Commercial Vehicle Group Inc (CVGI) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Commercial Vehicle Group's second-quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks that will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Rued, you may begin your conference.

Thank you, everyone, for joining us. Obviously I think the second quarter was extremely successful, with record earnings; and Chad will go through those numbers in a little bit. I think what is even more phenomenal here is that the second quarter was achieved while a lot of things were going on within the business.

Obviously we were integrating Mayflower Vehicle Systems, and that has gone extremely well. You never know what you get with an acquisition, but we got an extremely good management group that has been integrated into Commercial Vehicle Group; and Merv will walk through some of those things and what those people are doing. And that has gone extremely well, very successful. We completed the acquisition of MWC in the second quarter. Again we have acquired a very good management team in addition to the business. That integration is going extremely smoothly.

The secondary offering that was completed basically doubled the public float. The only remaining insiders with the Company now are the Hidden Creek Ind. (ph) Management Group which account for roughly 5% of the stock and are obviously committed long-term with the business. We booked some new business opportunities that Merv will go through. I think, more importantly, we've never seen the pipeline of opportunities greater as look into the future than they are right now.

Maybe the most exciting part is while a lot of improvements continue to be made in the business, we still see areas for future improvement. There are things that are clicking very well in the business, and there are things that we can continue to work on and improve. That is going to be our goal, because this team has never rested on its laurels, and there's a lot of opportunity going forward. With that I'm going to turn it over to Chad, who will briefly read the Safe Harbor language; and then Merv will walk through more details on the business, and Chad will walk through the numbers.

Thanks, Scott. Before we begin the formal portion of today's call I need to first read through our Safe Harbor language. I will then pass the call over to Merv to take you through a companywide overview; and then I will take you through our financial results for the second quarter of 2005 and our outlook for the third quarter and full year of 2005. Then we will take time to answer your 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. With that I will turn the call over to Merv.

Thanks very much, Chad, and thank all of you for joining us this morning. As you all know this is a very exciting time for our entire commercial vehicle industry and particularly for CVG. We are experiencing very high demand from our customers in the Class 8 truck and construction markets.

Our story remains one of growth. We have growth within our core markets, as our customers' production volumes remain at their highest level in years, with quarterly North American production volume coming in at 90,000 units in Q2. We also have meaningful organic growth opportunities with our existing markets and customer base, through cost selling opportunities and new product innovation. Finally we continue to see growth potential through the execution of selected acquisitions that complement our core customer base.

Product lines and geographic focus. Through the execution of Mayflower and Monona Wire transactions, as well as through recent successful stock and bond offerings, we feel that we have positioned ourselves strategically and financially to achieve our goal of being the only supplier of cabinetry (ph) systems that can offer fully integrated cab solutions to any of our customers anywhere in the world. We are focused on remaining disciplined in our approach to our business and our industry, and feel we are well positioned for the near term and beyond.

Before Chad goes through the financial results for the quarter I would like to take a few minutes to update everyone on a few things. First, I'd like to update everyone on the status of the ongoing integrations of Mayflower and Monona Wire as well as an overall operations update for the quarter. I'd also like to take some time to talk about new business opportunities, particularly our partnership with Volvo 3P to codevelop their new modular seating system. Lastly I would like to spend a few moments on our Company's emerging market focus, particularly in Asia, given the news coming out of China last week.

We are pleased to report that the integration of Mayflower and Monona Wire continue without incident. We have integrated Mayflower's engineering, sales, and management functions into our existing corporate structure. In the coming weeks wee will begin running Mayflower's AR and AP functions from a centralized location at our corporate offices. We foresee the integration of Monona Wire, which we purchased towards the end of the quarter, to proceed as smoothly as the Mayflower transition has, and we look forward to further integration of the management team into critical roles within our overall business.

Our entire Company including our new addition continue to meet or exceed our expectations on the quality, safety, and delivery fronts. During the second quarter our plant in Shadyside, Ohio, which was acquired during the Mayflower transaction was selected the 2004 recipient of the Fabricator and Manufacturers Association Award of Merit. The Award of Merit is given annually to companies posting an injury or illness accident rate that is better than the published Bureau of Labor Statistics by 10% or greater. Safety is and always has and always will be a top priority for us. We take great pride in our safety record as a Company.

Quality and delivery are equally as important to our Company, especially to our customers. While we already consider ourselves world-class in these categories, our customers are committed to partnering with us to constantly improve our quality and delivery even further. We consider that working relationship a key asset to our Company.

We have also had some great success and news in Europe recently. Earlier this month we announced that we've been selected to partner with Volvo 3P in the development of Volvo's new modular seating system. The partnership was created in an effort to design and develop a world-class global modular seating platform for medium and heavy-duty trucks. It will be broad in scope, and the platform will be designed to satisfy ever-increasing global expectations for safety, ergonomics, and durability. The modular seat system will be manufactured and launched on a global basis and will be designed to meet Volvo's stringent, Best in Class Engineering Product criteria or BICEP.

This partnership is initially expected to launch in Europe and further expand into Volvo's global production sites. We are honored to be selected for this partnership and to work side-by-side with a highly respected commercial vehicle industry leader like Volvo. This partnership with Volvo is a prime example of our commitment to be a supplier with truly global capabilities that can leverage existing relationships into meaningful crossselling opportunities worldwide. We look to further enhance our existing relationship with Volvo while continuing to explore further opportunities with them; and we look forward to the prospect of similar partnerships with other European OEMs as well.

As we said in the past we are focused on serving all the world's key markets for our products throughout locations strategically located near our customers, as well as through a strong supply base in neighboring emerging markets. We continue to pursue initiatives in Eastern Europe, China, and other regions of Asia to find the best mix of quality delivery and cost competitiveness for our customers.

Following the Chinese government's recent decision to partially float the RMB, we feel our focus in other emerging markets provide us with several options for low-cost sourcing while we remain strongly committed to our operation in Shanghai. For the last few months our operation in China has turned a small profit and has therefore achieved our objective of breaking even this year. We have two major customers currently taking product in China, and three additional customers at the final stage of quality evaluation, getting closer to taking product.

Our performance in China has led to direct savings for our UK operation as well. We had forecasted these initiatives to accelerate over the course of the year, as they have; and we have made additional moves within our Company to further support this operation. In the second-quarter Gordon Boyd was appointed President CVG international and given full responsibility for the operation of our facility in China as well as all of our CVG International business. Gordon formerly served as president of Mayflower and his experience in the industry is a welcome addition to our entire Company.

In summary, CVG has answered the call of (ph) our customers have made over the last six months of this year, and we are confident we will continue to do so while continuing to pursue new business initiatives and strategic acquisition opportunities. With that said I would like to turn the call over to Chad for the detail on our second-quarter financial results as well as for our outlook for the rest of 2005. Thank you very much. Chad?

Thanks, Merv. As we review our results for the second quarter, please remember that these results include the effects of Monona Wire operations only from the date of the acquisition and not on a pro forma basis, unless otherwise stated. Our second-quarter results were solid as revenues, operating profit, EBITDA, and net income were all above our guidance for the quarter. EPS came in at $0.78 per diluted share based on 18.3 million common share equivalent for the quarter. This is approximately 16% better than our guidance of $0.67 per share and the average main expectation of $0.67 per share.

On a pro forma basis we estimate that had Monona been part of the reporting period for the full quarter our EPS would have increased by approximately $0.06 per share, up to $0.84 based on 18.3 million diluted shares.

Revenue came in at 196.1 million, which is up 107% versus the 94.5 million recorded in the prior-year period. This increase resulted primarily from the addition of both Mayflower Vehicle Systems and Monona Wire operations, accounting for approximately 82 million of the increased sales over the prior year. In addition, approximately 43% increase in the North American heavy truck production, combined with organic growth and other market fluctuations, equally to approximately $15 million of increased revenue over the prior-year period.

Higher OEM sales in the European and Asian markets accounted for increased revenues of approximately 3.5 million, while favorable resulted foreign exchange fluctuations resulted in approximately 900,000 of additional revenue over 2004 for the same period.

When comparing revenues to our guidance for the second quarter, actual revenues were $7.1 million higher. This is a result of Class 8 production volumes equating to approximately 90,000 units for the quarter, versus our guidance of 81,000 units, or an 11% increase. This increase combined with fluctuations in other markets during the quarter equated to approximately 6.6 million of increased revenues. The European and Asian markets along with foreign currency fluctuations accounted for the balance of approximately $500,000 above guidance.

On a pro forma basis we estimate that Monona been part of the reporting period for the full quarter our revenues would have increased by approximately $18 million, or up to 214 million for the quarter; again on a pro forma basis.

Operating income was 25.8 million or 13.2%. Excluding the non-cash option charges of 10.1 million recorded in the second quarter of last year, this is an increase of 159% from the 9.9 million or 10.5% reported in the second quarter of last year. Yet it's still mitigated by the impact of increased steel and petroleum based costs in both '04 and 05. The elevated steel and petroleum prices negatively impacted us by approximately $1.5 million for the quarter.

SG&A for the quarter was 10.2 million or 5.2% of sales, as compared to 6.9 million or 7.3% of sales from last year. This improvement is primarily the result of sales growth in excess of SG&A growth and the addition of Mayflower and Monona at reduced SG&A levels. SG&A was in line with our guidance expectations for the quarter.

Depreciation was 3 million and amortization was 140,000 for the quarter. Capital spending was approximately 2.7 million for the quarter. We did experience a slightly favorable pretax impact from marking to market our foreign currency contracts of approximately $366,000, which only improved our EPS for the quarter by about $0.01.

Interest expense was 3.3 million for the second quarter of 2005, compared to 2.1 million for the same period in 2004. This increase is primarily be result of increased debt related to the Mayflower and Monona transactions. Our effective tax rate for the quarter was 38.1% which was in line with our guidance.

EBITDA for the quarter was approximately 29 million or 14.8%. Excluding the non-cash option charges of 10.1 million during 2004, this is up 141% from the 12 million or 12.7% for the same period in 2004. This is approximately 2 million above our guidance of 27 million. Excluding negative steel and petroleum impacts during the quarter of approximately 1.5 million, our EBITDA would have been approximately 30.5 million or 15.6%.

On a pro forma basis, we estimate that had Monona been part of the reporting period for the full quarter our EBITDA would have increased by approximately $2.7 million or up to 31.7 million for the quarter.

That said, when we look at contribution margins, as we have all discussed, whether it's versus prior year or versus guidance, our EBITDA increased by $17 million versus the prior year on a sales increase of 101.6 million or a contribution margin of approximately 17%. This is below our expected rate due primarily as a result of the addition of Mayflower and Monona at reduced EBITDA margins than the expected contribution margin of, say, 20 to 25% on incremental sales. Excluding the two acquisitions and currency impact, our contribution margin achieved over the prior year would have been approximately 24% despite increased costs associated with being a public company and other costs related to long-term growth objectives of the Company which we've experienced this year.

When comparing our EBITDA contribution margin versus our guidance for the second quarter, EBITDA was approximately 2 million higher on incremental sales of 7.1 million or 28%. Excluding the impacts of raw material pricing and currency translation this contribution margin would have been approximately 23%.

Our balance sheet continues to improve through operations and working capital management as the Company generated approximately $8 million of free cash flow during the quarter. Our net debt position at the end of the second quarter, which includes 3.9 million of cash on hand and excludes letters of credit, was approximately $202 million. Our net debt to pro forma EBITDA as of the end of the quarter was approximately 1.89 times. Our net debt to book capitalization was approximately 60%.

As we look towards our outlook for the third quarter and full year for 2005, our guidance is based on 75,000 Class 8 units during the third quarter of 2005, and 74,000 units in the fourth quarter, and 320,000 units for the full year. The primary reason for the reduction in the last half of the year versus the first half is related to certain shutdowns and holidays assumed for the related OEM customers. We estimate that this can be attributed to approximately 10% less production days available from that of the first half of the year. In addition, we estimate a modest reduction in the Class 8 market which will also take effect in the last half of the year, and that the market will be producing 320,000 units for 2005.

We that estimate the global construction market will continue to see modest increases through the last half of the year, however it will also be affected by certain shutdowns and holidays. We have given no effect, positive or negative, in the third or fourth quarters for any impact of mark to market of foreign exchange contracts. Our tax rate assumption is approximately 38% for the remainder of the year. Our interest rate on funded debt is assumed at 7%; and the rate on our $150 million bond offering from July of this year is at 8%.

As a result of the closing of recent transactions we will have an impairment charge for a portion of our deferred financing fees as it relates to the reduction of our senior credit facility in connection with the proceeds from the high-yield offering in July. This is a onetime non-cash impact to net income of approximately $1 million that we will see during the third quarter. Further, to the concurrent equity and high-yield offerings which closed in July we have included the effects of the net proceeds to the Company as it pertains to the overall effective interest rate changes as well as the change in basic and diluted common shares outstanding.

The Company uses a weighted average approach regarding common shares outstanding, and therefore will have approximately 20.8 million diluted shares outstanding for the third quarter, due to the addition of approximately 1.5 million primary shares, 217,000 option shares, and 1.2 million overallotment shares issued at various times throughout the third quarter. Total diluted shares outstanding for the fourth quarter will be approximately 21.1 million shares, and we will have 19.6 million weighted average shares for the full year of 2005.

Given these assumptions and activities, and our expectations for raw material pricing and recovery to remain at current levels, we believe that our revenues for the third quarter will be in the range of 193 million. EBITDA is expected to be in the range of 27 million. Our EPS expectation is approximately $0.51 per share assuming 20.8 million diluted shares.

This is a change in revenue of approximately $21 million from the pro forma figure I mentioned earlier of $214 million during the second quarter. This can be attributed primarily to the estimated 10% reduction in available production days from the prior quarter. For comparative purposes, excluding the dilution of the change in share count and excluding the impact of the non-cash deferred fees writeoff that we will see in the third quarter, EPS would be approximately $0.64 for the third quarter. This is a change of $0.13 from actual guidance of $0.51 and again can be attributed to the dilution from the change in outstanding shares of approximately $0.07 and the impact of the deferred fees, non-cash onetime impact of approximately $0.06.

Our expectation for the full-year 2005 revenues is in the range of $735 million. EBITDA is expected to be in the range of 103.5 million. Our EPS expectation is approximately $2.42 per share, again assuming 19.6 million diluted shares. For comparative purposes, our previous guidance for the year was $2.57, and our Q2 results were $0.11 better than expected, which would indicate a revised guidance figure of $2.68 given the assumption that our market forecast for the balance of the year has not significantly changed from our last call.

How ever, the dilution effect of the change in outstanding shares is approximately $0.18 for the year; and the writeoff of deferred fees, which I mentioned, for the third quarter has an impact again of approximately $0.06. These are the two primary factors regarding our revised guidance for the year to $2.42 cents and the difference between the guidance we provided on our last conference call.

As I previously indicated, our net debt position at the end of the second quarter was approximately 202 million; and our net debt to pro forma EBITDA was approximately 1.89 times. With the proceeds from the equity offerings in the third quarter, along with expected free cash flow generation and capital spending requirements, we anticipate our net debt position to be in the range of 155 million at the end of 2005 and our net debt to pro forma EBITDA ratio to be in the range of 1.4 times.

As we try to recap the sequence of events to where CVG is today and where the Company is going for the balance of this year and further into the future, it remains to important to take a glance at where we started this year, a mere seven months ago. As you may recall we began this year with a full-year EPS guidance of approximately $1.80 and today, on a comparative basis, excluding onetime events and share count changes, we're discussing an EPS of $2.57 cents for the same period or an increase of approximately 43%.

This comes as a result of two successful acquisitions, capitalizing on favorable market conditions, remaining true to our corporate strategy, and really taking pride in doing what we say we're going to do. With that said, we are obviously excited about the progress we have made during the most recent quarter and thus far this year. We're looking forward to the first full quarter with Monona and its management team as part of the CVG family, and we look forward to continuing to pursue our strategic goals and increasing shareholder value. With that I think we would like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Adam Plisner (ph) CSFB.

Chad, could you just start off, could you tell me if there is a respective pro forma EBITDA figure for Q2 of last year versus the 31 7? So we could just kind of keep our LTM going in the right direction pro forma.

Yes, hang on a second. I think it is around 19.5 million.

Great.

19.3, 19.5, somewhere around there.

And then, Merv, one of the things that you were talking about on the road, I guess, was sort of your difference (inaudible) in terms of how some of the supply shortage was affecting the build rate in the industry. I have not heard you talk about that. I guess Q2 in some ways with the build rate of 90,000 kind of proved that the flowthrough was robust enough to have a strong quarter. Is there a change there as well in your opinion that, I guess, the industry is capable of meeting the demand?

I don't know how many of the 90,000 were putting parts on that were built in Q1. In other words, they were red tagged because of the shortages in Q1 and then pushed through in Q2. I don't know that number. I still -- at 90,000 run rate times the four, you're at what? 360, exactly. And 360 is 30,000 more than we had in our best year. I don't know of anybody that has added capacity. So I still don't see how you continue to run 360,000 units. That is just my understanding of the market and also the days, the holidays out, and everything else. I still don't see how you get to that number.

Can you maybe talk to me about, I guess, the timing of your integration plan of both Monona and Mayflower, in terms of whether it means shipping some capacity down in Mexico, or it means maybe moving some products and processes amongst facilities. When does that sort of get underway? How would you depict the complexity of that process?

Planning is underway currently. We just had a major meeting a week and a half ago with all of the key players in our Company to go through strategy of moves, strategy of the emerging markets, how they play into our overall production. Obviously I think we've got 18 or 20 facilities in North America. How do those play out? How do we move all products into all facilities, so that we have a colocated facility closed by our customers? And how that strategy plays into effect.

So we've already, we have been doing planning now for a while, we have been doing some of the moves. But the overall plan has obviously changed since the Monona Wire acquisition. I think last week part of my staff was with me in Mexico looking at the facility there, how we would want to expand the facility, the different products that we could put into there next to our customers in Mexico. So it is an overall strategy. It hasn't started yet; it started three years ago on the moves. With the newest acquisitions obviously that just now starting to play into the strategic moves.

Chad, is there an estimate of the cost involved with that transition, as you integrate those two acquisitions? Or is this something that just happens over time and is not material?

Yes, it happens over time. I think like we've always said the opposite side of that question is -- what kind a percentage savings can you get from synergies? I think the way that we approach that is it really happens over time and it becomes part of our ongoing improvements that we see the Company can achieve.

And costs are related to those. Similarly we are experiencing some additional costs that we're absorbing right now related to the Volvo 3P program that Merv mentioned. Costs like that in terms of consolidations, some of it may be CapEx, some of it may be expense. But the way that we try to approach it is make sure that it makes sense and we can absorb it over time.

Thanks, gentlemen.

Christopher Martin (ph) from CSFB.

If we could just look at the quarter for a second, $0.78 versus $0.67, which is what you guys gave us just about a month and a half ago, I can understand how the North American build, Class 8 build has increased. But in my estimate it doesn't seem like that accounts for the entire $0.11. What else was it in the quarter that was that much better from the June 9 guidance?

I think it really was. I mean you've got a, what, 11% increase in the North American market, which accounted for pretty much all of the increased revenues that we've got in if you push that down through flowthrough. I mean we did come through in terms of some efficiencies through the quarter that were above some of the expectations that we had in our guidance. I really think that if you put that through, follow the model through in terms of the Class 8 market and what the impact was to that, I think you really get there.

Actually I think we were a little bit, Chad, too, we are fairly conservative on what we project. Mayflower in particular, which was relatively new, I think we were conservative in terms of what the efficiencies would be in the new business. I think that probably had something -- on the incremental business there it probably had something to do with it, too.

I think overall operations excelled a little bit better than what we thought.

I was just kind of looking back at the -- when you increased the build during the guidance on June 9, it went from 292 up to 306; that was about 14,000 units increase. When you back out kind of what the accretion of the Monona deal was, you were left with about $0.10 being represented by the build rate. So I figured there was something else in there. So that is helpful.

There are a few other things, tax rates, maybe a half percent better, interest a little better. We did have a $0.01 impact for marked to market. So there's a few other things that make up that $0.11. It is not all the operations side.

Okay, great. I'm just trying to understand the build forecast. I can appreciate the 320 is much closer to kind of what the industry expects. But again, just trying to understand a little bit, if you look at what the third and fourth quarters imply there, it is 75,000 units per quarter, I think we said, which is essentially the daily build rate that we saw back in January. But build rates over the course of six months have increased about 10%. Merv comments about he hasn't seen anybody really increase capacity. Is it your opinion that the build rates have really just increased because supplier constraints have eased a bit?

I think supplier constraints have eased a bit. But I also think that all of our customers have probably worked very hard to help also remove their own constraints. We've got better-trained work forces then we had, I think, in '99 too, which helps a little bit. Our people seem to be brighter about dialing up plans. And I'm talking about -- when I say our industry, all the supply base and all the customers seem to be getting better about understanding how to dial up. Hopefully we'll all understand how to dial down too.

So in the second half of 2005 your forecast actually implies a reduction in the build rate back to kind of January's level. Is that, again, just trying to understand, is that a drop because you think the last couple of months have been inflated by the easing of --

You've got production days and --

Right, just given the production days on a daily build rate kind of basis, so it's comparable for the drop-off in days in the second half. I mean are you guys just being a little conservative there? I think in the last couple of months that the build rate has been inflated a bit by the fact that some of these red tags have gotten out in the second quarter.

We've always been conservative on build rates. What we want to do is be extremely consistent in what we tell everybody. I think we've been that through the first four quarters of our existence as a public Company. That has kind of been our posture.

I think, too, Chris, if you look at -- we're sort of taking, if you look at it on an average basis through the first half of the year, it's probably more of an average, so of Q1 being around 81,000 units, Q2 being around 90. So 171,000 units roughly for the first half of the year. Take 10% of that and that is pretty much where we are forecasting to be for the balance of the year.

So really what we are saying is 10% out for shutdowns, holidays, etc. and then maybe a 2% or 3% reduction or 4% reduction from where we are running today. So we are not really indicating significant reduction from daily build rates today, if you use and assume the 10% production days out like we are doing.

Okay, that is helpful. Then just on the steel and price relationship there. The 1.5 is the unrecovered piece that accounts for any price that you received in the quarter? (multiple speakers)

Yes, that is net.

Okay. Just looking back at what that number was in Q2, because we have improved from $0.10 a share in Q1 to $0.05 a share in Q2, was it because we got more price? Was it because material costs have eased? Or was it because comparison to a prior year impacted it?

More of the customer kick in for -- we had negotiated price increases that kicked in. Once again, we're still not recuperating the full amount. And we will never recuperate the full amount, because we've had in our strategy since day one, as we've said on these calls, our goal is to more partner with our customer. We share it, our suppliers share it, and they share it. I think showing what we've done recently with Volvo and the commitments we got from other customers show our strategy is working.

I definitely agree.

I think what we are going to see, though, and I think we are seeing it really in the third and hopefully at the end of the fourth quarter, steel pricing is easing. It seems to be easing pretty rapidly here. So we expect that number to drop down as long as steel pricing continues to come a little bit more in line.

(multiple speakers) It's easing but it's really not easing that much in our markets that we use. We are at a point where I would be afraid to speculate what the steel price is going to do and whether (ph) it's going to have an effect upon our markets other than what we've got into our plans. Our steel is so varied in the mixture of it that it's really a hard to look at one number on the steel market and speculate how we are going.

We also have a lot of specialty steels too which -- you just can not compare it to what -- that's right, Merv -- what hotrolled and cold rolled steel prices are doing, that's for sure.

So just the previous forecast of a $9 million hit on the steel and petroleum type products, it was 3 million in Q1, 1.5 in Q2. I'm assuming we kind of remain at the 1.5 million for Q3 and Q4.

Yes, that is exactly right, Chris. So it takes it down. You are in the 7, 8 million impact as opposed to the 9, 10 we talked about before.

But we've got to remember also that we have still got to keep it in the neighborhood because of petroleum price increases. I haven't seen petroleum drop.

Excellent, thank you guys.

Henry Curran (ph) from Lehman Brothers.

Question for you, not to beat a dead horse again, on the OEM build are you hearing anything from them that leads you to believe the build rate is going to come down in the second half of the year? Or is it just your gut instinct at this point?

You guys all follow our customers. You listen to their calls, probably, which is more than I do. So the only thing we can tell you is what we see in the numbers coming out. And what we see in the numbers coming out of all of our customers is a pretty consistent run rate with what we got today, with the exception of the holidays and everything being taken out.

Also on the raw material pricing mix, if the raw material prices were to come down substantially in the second half of the year, how much of that would you have to give back to the customers? Or would there be some of that that you'd be able to keep in the form of pricing going forward?

We look at it on a quarter by quarter basis with our customers. Keep in mind that we went through the first quarter without very much of a buy-in by our customers because it took that time to negotiate. I'm sure it will take a little bit of time to negotiate it back down, simply from the fact that our customers as well as us are concerned that we try to bet everything on one quarter. So I don't think there will be a big rush for any of us to negotiate one way or the other, because the day after we negotiate we could find out it's going right back up again.

Putting these cases together with your customer takes more than a day or two, whether you are negotiating up or negotiating down. I would just stick with the numbers that we'd given at the start and not try to manage it on a quarter by quarter; that is our philosophy with it. We take the long-term approach and our customers have bought into that so far.

Okay, thanks a lot. Good quarter.

David Leiker from Robert W. Baird.

A couple of number questions here, first. What is your depreciation and capital spending now on a run rate? Or where would you expect that to end up for the year?

Depreciation probably around that 14 million mark, David. And CapEx, our CapEx is more tailed toward the last half of the year. So it will probably be around that 20 million market give or take.

Okay. Then the SG&A number was a little surprising on the low side. Is this a reasonable run rate going forward?

It depends what your baseline is. I think the reason that it dropped down at least as a percentage of sales is obviously just because of Mayflower Monona being added at lower rates than what CVG has historically run. That is just a matter of where the call centers lie. It was 5.2, I think, percent in Q2. I would see that on an ongoing basis probably in the 6% range on a combined basis.

As what we've said in the past, we have -- probably CVG by itself has carried extra engineers and extra purchasing and quality people by starting up operations in China, and looking in Eastern Europe and Mexico for Bide (ph). And also carrying extra engineering for the new programs that we couldn't talk about at the time; but one recently launched with BICEPs with Volvo. We will continue to carry extra engineers and be adding to that number, and that is the reason Chad's number has shown it will be a little higher than the current run rate (technical difficulty).

The balance sheet I believe does not include cash from the over-allotment, is that correct?

Yes, everything funded in July, so the 6/30 numbers won't include it.

What would be a pro forma number for the proceeds and the offering?

It's probably around between the primary, the overallotment, and the management exercises, net of fees it's probably around 40, 41 million proceeds.

Somewhere around 162 million.

So you have got about 12 million on your revolver then?

That is about right. Well, on a pro forma basis that is what it would be.

Yes, okay. Could you breakout Monona and Mayflower in terms of revenue contribution?

For the quarter?

For the quarter.

Hold on a second. Mayflower is around 73, 74 million. Monona you only have a one-month effect for Monona, David, so it is about 8.3 million or so.

Okay, great. Where do you stand right now with these build rates that we have from a capacity perspective?

We are probably different products along different lines. In particular the trim side has still got quite a bit of capacity open. The wiring side has got capacity open. The Mayflower vehicles side has got open capacity. The National Seating side is probably the one that is about 85% capacity right now, and that one is one where we've been adding some production lines to be ready for -- not necessarily an upswing in build but probably more for organic growth.

Once again, our capitalization on things like that is not -- that is in the thousands of dollars or ten thousands of dollars, not million.

Merv, I mean maybe -- what was our overall delivery rate during the quarter? I mean were we close to 99, 98, 99%?

24 parts per million, I think.

That tells you, David, that obviously we can clearly meet the demand of a 90,000-unit quarter, a 350, 3660,000-unit year, which I think is the key, without adding additional capacity.

Right, that is where I was going with that. Are you running three shifts? Overtime? What kind of a work schedule are you running in the (multiple speakers)?

I think the way we explained it when we were doing the roadshow and doing this, we always run overtime, probably. And we always run with 20% temp because that gives us the ability to do dial downs pretty quickly. We run with about 15% overtime even in the down market because of being able to flex our manpower real quickly. For our business even if this is a phone call (ph) and the worst of times, we would answer the question the same way.

Two last things here. We heard yesterday on a call that there is increased pricing pressure from the truck OEs on the suppliers. Are you seeing that in your business?

We have increased pressure every day. I mean there is always pressure on us to reduce. We have normally four and five year of long-term agreements. That doesn't keep the pricing pressure away. What we've been able to do is give our customers a good value for the cost. We work with them diligently on new programs. It is hard to cut the price if you are also adding engineering to support them.

Right.

So for us I think that the pricing pressure is the way it has always been. It has always been high.

It seems like in the conversation yesterday that it had taken a step further than what it had been.

I can't speak for the other supply base. I can't tell you that ours has never let up.

Okay. And then lastly, what do you think the timing is for us to start to see some revenue synergy opportunities come to fruition with Mayflower and Monona?

I think you already starting to see some. As I said on the call we've moved --we have consolidated sales, we consolidated engineering, we've consolidated -- starting to consolidate AR and AP. I think you are starting to see some of those synergies. Operationally, I think you will start to see some synergies as companies start to use each other for some sourcing opportunities. And it will continue to do, I think that is what you are starting to see. A little bit of the improvement on the earnings is through consolidation efforts in the job that this management -- this management team is doing a very good job.

No, you are. Do you have any of those synergies in your guidance?

In terms of the operational synergies, yes; I mean there are some in there. I can't really quantify them. But we take a pretty close look at where we are going to be. So there are some in there. We're just really getting rolling on where we feel we think we can take the synergies in top line and on the cost side. But there are a few in there, like Merv said, starting with things like the administrative functions. We have certainly got some of that included.

Great. Thank you.

I think a lot of the real synergies taking hold, David, from both the revenue and even a cost standpoint, I'm really looking at 2006 and 2007 though.

Thank you.

Christopher Martin from CSFB.

Two follow-ups here. Chad, when you were going to the guidance and said new guidance of $2.42, and you walked from the 257, plus the $0.11 cents in Q2 got you to 268, and then minus the dilution, minus the deferred. So are we essentially saying that you guys didn't raise your guidance basically for the second half, even though the build rate forecast has gone up from about 68,000 per quarter to 75,000 per quarter? Am I missing something?

Yes, I think if you look at the forecast for the balance of the year, Q3 and Q4 combined we only increased it by a couple thousand units. Because we were at 306, and we took up about 9,000 or 10,000 units from Q2. So we only increased I guess -- by that number it is 4,000 units.

So that and some favorable efficiencies in the quarter. But am I right in saying that the second-half guidance that was implied by both numbers given there has not changed?

That is correct, yes. Some of the -- it's P&L geography more than anything; but the bottom-line guidance really did not significantly change.

Thank you.

Chad, I mean you got some dilution from the bond offering too, which obviously is a good thing; but it's at a slightly higher interest rate than our existing debt was, probably a couple points. That has some effect clearly. That is offset by the slight increase in volumes. So we kind of kept a neutral position on the second half of the year.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay, thank you everybody.

We'd like to thank you once again for joining us today. This is truly an exciting time for our Company, and we are extremely proud of the results we continue to produce for our customers and our shareholders. And we look forward to speaking to you again with you all the next quarter, if we don't do that before. Thanks again.

This concludes today's conference call. You may now disconnect.