Commercial Vehicle Group Inc (CVGI) 2005 Q4 法說會逐字稿

Good morning. My name is Sabrina, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Commercial Vehicle Group 4th Quarter Earnings Conference Call. All lines have been placed on "mute," to prevent any background noise. After the speakers' remarks, there will be a q-and-a session. If you would like to ask a question during this time, simply press *, then the number 1 on your telephone keypad. If you would like to withdraw your question, press *, then the number 2 on your telephone keypad. Thank you.

Mr. Utrup, you may begin your conference.

Thank you, and welcome, everybody, to the 4th quarter conference call. As usual, before we begin the formal portion of today’s call, I need to first read through our Safe Harbor language. I’ll then pass the call over to Merv, to take you through a Company-wide overview. Then I’ll take you through our financial results for the 4th quarter of 2005, and our outlook for the 1st quarter and full year of 2006. We’ll then 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 the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

With that, I'd like to turn the call over to Merv.

Thanks very much, Chad. Thanks, all of you, for joining us. I'm very pleased to be speaking with you following the release of our numbers, this morning. 2005 was a transformational year for our Company. We recorded 755 million in sales for the year – which is a 98 percent increase over our sales level in 2004.

EBITDA increased from 2004 to 2005, with 106 percent. We're very pleased to have grown the bottom line faster than the revenue line. This growth was achieved through the successful integration of 3 strategic acquisitions we completed during 2005, as well as by strong growth in our core markets, during the year.

We must give credit to all of our dedicated employees, who were up to the challenge we put before them, or [inaudible] the demands of commitment, acquisition activity, as well as increased demand from our customers – which effectively doubled the size of our business in 1-years' time.

More than 340,000 Class A trucks were produced in North America, this past year – the best year on record. And we continue to see strong demand from our customers across the construction, agriculture, green and specialty-vehicle markets.

Even after the record production levels recorded in 2005, current industry forecasts project 2006 should be an even stronger year for the industry. We look forward to the challenge of the coming year, and remain committed to offering the highest-quality products and services to our customers.

We know that our investors and all those involved in North American Truck Industry are questioning what impact 2007 EPA Emission Standards will have on the truck market. We have seen all the same forecasts you have. But neither we nor our customers can say for certain what the magnitude of the impact will have on production levels.

We feel our job is not to speculate on what the market impact of environmental legislation will be, but instead, we feel our job is to continue to grow our business, and to remain lean and flexible, so we can react to any change the market may throw at us.

We will continue growth in products, processes and geographical areas. To that end, our operations remain lean, and our balance sheet remains strong – with a net debt at 1.34 times pro forma EBITDA. Our disciplined approach to our business has put us in a very strong and strategic position, today. While our competitors may struggle to adapt to market fluctuations, we will capitalize on our strong position in 2006.

We would not be where we are today without many successes we had in the past 12 months. From an operational perspective, our strategy has not changed. We continue to improve our already-stellar quality, safety and delivery statistics throughout the year. We have fostered a culture of continuous improvement for all employees, through our Total Quality Production System, or TQPS.

The principal goal of our TQPS system is to eliminate waste in our operations, to maximize efficiencies -- whether it be in the factory, warehouse or the front office. I am pleased to report that the TQPS system has been introduced to our regionally acquired operations, and TQPS has already made an immediate impact on these manufacturing facilities.

We also have benefited from applying these principles to our management functions -- as we realigned operations into 3 distinct business units. Electro-mechanical division, an engineered vehicle structures division, an interior systems division. This strategic alignment allowed each division’s executives to focus on their specific product innovations, customer service and quality initiatives – while all of our divisions remain closely connected by a strong senior management team, who drives CVG’s culture of excellence throughout the organization.

This new organizational structure is the framework we will use to take our Company to the next level in the coming years. We have the right people onboard, and are confident we will thrive with this new structure.

2005 witnessed some meaningful new business wins for our Company. CVG formally agreed with Freightliner to provide the standard seat on its next-generation truck model, which begins in 2007. This contract represents new business for CVG – enhancing our already-strong market position. We also signed a contract extension with International Truck, and [inaudible] to provide them with the standard seat position for the new long-haul truck, which begins production in 2007.

These contracts on their own are noteworthy. But when taken together, the results of these contract wins is even more significant. Today, we are the only Company to hold standard seat position with all the major North American OEMs. An enviable position that cements our brand name in the forefront of the industry, and on the mind of all the major fleets, and owner-operators, and then anchors our position with the OEMs, and allows for further cross-selling opportunities in the coming years.

This was in addition the Global Seat Award from Volvo, earlier this year. It also is in addition the business that we're quoting with the other large OEMs in Europe. We have had great success cross-selling our product offerings into the OEMs across all industries. And we're currently quoting on major cross-selling initiatives with each of them.

In 2005, we were awarded a contract to produce the instrument panel for Western Star – the first such product offering we will provide for this OEM. We were awarded this business based upon our close ties to this customer, which secured the opportunity for a new product line we are not currently producing.

While we're already a market leader for components and subsystems in our core markets, we have made it clear that we're not satisfied with simply providing components to our customers. We are currently involved in 2 exciting projects that will fulfill our stated goal to provide a complete cab system assembly – including the structural pieces, along with the interior components, which we will assemble and deliver to the OEMs for final installation on their assembly lines.

We will release details of these projects as they become finalized, and allowed by the customer. But we can say with great confidence, that CVG is closer than ever to fulfilling the goal of providing complete cab assemblies for our customers.

Looking ahead to 2006, we see many exciting new business opportunities. Particularly in the bus, marine, construction and agriculture markets – where we still have meaningful opportunities for further penetration. Our customers in every industry, are seeking suppliers with truly global capabilities, and our stellar reputation demanding Class-A truck market will serve us well, as we continue to dive deeper into these markets.

We also have set aggressive cost-reduction price for our existing product offerings. We're in the process of executing multiple cost-reduction and rationalization programs. In addition to using our TQPS system, to further lean out our other operations.

We have dedicated teams focused on developing suppliers in the emerging market areas of China, India and Eastern Europe. And we continue to pursue select, strategic acquisition candidates that complement our existing business, by offering us entry into new geographies, industries and product lines.

In summary, we are incredibly pleased with our Company’s performance for 2005. And we're even more excited about the prospects for our business in 2006.

For 2007, we are currently quoting a very large amount of new global business, and we expect to win our portion. Much of it is an offset to 2007 North American Class 8 cycle.

With that, I'd like to turn the call over to Chad, who will go through the details in our 4th quarter 2005 results, as well as the outlook for the 1st quarter and the full year of 2006.

Thanks, Merv.

As Merv did indicate, we are extremely pleased with our 4th quarter and full-year results. Our operating performance was again strong, this quarter. And our diluted EPS was above our guidance of $0.57 – and in line with the average market expectation of $0.58.

As we look at the full-year performance, recall that we began 2005 with a full-year EPS guidance of approximately $1.80. After 3 successful acquisitions and a successful concurrent equity and high-yield offering, our year ended with an EPS of $2.51 – for an increase of approximately 40 percent – while at the same time, taking our overall leverage to 1.34 times on our pro forma basis.

With that said, before we begin discussing our results for the quarter, it is important to note that we did have a gain related to certain one-time events, during the quarter. These non-recurring events equated to approximately 550,000 in operating profit and EBITDA. These events relate to the net effects of adjustments for the termination of a retiree medical plan, and other non-recurring provisions.

While the net gain did improve our results for the quarter, excluding these adjustments, our operational results remain extremely solid, and in line with contribution-margin expectations.

As we look at our revenues, the quarter came in at $200.1 million – which is up 98 percent versus the $101.3 million recorded in the prior-year period. This increase resulted primarily from the addition of the Mayflower Monona and Cabarrus Cabarrus operations – which accounted for approximately 96.3 million of increased revenues, over the prior year.

In addition, approximately a 5 percent increase in the North American heavy truck production, combined with organic growth, annual price adjustments and other typical market-and-content fluctuations, equated to approximately 2.2 million of increased revenues over 2004.

Higher OEM sales in the European and Asian markets accounted for increased revenues of approximately 2.3 million – offset by approximately 1.9 million of reduced revenues from FX fluctuations versus last year.

When comparing our revenues to our guidance for the 4th quarter, reported revenues were 6.9 million – or approximately 3 percent below our guidance. Class 8 production volumes equated to approximately 82,000 units versus our guidance of 79,000 units, and did have a modest, favorable impact on our revenues for the quarter. However, lower-than-expected production levels with certain customers during the quarter was the key factor in driving our lower-than-anticipated sales level.

As a result, our overall revenues relating to the North American operations were approximately 5.3 million – lower than our estimate for the quarter. In addition, the European and Asian markets – along with FX fluctuations – accounted for approximately 1.6 million in reduced revenues from the expected levels for the quarter.

While our overall markets were in line with the expectations for the quarter, it is important to remember that customer and product or model mix can have a higher impact on sales level, in any given quarter or year – which we have consistently mentioned.

Operating income for the quarter was 22.5 million – or 11.2 percent. This is an increase of 80 percent from the 12.5 million or 12.3 percent reported in the 4th quarter of last year – and yet it’s still mitigated by the impacts of increased steel and petroleum-related raw materials, utilities and freight costs, over the prior year.

SG&A for the quarter was $13 million, or 6.5 percent of sales, as compared to 7.7 million – or 7.6 percent of sales from last year. This improvement as a percentage of revenues is primarily the result of the sales growth in excess of SG&A growth, and the admission of Mayflower, Monona and Cabarrus, at reduced SG&A levels.

SG&A was slightly higher than our estimate for the quarter, due to certain programs and initiatives of the Company. However, as we will discuss when we discuss 2006, SG&A is expected to remain at approximately 6 percent of sales for the coming year – which we had discussed on our last call.

Depreciation was approximately $3 million, and amortization was $141,000 for the quarter. Capital spending was approximately $11 million for the quarter, and 20.7 million for the year – which is in line with our estimates provided throughout 2005.

Interest expense was 3.7 million for the 4th quarter – compared to 1.3 million from the same period, last year. This increase is primarily the result of the increase in debts related to the acquisitions – and, again, was in line with our expectations.

Our effective tax rate for the quarter was 34 percent. This is an improvement from our estimate of 37 percent, and is related to adjustments to our overall effective local, state, federal and foreign provisions – as well as a favorable adjustment from the R&D tax credit analysis work, which we performed in the quarter. These adjustments have been taken into consideration for our ongoing 2006 rate – as we will discuss, shortly.

EBITDA for the quarter was approximately 25.6 million – or 12.8 percent. This is an increase of 80 percent – from 14.2 million or 14 percent for the same period in 2004, and just slightly lower than our guidance of 26.5 million – yet the same percentage of sales, at 12.8 percent, as our guidance.

To reiterate – excluding the one-time gain of approximately 550,000 – which I previously mentioned – our operational results were in line with the expected contribution margin versus the change in sales for the quarter.

As Merv mentioned, our balance sheet remains strong, as the Company generated approximately $16 million of free cash flow during the quarter. Our net debt position, at the end of the 4th quarter was approximately $150 million – and again, directly in line with the estimate we provided on our last call.

Our net debt-to-pro forma EBITDA as of the end of the year, was approximately 1.34 X. Our net debit-to-book capitalization was approximately 43 percent.

As we look toward 2006, we have based our guidance for the year on 350,000 North American Class 8 units. We estimate that the global construction market will show a favorable increase of approximately 5 percent over the volumes produced in 2005.

We anticipate our net organic growth for 2006 to be in the range of 5 percent of our 2005 sales -- and again, directly in line with what we have always indicated.

As a reminder, we have certain programs which will phase out during 2006, which were identified during the diligence process of the Mayflower-Monona acquisitions, relating to the specialty-vehicle – Ford-GT – program, and specific wire harness programs. These programs equate to approximately $16 million of revenue increase for 2006.

Revenues will be impacted, based on our standard price-reduction commitments, in the range of 1-2 percent. The most important piece to take away from that is this is beginning, immediately – for the most part – in the 1st quarter of 2006.

Also included in our estimates for 2006 are incremental sales, relating to the pass-through of material cost increases. Primarily, for steel and petroleum-related products – which we've seen increase, over the past year and into the 1st quarter of 2006.

Incremental to 2005, and net of recovery, we anticipate that we will absorb approximately $3.3 million for the full year of 2006.

We have estimated the incremental impact of our increased freight-and-carrier costs to be in the range of $2 million for 2006.

We have given no effect – positive or negative – for any impacts of market-to-market, of our FX contracts. Our tax-rate assumption is approximately 37.3 percent. Our interest rate on senior debt is assumed at 7 percent. And the rate on our $150 million senior notes is at 8 percent.

Finally, the Company adopted FAS123R on January 1st of 2006 – and as such, will be required to begin expensing stock options and grants as of that date. We have estimated the impact of the adoption to have a pre-tax impact of approximately $1.9 million for the year – or approximately $0.06 EPS.

It is important to note that, as we discuss our 2006 estimates, this expense has been included in our "Other Expense," below the operating line – for comparative purposes. However, it will be recorded in SG&A for GAAP, in our future filings.

The Company has a weighted average approach regarding common shares outstanding, and therefore estimates approximately 21.3 million diluted shares outstanding for the 1st quarter, and full-year 2006.

Given these assumptions, our expectation for revenues for the full-year 2006 is in the range of $880 million to $895 million. Our EBITDA is expected to be in the range of $118 million to $122 million. Assuming 21.3 million diluted shares, and excluding the expensing of stock options, our EPS expectation is in the range of $2.61 to $2.71 per share.

In comparing our guidance to the models available – which comprised the average market expectation of $2.90, there are a few key factors which have been included in our guidance, and should definitely be considered, when estimating 2006. From an operating standpoint, recall the incremental freight and net material cost increases are estimated at a combined $5.3 million impact for the year – or approximately $0.16.

From a non-cash and non-operating standpoint, an increase in depreciation related to asset-revaluations and capital spending accounts for approximately $0.05 – while non-cash amortization of deferred financing fees will remain a cost as in 2005, and accounts for approximately $0.03.

So to summarize, for comparative purposes only, excluding these few factors and the expensing of stock options, our EPS would have been in the range of $2.85 to $2.95 – and directly in line with the average market expectation.

In addition to the estimates already provided, the following are key figures to give further color on our estimates for 2006.

We estimate 85 Class 8 units for the 1st quarter, 89 for the 2nd quarter, 87 for the 3rd quarter and 89 for the 4th quarter, for a total of 350,000 units.

SG&A – as I previously mentioned – is expected to be in the range of 6 percent of sales. Interest expense – including non-cash amortization of deferred fees – is expected to be approximately $14 million for the year.

Depreciation of approximately $16 million for the year – amortization of approximately $300,000 for the year – and capital spending of approximately $24 million, or approximately 2.7 percent of sales.

As I previously indicated, our net debt position at the end of 2005 was approximately $150 million. And our net debt-to-pro forma EBITDA was approximately 1.34 X. With our expected free cash flow generation and working capital movements, we anticipate our net debt position to be in the range of $105 million at the end of 2006 -- and our net debt to EBITDA ratio to be in the range of 0.9 X.

As we look toward the 1st quarter of 2006, we believe that our revenues will be in the range of $216 million to $220 million – and our EBITDA is expected to be in the range of $25 million to $26 million. Assuming 21.3 million diluted shares, and excluding the expensing of stock options, our EPS expectation is in the range of $0.51 to $0.53 for the 1st quarter.

As we review our 1st-quarter estimates versus the full-year 2006, recall that certain events such as standard annual price adjustments, as well as annual wage or inflationary adjustments will have an immediate impact at the start of the year, as opposed to productivity or efficiency programs, which progress further into the latter stages of the year. It is primarily for this reason that we had estimated a progressive increase in earnings from the 1st quarter, compared to that of the 4th quarter or full year of 2006.

Again, to summarize, as you may recall, I previously mentioned we did begin this full year at approximately $1.80 EPS for the full year of 2005. After 3 successful acquisitions and again, the successful concurrent equity and high-yield offering, we ended with the year of $2.51 – which is approximately 40 percent – while at the same time, ending with a pro forma leverage of 1.34 X.

Again, we are extremely proud of the progress that we've made this past year, and we look forward to 2006, and continuing the success we have achieved since becoming a public company a mere 18 months ago.

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

At this time, I would like to remind everyone, if you would like to ask a question, press *, then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the q-and-a roster.

No questions?

Your first question comes from John Emerich.

Just looking at your EBITDA and [inaudible] interest expense, SG&A and capex and coming up with free cash flow of roughly 49 million. That’s with cash from operations – excluding any working capital changes, I guess. Is that about right?

Yes. Net debt at the end of '05 – you're talking '06.

Yes.

Net debt at the end of '05 was about 150 million, and I believe I estimated it to be around 105. So, yes. Around that 45 million.

Right in there. Okay.

Yes.

Actually, that’s all I had. Thanks.

Thank you.

Your next question comes from Joel Tiss.

I wonder. I have a couple of questions. I don’t want to take the whole time up. But in the beginning of the call, you mentioned a bunch of different product wins. I wondered if you could give us some idea of the significance of those. Maybe – if you don’t want to get too specific – just sort of in aggregate, what that would mean.

The seating wins – if you look at those – if you look at all the interior systems wins… Maybe that’s the best way of doing it. For '07, the wins that are predicted to start up in '07 – you're probably looking at $55 million. Then for the international piece of it, that would start later. The wins would probably have been in the 60-65 million area.

Okay. Thanks. And can you give us an update on acquisitions – how they look? What you guys are thinking for the next 12 months?

We have spent a great deal of time in the last quarter and the first part of this year, looking at some very strong candidates for acquisition. Most of them have been in the emerging countries. China, India and the Eastern European countries. We see some very good candidates there, and are progressing well with the review of those.

We obviously have the need for Eastern European plants. But we're looking at some very strong candidates that already have market position. We've always had an eye out for the acquisitions, and we’ll continue to be that way.

Also, on the cost side. Could you just give us a sense of why it’s so difficult to recover the cost increases in 2006? I think it seems like you guys have done a better job of that in the past, or had more flexibly to recover those cost-increases in the past. I just wondered if anything’s changing, here, to account for the gap?

When you look at foam products, for example, compared against steel products – the steel products covered a lot more suppliers than the foam products do. The foam products in North America were much more affected than the foam products pricing in the rest of the world.

In North America, we had Katrina – which wiped out some of the plants that produced the chemicals that go into the foam, in the Gulf Coast area. We also had the major foam producer in North America go bankrupt in the 4th quarter. So you look at those 2 things, specifically to North America foam – which we use a great deal of in our interior systems – and we're not seeing it pushed by all suppliers. It’s not a global example.

Since we do have standard position in all the customers, we're the only one in there pushing for seat foam. And about the same way with interior foam.

Joel – not to mention – if you look at just '06 and '07, with organic growth of, even just say 5 percent… You're looking at $80-100 million of organic growth with these customers – which – to absorb a smaller fraction of some of those material increases, like we did in 2005, goes a long way for those relationships, to allow those wins to happen.

Okay. I get it. Aren’t you probably about the same place that you were when the steel increases were impacting us at the beginning of last year?

Yes. We're probably around in the 75-80 percent recovery. As I mentioned, we're looking at net incremental increases that we will absorb this year of around between $3 and 3.5 million. I think I indicated 3.3.

If you recall, the last couple of years, it’s been in the $6 to 9 million – over the last couple of years. So the impact is getting less, and the organic growth and the relationship is definitely getting stronger. So we feel it’s definitely paying off.

Okay. And just the last question. Can you give us just sort of your off-the-cuff view on 2007? What the industry looks like, and what you guys can do to react to the changes out there?

We've had numbers anywhere from 200,000 to 265,000, as what the market’s going to do. We have no better clue than you guys do, with the exception that we all have an indication – based upon 2006 numbers – how much the pre-buy is going to affect 2007.

We still know the average years on the trucks are much more than what the fleets would like to keep it at. We know those are going to affect it. So we're probably – in our own mind – thinking 2007 is going to be less than what we see some of the predictions coming out of some of the analysts.

We also – in our Company – if you look at it on Class 8 – it’s 44 percent of our current business in revenue. If you look at the strategic moves that we're making, there's less and less dependence on just Class 8, alone.

I cheated. I have one more. In terms of how the flow of business is going, and the way that the order slots are filling up – what’s your best guess at when we may see an inflection point in the orders, in 2006? When we transition from a higher level to a lower level?

In 2006? I don’t really see us dropping much of a lower level. I think the industry will continue to run at about the same rates that we came out of 2005 running. I think if there's a drop down, it would put too much pressure on the engine and the number of orders that are coming in.

I was talking about the order levels. Where we're running at sort of 35,000-plus per month.

Yes. I think you’ll see that spike up in the 2nd quarter and 3rd and 4th – on the orders.

Okay. Thank you.

Your next question comes from Jamie Cook.

Hi. Good morning. Could you just talk a little bit about your expectations for Europe in 2006? If you're seeing any improvement there, and how that should impact more of the construction on that side of your business?

Are you talking about the overall market, in general?

Yes. I'm just talking about the market, in general. What we're hearing from some companies that supply into that market, is that business could be picking up in '06. I guess I'm just trying to figure out what your expectations are.

Yes. If you look at the production volumes – if we just look at the current models that we supply out of Eastern Europe – we are definitely including a volume spike from '05 to '06.

What we've included in our estimates is around 5 percent, on a global basis. If you average it out, I think we're assuming around 4 percent for Europe and Asia, and a little higher than that for North America – for the models that we supply products for.

So in answer to your question, yes. We are definitely seeing and anticipating an increase in volumes for '06.

We're expecting – from what we see – the European market probably to jump about 7-8 percent. That’s what we're reading, anyway.

Okay. Then next, I guess, could you provide… I don’t know if you’ll do this, but could you provide any more color on the revenue shortfall? If you can? I guess, related to the lower production levels with your customers?

Sure. One major OEM that took out two weeks?

Yes. There was some production that was removed in the 4th quarter that was not included in our estimates. That particular customer or any particular customer – depending on the mix and the models that we provide products for – can have a lot of significant or more significant impact on our sales.

For example if we sell sleeper units or cab structures and seats and interiors to that particular customer – when they take 2 weeks out, it’s going to have a more-dramatic impact on you than if the entire market goes down by the same amount. If that makes sense.

It’s more of a content shift from our estimates, than anything.

Okay. Great. Thank you very much.

Your next question comes from [Marty Pollack].

Couple of questions, actually. Is it possible you could break down the pricing? The net price by actual nominal price increases? And then at least give us what the actual cost increases are for steel and plastics, et cetera? And their impact on '05 and '06?

Well, '06 – your material pricing… I don’t want to get into the gross amounts. But we've mentioned 75-80 percent recovering, and absorbing approximately 3 – $3.3 million for '06. That roughly represents 25 percent of the increases we're seeing on a gross basis.

From a pricing standpoint, we have price-downs for our contracts – long-term agreements with our customers – as we've always indicated. They range from 1 percent to 2 percent – depending on which customer it is.

And which product.

And which product.

The key thing about those price reductions – as I mentioned – is many of those – or a majority of those – are impacted on a calendar basis. So you’ll have that impact immediately, January 1st – as opposed to, again, productivity or efficiency, from an operating standpoint typically increases throughout the year. So you kind of have an offset or an incremental change in your margins from a 1st-quarter to a 4th-quarter approach.

With regard to just gross margins – looking year-to-year, and again, I'm not sure how much of the acquisitions clearly affect all of this. But, gross margins quarter was 17.8 percent versus 20 percent last year. Looking forward, sort of looking at the incremental margin, [inaudible] with all the acquisitions in there, it’s still fairly modest, incremental – I think around 10 percent, or so.

Looking forward – especially with your guidance in place, now, for '06. Are we getting any incremental margin growth for this new estimate, with this guidance?

Yes. You definitely are. If you look at it – it’s a little complex to look at, year-over-year, just a revenue-and-profit to a contribution. 2006 was a little bit different, because you've got sales or revenue increases from material pass-through. Okay? That inflates your sales. Say you take the $10 million from '05 to '06 – while it deflates your profit. Because you have a net absorption.

Yes.

Then you've got pricing of, say, maybe the same number… $8 to 10 million off the top line and off the bottom line. Then, another item of that is – if you recall – we talked in the last conference call of certain mix changes where we pass through material content for a certain program with a customer, and we may achieve a 3-5 percent margin on that business. That may be another $10 million of inflated revenue – where we're only achieving a 3-5 percent margin.

So you have a lot of one-off situations, when you're comparing '05 to '06 that definitely need to be considered. If you back those out, you're definitely getting in that 20-25 percent contribution margin range. So it’s a little apples-and-oranges, but those are the things that are really taken into account.

Not to mention freight increases and other one-off items, when you compare '05 to '06. The variables have changed.

Yes. With regard to… This is my last question. Clearly, who knows what’s going to be in '07? But if one looks, again, at the decremental margin, with obviously so many business offs that you described… What kind of decremental margins do you think you can actually hold to, as we see – perhaps – the normal decline that’s out there for truck? I mean do you think the 20-25 percent would still be the kind of thing you could do on the down side?

Absolutely.

Yes. Our variable and fixed-cost structure – if it goes down to that – even the lower level – we're pretty confident we can stay in that 20-25 percent range. Because of the flexible manufacturing capabilities that we have.

Over time, of about 20 percent on a normal basis. And we run temporary employees at about a 20-25 percent ratio. So the first thing that happens, when we go into a downturn, is we take the overtime away. Then the next thing is, we start floating the temporaries out.

Thank you.

Your next question comes from [inaudible]

Yes. Hello. Thank you. With regard to '06. I know on the last call, you mentioned "shortages." Has that been an issue in the 4th quarter? Was there any expectation, with regard to the builds by the OEMs?

It was an issue of some magnitude. But near what it was at the first part of '05. That one happened with one of the customers that we have a significant amount of business with.

So you don’t expect that into '06, at all? There's no issue, there?

I didn’t expect it in '05. So, no – I don’t expect it in '06.

With regard to the contribution margins. In the case of Cabarrus and some of the others in the plastics area. Do you expect that contribution margin to remain weak? And then also, you mentioned revenue costs and [inaudible] foam and the like. Is the contribution margin still being impacted by those issues, and the insurers' cost?

If you look at 2006 – our resin increases and things of that nature – that’s included in that net 3.3 million. So naturally, it will have some impact. But from a true contribution-margin standpoint, no. That variable in fixed-cost structure for acquisitions is in line with the 20-25 percent that we've been discussing.

With regard to the foam-producer. Is there a second, given the bankruptcy? Are you looking for a second supplier, there?

We are looking for a 2nd, 3rd, 4th and 5th. We've even gone to the extreme of looking at encapsulating the wire frames in China and vacuuming the foam to take up less space, and shipping it over. So, yes – we are pursuing some very aggressive, alternative.

They've got a new buyer coming onboard. Hopefully, for the bankrupt company. We’ll continue to work with them ’til we can get a transition, or either we’ll get them to agree to the pricing changes.

Do you have a second supplier, at this point?

Yes.

Thank you.

Your next question comes from [Guy Barron].

Hi. Good morning. A few questions, here. First off, just quickly – Pro forma before EBITDA last year – do you have that number?

2004 Q4? No, I do not have it available in front of me.

Then just sort of looking quickly to your guidance that you've given for the 1st quarter of '06. If I'm sort of doing the math right, I think I'm sort of estimating what your EBITDA looked like in the 1st quarter last year on a pro forma basis. It looks like you're guiding to sort of a flat to slightly-down number.

As we sort of look to the year and the guidance you've then given for the full year, where do you sort of see that organic growth coming from? And maybe is it a timing issue? How does that then relate to some of the mix of material issue that you've talked about, as well?

If you look right off the bat, there's a 1-2 percent drop in the top line and the bottom line, for customer negotiations – productivity drops. Then, during the year, you've also – at the first part of this year – you’ll see the impacts of the resins and the foam materials that goes in. Then, during the year, that hits in the 1st quarter. Then during the year, you see the improvements taking place in our shops, across… in each one of the global locations we're in.

So you've got those, and you've got obvious cost-reductions, where we're going after in the emerging countries, and have a good handle on, that will show improvements in the percentage, all through the year. But most will start more toward the 2nd and 3rd and 4th quarters.

Just sort of backing up for a second on the acquisition issue. Is it sort of fair to say that you are looking at any given time at maybe a half a dozen to a dozen different targets – different areas? Then what is your view or maybe appetite change – if at all – in a changing production environment?

We don’t see it. We are currently looking at – like you said – a significant number. Each quarter. Always, really. If you talk about our appetite, being leveraged as low as we are, our appetite will remain strong. But it has to meet the criteria that we've always said – that we've stated.

It also has to fit into the geographic area that we're looking for – because we are looking to diversify enough that… Currently, we're 44 percent in a Class 8 market in North America, and we continue to look at taking that to a lower number.

So just from a leverage perspective, does your objective or commitment remain in keeping it under 2.5 X in the [inaudible]?

Even in a down market.

Longer-term, I know there's sort of a view out there, and I believe it’s consistent review as well – that following an anticipated drop-off in '07, to whatever degree... Volumes would then, presumably, sort of rebound in '08 and '09 – heading into the emissions changeover in '10. Can you maybe give some more color on maybe how that emissions changeover that’s expected really differs to the ones in '02 and '07? In relation to what’s required as costs to the drivers?

Then, maybe more specifically, what is your level of confidence that the bond levels would rebound -- and do they rebound potentially tied to customers sort of de-aging their fleets ahead of that changeover?

Well, that’s a lot of economics for a non-economic person. But I guess what we see in '08 is that it does rebound back up to the levels that are well-above the 300,000 levels in '08 and '09. Then in '10, the engine – from everything that we are understanding – and we're not engine people – is that the engine is a major change in the engine. Not just a modification, like went on in '02 and '07. Both [home] items. Supposedly, the air that goes in is dirtier than the air that comes out.

But we do see… If that is the case, then the engines will probably be a more-expensive item in '10, and you’ll probably see a pre-buy in '08 and '09, just due simply to the fact that the age of the fleets, as we just talked about… and especially if there's a slowdown in '07, where not as many people are buying it. Then the age of the fleets obviously are going to go up higher.

Do you know, specifically, what the cost-differential is? Or maybe what the cost would be to operators or drivers, to sort of switch the engine versus pull that [inaudible]?

I do not feel comfortable speaking on that. That’s not my area.

Thank you.

Your next question comes from [Shawn Nicholson].

I just had a question on the acquisition. I know you guys have stated the emerging markets look better than here in North America. But what kind of products are you looking at, as far as which ones would be most attractive to you?

Wiring harnesses. Interior trim products and cab structures. Or anything that goes into the cab, or anything that’s bolted onto the cab.

From a product or process standpoint, our approach is the same strategy. Whether it’s in a developing country or in North America. Obviously, with some focus on additional diversification. But the strategy would be the same in North America, versus anywhere else.

In Eastern Europe and Asia, we would also be looking at products that go into buses – much more than what we would in North America. Because the number of buses in those countries are much higher-build than what we have in North America.

That’s why I was curious – if there was anything other than Class 8 type of products that you'd get into.

Of the last 3 acquisitions that we have made, or the only 3 that we've made since we've gone public – 2 of those acquisitions are not in the heavy truck business. One is in… When we bought it at the time, it was totally construction equipment, on the wiring harness, and some agriculture. The Cabarrus Plastics was zero in the heavy truck, and mostly in the water sports and the ATV areas.

It will have truck business put into it. All of these will, as we cross-sell the products into our customer base.

The one thing… I don’t know if you guys pay attention to what other people are forecasting for '07… I know ArvinMeritor came out and said they expect 325,000 units for Class 8.

What do you guys derive your estimates from?

Are you saying that they're saying that for '07?

'07. Right.

We think that '07’s not going to be as drastic as some are predicting – simply for the fact we do not see the ability to build all of the demand that will be for a major pre-buy in '06. We think it’s going to be… If it hits down as low… has an impact… probably get around 250-265,000 units.

I'm sorry. It was '06 that they said 325. Not '07. You guys aren’t too far off on your '06 guidance. Instead of [125,000, you guys are at 350. Obviously, [inaudible] [crossing]

[I think they're] backing off from what they produced in '05. Simply because of the engine change. That’s the reason we left it at the '05 run rate.

That’s all I had. Thanks, guys.

I would like to remind everyone – if you would like to ask a question, please press *1 on your telephone keypad. Your next question comes from David Leiker.

A number of questions. I just want to verify something [inaudible], Chad. Do you think capex for '06 of 24 million and '07 of 16 million?

Just '06 of 24. I didn’t give an '07 number.

Then 16 million for depreciation and amortization?

Correct. Just the 16 million for depreciation.

[inaudible] talking about in '07 and '08 and then '09, with the Volvo. Where does the capital spending number move?

At a similar level. We talked about it before. We've got a lot of programs that are out there right now for '07 and '08 starts that we're working on, already. So I would expect it to stay within the range of that 2-2.5 percent that we've more historically been. Even '06. Or slightly higher than that. But it’s still going to stay within that range. It’s just a best-guess, at this point.

A lot of our programs for new business and global expansion are more or less underway. Obviously, that could change tomorrow or whenever, but as of right now, I would expect it to still stay roughly the same, or slightly lower.

In the 80-95 revenue number for '06… I'm thinking that there's probably about 60 million in there from Mayflower and Monona. Does that sound about right?

From a pro forma basis?

Well, you've got Mayflower for one month – and Monona for 5 months. So it wasn’t in '05 numbers.

Yes. The '05 pro forma number for all three is around like 75-76 million. Something like that.

786. Okay. And the current… The 1.9 million number that you gave for currency. Was that currency in European end-markets, or just currency?

That was just currency fluctuation. [inaudible], really.

The 38 million for new business that you talked about… That is not net of the 16 million of business that’s running off. Correct?

No. That’s a gross number.

Working through my questions, here. All of the guidance numbers you gave exclude the impact of FAS 123. Correct? The EBITDA and the EPS?

That’s correct. For comparative purposes.

Okay. Then one last number question, then a couple of other items. Looks like there was a reclassification on the balance sheet that boosted the goodwill. [inaudible] I think there was about a $20 million jump from the 3rd quarter.

From the 3rd quarter?

Yes.

Hang on just for a second. It might be classification of intangibles. Valuation [trust]. Customer-relationship trust. More than likely, that’s what it is.

I mean the fixed-asset number went down maybe 20, and the intangible and others went up by about 24 million. [inaudible] [crossing]

Maybe we can just follow up on that.

Yes. I can follow up with you when we look at it, here.

I don’t know if there's a way to really answer this question. But if you look back at the business as it existed 12 months ago – at the start of 2005 – is there some perspective you can give us on how that piece of the business performed, without the 3 acquisitions in '06?

That portion of the business performed very well. [inaudible] systems and the interior group – National Seating. Cab continues to be strong producers – which is really the bulk of the business that we had before '05.

What about quantifying the revenue performance or EBITDA performance?

I don’t have them broken out in front of me like that. But what we do is look at the margins each month, and go through the structure and the cost and things. We get down to that level. It’s starting to become very hard to do that, since we're producing a lot of the products in the same factories now, today.

You go into an Interior Systems plant, you’ll see seats and interiors, in most of them. You go into some of them and you’ll see some of the electromechanical group, with the wipers and mirrors in them. It gets very hard to chase that thought.

Then I don’t recall you really talking much about the aftermarket piece of the business, and what the status of that is – how it’s performing and if there are any opportunities, going out into '06 and '07?

The aftermarkets perform very well. I think even talking to a lot of the automotive aftermarkets for winter… Even though it seemed very cold to us, it’s been a very light winter, in comparison to past winters. So you see less replacement of wiper systems in the past, what we had – which has dragged our aftermarket number down somewhat.

We've seen significant growth in the aftermarket portion of our business, and we continue to see significant growth in the next 2 years – especially in some of the markets that we have, today. We increased the penetration of that market into aftermarket.

Currently, if you look at our business, really the only things that we have in the aftermarket are wipers and seats. So the rest of our business is very wide-open, to take into the aftermarket business with new products. That’s one of the things that we're pushing on.

We've added over 100 distribution points in this past year.

One more number question. Do you have a cash-from-operations number for the year?

For the year? For the quarter, it was 16. I think for the year, the change in net debt was around 40.

It’s somewhere there in the cash flow line items. Cash from operations.

It'd be a little different, because I'm looking at true net change. Excluding the acquisitions, you're looking at 40-45 million. Somewhere around there.

That’s the cash-from-operations number off the cash flow statement?

No. It will not match the cash flow statement, because of the acquisition activity and the equity and high-yield activity.

Okay. So 40-45 million is the '05 number ex-acquisition impact?

Correct.

[inaudible]

Yes.

Congratulations on everything you guys have accomplished the last 18 months.

Thanks, David.

Hey, David – just a follow-up. The change in the intangibles on our assets. The reclass is related to the customer relationships – as you might know. T here’s a requirement to value customer relationships with acquisitions. That was completed for Monona in the 4th quarter. So that’s a reclass.

Great. Thank you.

Your next question comes from [inaudible].

I had a [inaudible] question. Is there some correlation you could describe between your own unit growth and the Mayflower business?

Your top growth and Mayflower?

Mayflower acquisition – currently – is being driven by the market growth and the business. Where the rest of the business is… You see more conquest business going on.

When you look at Mayflower, the conquest business has to come from… it takes longer to build tooling for our [inaudible]. It takes longer to get those moved around and moved in.

Anytime you're looking at new business for Mayflower, you're probably looking at it in the years versus in the months.

I actually mean just the core industry growth. As truck production is good, would it then [pipe] for the growth rate of revenues for Mayflower? From your existing customers.

From a Mayflower perspective versus the total market, it’s really what we discussed about the impact of the 4th quarter. Mayflower has 2 key customers, which… And a content on an average truck of anywhere from $3-6,000 versus any one of our other product lines – say interior trim or seats – are going to be in the couple hundred dollars, on average.

When the market shifts from a customer standpoint, it can have a further impact on Mayflower than it can on any other product line. So as the entire market grows, you have to look at the market share content by customer, because that definitely has a further impact.

One more quick question. The numbers you gave for the '07 business wins for interior, and then for international. Are those annualized numbers? Or were those your estimates for what would be recognized in '07?

That’s the number that Merv gave. It would be something that’s probably recognized in '07. And it’s in line with the 4-6 percent organic growth that we talk about. It’s a thing that we saw in '05, after the acquisitions and the 36-38 million that we're talking about in '06. It’s in line with that.

And you're still – apparently, you said – very active on potential new business for '07? Or would it be further out?

Yes. For '07 and farther out. We have a tremendous amount of business that we're quoting for these. Keep in mind – as we've always stated – our business in Europe and Asia is non-existent, almost, when you look at the heavy truck business. So everything that we're quoting over there is '07 business.

And can you quantify…

'09 – I'm sorry.

'07 and '09.

Can you quantify dollars of what you're quoting? The value of what you're quoting on? Not what you’ll win, but just what you're quoting on?

At any given time, we could have a couple hundred million dollars out there that we're quoting on. From various markets and customers.

So now you're quoting on… But is it more of what you're quoting on now versus a year ago?

Oh, absolutely.

It is a lot more, right?

Yes.

The implication – if you win your fair share – the 4-6 percent growth rate would be accelerated.

Yes.

Thank you.

And you have a follow-up question from David Leiker.

Just one quick one. For the EBITDA for '05.

112, I think. Yes. About 112, David.

Great. Thank you, much.

At this time, you have no further questions.

Okay. Thank you everybody for calling in. We look forward to speaking with you next time.

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