter, and we are extremely excited for our first full quarter with Mayflower and its management team. We look forward to continuing to pursue our strategic goals of enhancing our competitive position, growing sales and earnings, and increasing our shareholder value. And with that, I would like to open up the call for any questions.

(OPERATOR INSTRUCTIONS). John McGinty, CSFB.

John McGinty, First Boston. I am a little bit confused. Your guidance at this point is $2.35 for the full year?

That's correct.

And that is with $0.60 in the second quarter and essentially $0.59 in the first quarter actual?

Correct.

Which is, unless I'm wrong, essentially bringing the third and fourth quarter down from where you were before?

No, it should be the same. It is -- you're talking probably what -- $0.08, $0.09 in the first quarter, and then $0.02 in the second quarter in Q3 and Q4 remain relatively consistent with what we previously had.

What is the rationale for the -- what do you know that none of the manufacturers know about the build rate being 75 in the second quarter, when everyone else is pushing, talking about the build rate being at or above the first quarter rate?

We're just trying to be conservative. We don't know anything more than anybody else does.

There is one thing to be conservative, but you get back to what Scott was saying at the beginning, one of the things we've got to be careful is you don't set up and put numbers out there that are so patently low that somebody thinks there's something fundamentally wrong. Because the truck manufacturers, a major component supplier had a conference call about an hour ago, hour and a half ago, talked about trying to spend this entire year raising the build rate of engines, as did the other engine manufacturer, and the large transmission manufacturer is doing the same thing. You've got the build in the second half going down to 68,000 a month -- a quarter on average to get to 292, right?

Correct.

Why?

We have -- we obviously know that some of our customers may be having some issues in terms of supply chain. And obviously it may be a little bit conservative, but we have taken down the Q2 from 81 down to 75. Then you do have --. (multiple speakers)

Are your customers -- you obviously talk to all these OEMs a different level than we can, but when you talk to PACCAR, when you talk to a Freightliner, when you talk to International, and you talk to Volvo, are they telling you that build rates are coming down in the second quarter from where they were in the first quarter?

(multiple speakers) no, they're not telling us that.

They're not telling you that. They're not telling us that, either.

There is -- they are still having some issues uncertain product lines, and they are concerned about that. What we do is the put out guidance with -- we're not market predictors. We put out guidance that we're very comfortable with from a volume standpoint. I think we have been consistent with that since day one. Now to the extent -- everybody else feels that our guidance on our volumes are low and that's fine. But that is what is based upon.

I guess the other question and I will get back in queue -- can we talk for a second about price? One of the things that is going on on every other major component supplier, and again I am talking about the major components, the identifiable ones, the engines, the transmissions, the axles, not that seats and interiors aren't identifiable but those are like big chunks. In fact, what we are seeing are more substantial price increases such that the price cost negative variance that you talked about being 3 million in the first quarter, would go away.

So in other words, in the second quarter that might (ph) still be a negative, but the third and fourth quarter should be $3 million better when you look at those other manufacturers. Did I hear you correctly that you're assuming that this negative stays at this rate kind of going forward?

No, what I was referring to in terms of staying -- (technical difficulty) pricing (ph) going forward is the pricing levels on a top-level. The impact that we had in the first quarter as a result of working through some of the contracts and agreeing on pricing, both with customers and suppliers -- which we had anticipated that this would occur during the first quarter. And I think our impact that I mentioned on the last call was around $9 million net for the full year.

(multiple speakers). In the first quarter it was 3 million. Just to make sure -- I want to make sure I understand what you're saying.

That's right. It was between 2.5 and 3, somewhere in that range.

Why isn't it going down to zero in the second half? In other words, why are you not getting more price is I guess is what I'm saying, because the other guys seem to be getting more price -- the other guys being major component manufacturers? Are they just able to push you around? That doesn't seem logical. Could you talk about that?

No, they're not able to push around. I think our overall strategy is to try to get a proper balance from each of the customers in terms of what we need to recoup and not push the edge of the envelope because John, as you recall, we have major changeovers with several customers in 2007 and our goal is to capture all that business on a total systems basis.

So we're trying to strike the proper balance from each customer in terms of pushing for recoupment of cost today and putting ourselves in the best position to win that business long-term.

Joel Tiss, Lehman Brothers.

Can you talk a little bit more about your foreign exchange policy? Are you just trying to hedge what your potential exposure is, or is that viewed as a profit center?

No, it is definitely not viewed as a profit center. We're basically trying to predict or forecast our sales and purchases out in future periods, and basically fix our contracts with rates that we know of are -- the rates that we feel are acceptable today going forward with those contracts.

Okay.

Our goal -- I mean basically we breakeven on foreign exchange. Unfortunately we have swings on a quarter to quarter basis which we're trying to work out to make sure that we have a better long-term matching, that we don't have some of these quarter to quarter swings that you see in this quarter.

That is why we try to make sure that everybody understands that our true earnings this quarter are in the $0.49 and on a pro forma basis, including Mayflower for the full quarter; $0.52 compared to I think the consensus estimate of 41.

Also, can you talk -- I don't know if you answered John's question about price increases, but can you give us -- I didn't hear it, and if you did say it I'm sorry. Can you give us a sense of what sort of price increases you're pushing through? And I will tag on -- are you feeling any supplier shortages on your side? Is [sic] there any places where there is [sic] bottlenecks?

We do not have any supplier shortages from our side. I guess a different example, we have not pushed price increases through. What we have done is push surcharge costs through. And we share those with our customer because when it goes down, the market goes down and the steel goes back. We're not going to have a hole where they are going to come back and want the pricing back. So we deal on it on a surcharge basis.

The market is up, and I think it is unrealistic to expect that our customers are going to accept huge price increases and not have an attitude towards us when the market comes back down, when we are picking up very good margins because of the upswing in the market.

So, no, we're not going to be pushing any heavy price increases through. We have handled -- we think we have very good margins with our business as compared to do a lot of them that you're talking about today. And we share with our customers so we can reap rewards with our customers, too.

I think the bottom line is we're looking at more of the long-term than just recouping short-term costs here. And when we've got substantial amounts of business awards sitting out there, I think we're putting ourselves in a much better position than our competition vis-à-vis a number of fronts, with our engineering and development capabilities, and in our willingness and ability to share these types of things with a customer.

I think one other point that we should make is obviously steel prices have gone up dramatically over the course of the year. I think we going to see steel pricing start coming -- it is clearly coming down slightly in the second quarter, and that trend will probably continue for the balance of the year somewhat. So when Chad makes the statement that we are -- what we got into placement first quarter, we do not expect that negative variance from steel to recur for the balance of the year. It should start trending slightly the other way.

But that is going to be offset, I think, from some of the petroleum-based products we use, where we are going to continue to get some increases. But we don't expect it to have the impact that it has on a total raw material basis last (technical difficulty) or for the first quarter throughout the balance of year.

But you're also as steel goes down, you're just going to give it back to your customers as sort of -- that is your pricing strategy. Is that fair?

It really should be a non-issue. It should balance out.

No, I think -- the point is if steel went back to the same price as they were in December of '03, a portion of that would go back to the customers, a portion of that would go back in our pockets. So if you assume -- and it varies by customer how much of that surcharge we passed on, but if you assume that we passed on 60% or 50%, 50% goes back to the customer, and 50% goes into our pocket.

I think if you look at it on a net basis, what we had indicated at the last time we spoke was our net impact was a $8.5, $9 million for this year. We still feel that is going to hold true unless prices change significantly. We just had a larger impact in the first quarter than we said (ph) we will for the balance of the year.

Just last, can you talk a little bit about Asia? What is the eventual run rate in China? And are you profitable now? And who are your customers, that sort of stuff?

We're close to breakeven -- we are at breakeven basically this month in China.

Yes, we're still ramping up the operations at this point. The major customers -- these are customers that were -- had products produced out of the UK, which we are still supplying some subcomponents out of the UK. And I think Merv mentioned one of the issues we're having the China right now is just supplier-related issues.

So we still supply a portion of those components out of the UK, which is obviously driving up the cost a little bit. And we are trying to work through those issues. At the end of the day, we've got probably $20 to $25 million of construction seating business in the Asia market, which we intend at least over time to supply all that out of China at some point. But it is behind schedule from where would like it to be, and that is why Merv had mentioned we're doing all we cam to kind of push that along as fast as we can.

We've had to have a lot more staffing in China than what I think most people envisioned. We have basically about 29 people on the ground just dealing with supplier issues in China. And I think it is sort of idealistic for all of us to think that you can go over and open up a plant in China and all of a sudden select Third World country suppliers, and that they are going to make it the same product as developed countries without working on it for a year or two.

Some products we have been working on for two years there that have just landed, and we just started using the products. So it is not an overnight drop in cost. But as the products get better and suppliers get better developed, then we should see the increases quicker without as much support, technically.

The primary customers, I think to answer your question, are Caterpillar and Komatsu.

Laura Thurow, Robert W. Baird.

I just have a question on the other income line. I guess -- I know you're not giving guidance on that, but hat is there anyway we can think about that going forward and modeling that, given the volatility that is in there, at least right now?

No, there really isn't. At the risk of sounding sarcastic, unless you can predict currency rates out through the rest of year, there is really no way to do that. And that is kind of why I put the disclaimer in there that we haven't really projected anything for that. We will continue to have those fluctuations.

It is beneficial to us for obviously cash purposes and modeling purposes, but it is a non-cash GAAP adjustment that we'll just continue to have as long as we have those contracts.

In your guidance, for example, $0.60 at second quarter assumes no impact or no change sequentially?

I'm sorry, no impact. That would be zero for the quarter.

On the tax rate, I noticed the guidance now is 38% -- a little bit higher than what you were at this quarter. Is that just the impact of Mayflower being in there only for two months? And is that than the run rate going forward indefinitely, or just for the balance of year?

It is a little bit of that. You've got -- there's always going to be fluctuations on a quarter by quarter basis for tax purposes. It could go up or down 2% for pretty easy, just based on geographic regions and any new pronouncements and that type of thing. What we have projected going forward is approximately 38% for the balance of the 3 quarters and around for the full year.

One quick housekeeping question. Can you talk about your expectations for depreciation for the full year and also for capital ventures?

Say that again, Laura, I didn't hear you.

Could you give us a sense of your expectations for depreciation for the full year, and also for capital expenditures and where those are now?

For the full year, depreciation is probably around 14, somewhere around there, 14 million. Again this excludes the Mayflower transaction; this is only for February, the date of the close forward. So it is probably around that 14 million range. And our capital spending really hasn't changed from what we originally guided to, which is 16, 17 million.

I'm sorry. The 14 million is for the year, and that is including Mayflower -- for how long it is included on (indiscernible) basis are you saying?

Yes, the 14 million of depreciation as well as the capital expenditure number would only be -- Mayflower closed on February 7, so from that point forward. It's more or less 11 months.

Lastly, on the acquisition side, you obviously talked in the past about wanting to be in and around the cab. And I just wanted to get your sense of the opportunities that are out there now that you're looking at that -- and clearly Mayflower was a great opportunity. Is there anything else specific that you're targeting in general at this point in time?

We continue to look at anything that fits in within our strategic possibility. And we look at them on basically a weekly basis. We get two or three to look at, we have certain guidelines that we try to stick (ph). First it's got to meet the strategy, and then next it's got to meet what we think can add to the shareholder value. And yes, we are looking at a few right now. But our goal is also to look at not only the product line but the geographical issues, too.

Shareen Kadir (ph), Pilot Advisors.

Congratulations. It was a great quarter. I just have a few quick questions. First, I missed a little bit of the call, so I apologize if you went over it. But with respect to your gross margin, obviously a portion of it is steel, but I am just curious if any portion of it --layering in Mayflower, to the extent that Mayflower has a lower gross margin, and if they do, is that an opportunity -- if you could just sort of talk about the two-business gross margin I guess, and separate it out from what is going on with steel and some of the other commodities?

Second, if you could elaborate on new business wins and what the environment is like for that? Whatever you can say about it would be great. And then you broke down your sales growth in dollars, and North America had the organic. If you could just repeat those numbers, I just want to make sure I got them downright.

From a margin standpoint, the Mayflower and pre-existing CVG, I guess the margins are fairly comparable. I don't think you would get much from looking at the two separate. We obviously approach everything in terms of increasing those margins the same way. I think the difference is when you compare them to say a last year or 2004 quarter without Mayflower.

I think the thing that we were getting at is not -- making sure that nobody is looking at this in terms of the sales levels and margin levels for the first quarter for Mayflower should not be viewed as incremental, driving that 25% or so contribution margin. But from a raw gross profit standpoint, they are fairly comparable. Mayflower is probably a point or so less, but they are fairly comparable.

And yes, we drive (ph). (technical difficulty) We have a continuous improvement program, which is the total quality production system that is based upon Toyota. And our first class at Mayflower we starting at the end of June. So we would expect that we will be leaning out Mayflower the same way that we worked with the rest of CVG companies and continue to work with them.

From a revenue standpoint, were you comparing to last year or to the guidance?

To last year.

To last year? Mayflower (multiple speakers).

(multiple speakers) the dollars of growth.

Mayflower represents about 40 million of the change. The other piece is 23 million roughly for the North American heavy truck production growth as well as organic growth.

Plus organic.

Yes. There is about 2.5 million in the European and Asian seating market, and about one million of that its currency. Not 1 million of the 2.5, but an additional million.

Just the new business, sort of how does that is going, what is going on with that?

We have landed (indiscernible) -- I obviously can't go into specific customers, but we have landed an instrument panel that will come on later this year. We have landed some marine business. We have landed some interior trim business. We have landed some flooring business. We have landed some cab business, as far as the steel cab business. So we have had organic growth going across the board.

Yes, I think what we have we have always indicated is we target our organic growth to about between 4% and 5% of the previous year's sales, which for this year CVG prior to Mayflower would have been between $15, $16 million. And we are on target with that.

Greg Bach, Market's Edge. (ph)

Congratulations on a great quarter. Our question really revolves around some of the statements you made initially on the conference call. One of the things that we're looking at we feel that your stocks is very under-discovered and really undervalued as well. You had stated that you're going to get your story out. What are you going to put in place to try and accomplish that task?

I think it is painfully evident that we need to try to make sure that everybody understands the Company. I think there's a couple of things that aren't being seen as readily, and that is a lack of asset intensity here, the asset light. For an industrial Company asset lightness that we are and the high return on invested capital -- we are mid-teens return on invested capital driving towards the low 20s over the course of time here.

I think that any suggestions you have we would love to hear, but I think we need to be more proactive in our whole marketing of the Company to the market. We have been obviously very busy thus far with what we have done. I think our whole team -- and have not spent as much time in the Investor Relations area and so forth. And obviously that is what we need to do. And I think there is -- the we are going to get out and see people a little more regularly, and try to get some materials put together and look at other avenues.

Put together basically a fact booklet and we're going to try to do some show and tell with that. That is Scott's saying.

Excellent. One thing that we could just make a suggestion -- if you put your guidance in your release, as new investors come and discover the stock via scans and so forth, it is going to make them and little bit more intimately aware of the position of the Company as far as the optimism and so forth. So just -- I don't know if that is possible in the future?

We will find out.

I think that it will go long way as investors discover this is a great Company. But thanks a lot. Congratulations on a good quarter. And we look forward to your future releases.

John McGinty, CSFB.

Just a couple of follow-up -- one, Chad, just make sure I understand, you do hedge the real currency exposures you've got? What we're looking at here is just simply the marking to market of what is out there, which is in non-cash fluctuating totally with exchange rates?

That's correct. Yes. The hedging that we do is related to cash, but what you are seeing here is what 100% non-cash impact marking to market the value of all those contracts as of a certain date. Here, it would be March 31.

Are trying to change that? I understand it is non-cash, but the market -- if the dollar were going the other way the market would not be looking kindly if you were reporting $0.10 or lower earnings, even though again to cash and everything was unaffected.

Yes. In fact, we are currently discussing our options in changing the methodology. We started that over the last 30, 60 days in terms of determining how we can do that. If we do that, this impact won't go away in the near-term, but it can potentially go away for new contracts that we set in place. So we are reviewing that, yes.

And then on China, the production being a little behind schedule there (technical difficulty) being a breakeven presumably versus expectation at some point of a profit, when you gave the original guidance for the year, were you expecting a positive contribution from China? In other words is this a negative that is going the other way in all of the factors that are out there? Or is it just so small it is a nonevent relative -- in other words, was it never supposed to big enough to be meaningful for the full year yet?

For the first quarter I think it is a nonevent because we were still in the ramp up phase. For the full year it has a $2 million impact, and that is what we're pushing towards getting back on track.

In other words, you think you may get there?

Yes. (multiple speakers) definitely.

One of the things when you're doing the Road show that you talked about very early on, very early stages, one of the major European OE that is also a U.S. OE had invited you to there to talk about a couple of interior components that they were having made, either by themselves or by someone else, was really kind of the first entree into the European truck market. Is that still going on? Are you still in a preliminary stage? Have you gotten anything out of that?

As we speak, we have two groups one in Germany and -- we have two groups in Europe.

One in Germany, one a little further north.

--That are working on programs with the customers. Other than that, we're continuing to work on it and doing costing --.

The point is, it is out there.

Yes, it is out there. To elaborate on what Merv touched on before, this is -- and what I had mentioned in terms of SG&A and cost, not only in China, but these are some of the programs that are in place, have been put in place in the first quarter and will continue to be put in place that obviously aren't free, but are for the long-term benefit of the Company.

Some of these programs won't hit until 2007.

I understand that totally, just wanted to make sure that that was at least still out there on the radar screen.

It is still out there, and it is getting warmer every day.

If we come back down to the organic growth, I think you all made the point that your organic growth target was 4 or 5%, which would have been 15 million I think on core Commercial Vehicle Group, right?

Yes, that's right.

Is that still -- if we were at 653, which is the -- that is the guidance for the year, are we still out 4, 5% of that number?

For this year, I think if you look out into '06, that is something that we're going to certainly be targeting internally. I think for '05, the acquisition with Mayflower that came in, we knew the business that was there in place and you have got to put a lot of things in place in order to get that. So we're still with the 15, 16 million for '05 organic if you peel off Mayflower piece.

When you look at cabs too, John, moving interior trim, having Conquest business or -- it is much simpler with an interior panel or a seat than it is with a cab. With a cab, there is so much movement of equipment, and taking it out of our current customers, that is not going to be on the same growth plane.

Actually, the question I had -- there are so many significant introductions by the truck OE that are really being done in '07 into coincide with the new engines. Not that much is really being done in '06. Are you guys going to be looking at -- if we were -- I know (technical difficulty) nor am I asking you to disclose what your wins are.

But would it be a safe assumption that your real opportunity for significant wins would be much more in '07 because of the timing of when introductions are related to the technology of the engines, not related to what you're doing, but just when some of the big truck OEs have major light international with its LH (ph) and things like that are definitely '07 tied to the engine. Is that a fair assumption that you've got more opportunity for wins and having a bigger impact on '07 than '06 just because of timing?

Absolutely '07 and '10(multiple speakers).

'07 and '10, let's take '07 just to start.

'07, absolutely, that was the point that we're trying to make vis-à-vis how much price you try to push through versus all the opportunities out there, and really working with the customers right now. That was the point I was trying to make on balance. And I know Merv wants to expand on that point, too. But there is -- we have substantial opportunities in each of our business lines for '07.

I tried to give an indication that when we were talking about the integration of Mayflower, I said we have signed two long-term agreements with customers on the Mayflower side. Long-term agreements go out through 2008 -- 5 years.

That's what I needed to know. Thank you very much.

Just expand on the point you're making, John, we would be extremely disappointed if we don't get to 2007 and 2008 and not have 5 to even maybe 7% or 8% internal growth on the expanded sales volumes that we have now.

Absolutely. I wouldn't expect -- you can get the odd panel here and there, like somebody is going to put in as you said a new dash panel or whatever you've got this year. But I would think in '06, just on the nature of what the truck OEs are doing, would not be a particularly big year in terms of introductions, whereas '07, '08 would be substantially on average very, very good if you doing over the three years. But it is going to be much more '07 than '06.

Right. So we've got more new business opportunity in '07. Absolutely. Although --(multiple speakers).

We've got front loaded expenses for '07 sales.

The other question is, let's assume for a second that the build, whatever it is this year, is essentially the same next year or may be a little bit better. And I am talking about Class A truck build, the consensus is there is not that much more capacity going to be available in '06 than '07.

If you guys are stable in what you're producing, in other words point you're not ramping, you kind of get it all together, you get a little bit of relief, on a modest increase in volume, I am talking about on the Class A truck U.S.-related market, not the other stuff, but on a relatively stable market, maybe a 5, 10%, do you make I would assume substantially more money in '06 than in '05 just because you don't have the inefficiencies? You don't have the ramping, you don't have all of the things that I assume you -- are still kind of disrupting your operations as opposed to being able to go at 290 -- 300,000 your share of 290 -- 300,000 on a flat rate basis?

I think if you look at some of our numbers compared to other suppliers that have gone through the ramp up, and that is one reasons on made the statement I did that we have had it with relative ease. When we originally did the IPO we said that we could go up to about 330,000 units without it. And we have not really struggled with ramping up.

I wish I could tell you that on a more stable base that we would have substantially improving margins. I think we'll have moderately improving margins just because we are going to be able to take a breather and continue to implement some of our productivity in our lean initiatives.

When you look at our numbers, and when you can say ex material costs, we were dropping over 30% in terms of EBITDA on (ph) the bottom line, that is pretty impressive. And I don't think we're going to be able to -- we have handled this probably better than most suppliers, and I think that is just a reflection of the overall team and our real capabilities within the Company.

Are we going to have margin improvement? Yes, but it is not going to be because of inefficiencies because I think you can see we didn't have probably the same amount of inefficiencies that some of the other suppliers have had.

Fair accounting. Thank you very much.

And that is the other thing I would just add to that real briefly. To the extent you see some modest drop in volumes, we handle that much better, because as you remember in the year 2001, 2002, 2003 we were able to improve gross operating and EBITDA margins in each year despite obviously the declining and fluctuating volumes in those periods.

Exactly. Thank you.

I do think we have very good dial up and dial down plans. And I think it has been proven, like Scott said.

Joel Tiss, Lehman Brothers.

I don't know this was asked or not, I had a little trouble following some of the questions. Can you just -- have you talked about your industry outlook for 2007 or even just really helping us translate all the different things that we're hearing from the different customers? And maybe even a little bit of sense of what some of your customer strategies might be about maybe shaving some production off of '06 and saving it for '07, those sorts of things to give us a sense? Thank you.

I think if you look at the way the industry is predicting, and if what John mentioned earlier, if it does trend up next year, we have had suppliers that have not been able to ramp up and have had small shortages that have really affected our customers. And I think that it is going to be hard to hit a 330,000 unit when 1999 is what we had. And we have taken a lot of capacity out since '99.

So I think that if there is the demand for 330,000 units, part of it will have to slide into '07. And so we don't really see '07 as near as much as of a drop-off as of a lot of people are predicting.

I think everybody has their own view of that, but I think we are all pretty much in agreement that we see kind of through '08 just being in a range of 300,000 units give or take 5%. You can't predict. There is a lot of other things that you can't predict. But we really see next year being roughly the 300,000 unit plus or minus that.

And we really see '07 being kind of in the same area, with maybe a slight decrease in the first half with a better second half in '07, and then '08 maybe even rebounding from then. Because when you look at the demand and the age of the fleet out there in total, and all the other things that are going on, and you never know how the economy is going to be performing, that is about the rate of replacement plus new trucks that is required over the next four years. And we don't see anything really changing that.

And there aren't any issues with shipping the compliant engines during the right time frame? Like for '07 they have to be shipped in '07, or whatever that would add some more cyclicality to the build?

There may be some cyclicality within that gear which can cause some inefficiencies if you are a manufacturer. But everything that we see and hear right now, things are on track to meet those '07 guidelines. Obviously, things could shift, but right now we're not seeing that. You may have heard something different lately, but we are pretty much in touch with -- we also do business with the engine manufacturers too, so we don't see that happening.

And they are not predicting that either. I think most all the engine manufacturers feel very comfortable where they are at with their engines for '07. And I don't think they will get caught like they did in '02 again.

John McGinty, CSFB.

Just go back to that, when you look at what the ACT numbers are, you look at what Eden's economist (ph) numbers are, the numbers to go from 300 down to 230 in '07. You pay your money and take your choice on that, but that is what the consensus forecast out there is. Could you talk about your dial down plans?

And if we did go from let's say 300 to 240 just to pick a 20% -- I think that is a 20% decline -- what that would mean in terms of your ability to -- as your ramp down to kind of hold your margins?

There obviously would be some overhead absorption issues, but presumably -- could you just talk about how your ability, as you did in 2000, 2001 variable-ize your cost structure given, again, what is there?

Our first line of attack is to take all overtime out. Our second line of attack is to reduce temporaries, and our temporaries run about 15% to 16%, somewhere in the neighborhood.

Percentage of the total workforce.

Percentage of the total workforce.

What is overtime running, ballpark right now as a point of -- as a portion of the hours that you're working? Is it 5, 10% of the total hours --?

About 10%.

So you take 25% of the workforce out with relatively little cost or no cost?

Really actually, the 10% is the savings in some regards. And then when you take the temps out, it is a little bit of a cost. Because you know they are at a lower wage rate than the others. So all in all, those two things take it -- those two together is going to take our hourly labor, our direct labor and indirect labor down about 25%. So that takes us from 300,000 basically down to what -- 230?

Absolutely.

That and then obviously if it gets tighter than that, we've got facilities that we can -- we have done that before -- consolidated facilities.

And your direct material goes down because you're just not buying it.

That is just a total variable cost.

Again, we're talking what? If we take the direct labor and the purchase -- in other words the materials, the variable costs -- just so we can get a flavor, what are we running, 65% of your total cost of sales or something?

For material and labor, yes, that's probably pretty close.

Just to give a flavor of what you have to do on the downside.

Our fixed cost base is probably substantially less than any of the truck suppliers that you have out there. (multiple speakers).

Absolutely. For sure

(multiple speakers) invested capital is so much higher. So our ability to manage that situation is --.

Dramatically better than anybody else's, absolutely.

I think when you went our plant in Tennessee, you saw that we started changing our lines over where we can variable man the lines, which we have not done in the past, too. And that gives us (technical difficulty) whether (ph) you can take a line -- it can be run with 10 people, or it can be run with two.

Exactly.

There is some pick up in that area, too, that would keep us from losing efficiencies.

Absolutely. Thanks very much.

Shareen Kadir, Pilot Advisors.

If we look back historically, the last -- I think like in 2001 the truck market was about 146,000 units. And you guys' margins were like 50% -- or over 50% (ph) gross margins, and I think your EBITDA margins were definitely double-digit. And I think since then you have only gotten more efficient cost structure-wise.

Can you just compare that same number -- if we hit that same number today versus in 2001, how your modeling looks different or how your earnings power might look different?

We hope we never see those numbers in 2001 again.

That's fair enough, but my point is you guys really -- I think it highlights your variable cost structure. (multiple speakers).

Yes, it does. We've gotten -- we have implemented since those days about 35% in lean manufacturing in our facilities. Gerry, our President of the Americas is in here. Gerry, why don't you give them a typical work sale that we implement the (indiscernible) system in? What's [sic] some of the typical savings?

About 25% labor productivity.

Speak up.

About 25% labor productivity on a sale that we call certified to our lean practices we are realizing. Typically we end up with about a 40% capacity throughput through that sale with little capital investment.

We're not world-class everywhere, but we're making a major move to that. So if it were to get down to those numbers again, we probably would be able to maintain that with the increased costs of being public and Sarbanes-Oxley and some increased vestment costs with Mayflower. I think that we could maintain that type of performance with that kind of volume with what we have going on.

Gerry is a little on the conservative side. I think we obviously can be better than that because like you said, we have implemented the lean manufacturing. He just told you the 40% increase in throughput, 25% in labor cost savings. And the inventory levels decreased, the working capital decrease is probably about 40%. And the floor type space savings is about 20%. So if that gives you some way to apply it, you're not going to hit that high on all. You're not going to hit that low on some.

That's great. An unrelated question, to the extent you can talk about it, what are the intentions of Onyx (ph)? They are obviously still the largest shareholder. Is there any update on that?

Good question. I think they are the largest shareholder. I think right now they're not too happy with the share price. They will be looking for liquidity, but I think when they look for liquidity it will be in a very organized fashion in the form of an offering. They have never gone out and sold before, so it would be in a very organized fashion. They're not going to be somebody that is going to be just selling stock on an interim basis. So that is how would be handled.

I think from our standpoint, if we could do something organized and get them out and improve the float in the liquidity of the stock, I think that would be helpful because obviously that is one of the things that we face, is that the float is pretty low and liquidity is pretty tight. And our stock is just naturally more volatile, and it naturally has more ability to play games with it, such as what we're more than likely seeing right now.

We have no further questions.

We really appreciate you guys taking your time to listen to our story. We're very proud of it. We hope we don't come across boisterous (ph), but we are extremely proud of our Company. We think it's got a great deal of potential. We think we're displaying that potential to you each quarter.

And I think we look forward to quite a few more quarters, if this market stays the way that everyone is predicting. And we feel very comfortable with the projections that we're giving you. I know some of you think it is a little conservative, and I think that you guys have got enough information to make your own reads on it.

Thank you very much. I think this is a very good conference call because the questions were excellent from the group out there. And we also appreciate that. I have participated in a lot of these, and this is one of the best group of questions and more business-focused questions that I think we've ever had. So thank you very much.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.