Commercial Vehicle Group Inc (CVGI) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Commercial Vehicle Group first quarter of 2006 earnings conference call. (Operator Instructions). Thank you. Mr. Utrup, you may begin your conference.

Thank you, and welcome everybody to the first 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 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 first quarter of 2006 and our outlook for the second quarter and full year of 2006. We will 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. I would now like to turn the call over to Merv.

Thank you, Chad. And thanks to everyone who has joined us today on the call. As you all know, there are many opportunities in the commercial vehicle industry right now. We continue to see strong demand from our customers in the heavy truck and construction markets.

Production volumes remained strong in the first quarter, with Class 5 through 8 North American build rates reaching almost 160,000 units. Approximately 92,000 of this production came from Class 8 market, with over 67,000 production units in the Class 5 through 7 markets. In addition, the backlog for Class 8 trucks totaled more than 220,000 at the end of the first quarter, the highest backlog in more than six years, while the Class 5 through 7 backlog totaled over 80,000 units. These backlog numbers point to continued strength in production through the second quarter and the remainder of 2006.

CVG has continued to grow in correlation to the markets and customers we serve. We've also continued to grow organically, taking advantage of opportunities to sell across industries and seeking out new production innovations to offer to our customers. We continue our search for potential acquisition candidates worldwide, which remains a key factor in our growth strategy. We are working every day to position the Company towards achieving our vision to become the preferred global supplier of complete cab systems to the entire commercial vehicle industry, including in heavy truck, bus, construction, agriculture, and marine markets worldwide. And while we know there's a lot more work to do to achieve this vision, we're confident that we are up to the challenge.

We made some significant moves to meet our goals and minimize our challenges. And before Chad goes through the financial results for the quarter, I would like to talk to everyone about some of these moves and the key events that helped shape our quarter. We filled many key leadership positions in our Company this quarter, our new Vice President and General Manager of the Electromechanical Division, a Director of Operations for the Electromechanical Division, and a Vice President of Purchasing for all CVG Americas. These roles are vital to our operations, and we're proud that we have the ability to attract a high-caliber of talent to our organization. Our quality products begin with a strong leadership from all levels of our Company, and we're confident that these individuals will add value to our operations going forward.

In the first quarter, we also took steps towards streamlining operations in our Electromechanical Division by announcing the restructuring of our wire harness plant in Spring Green, Wisconsin, and administrative offices in Naperville Illinois. The Naperville Illinois administrative office has been relocated to our Company's corporate headquarters in New Albany, Ohio. The Spring Green Wisconsin facility, which manufactures and assembles electric wiring harnesses for the commercial vehicle OEMs, will be relocated to existing operations located in Iowa and Mexico.

This was a carefully weighed decision which was made in keeping with our culture and the strategy of continuous improvement and cost management. We're confident that this decision will have a positive impact on our organization from both an administrative and operational standpoint.

Our OEM customers took notice of our stellar quality and service capabilities by awarding us a number of their annual supplier awards. The good news began in late February when our Engineered Vehicle Structures Division was recognized as the 2005 Diamond Supplier to the International Truck and Engine Corporation. Diamond Supplier recognition is granted to suppliers that meet or exceed International's performance expectations for quality delivery and cost.

Also, our stamping facility in Shadyside, Ohio was selected as the 2005 recipient of Fabricators and Manufacturers Association Award of Merit. This is the third consecutive year Shadyside has been honored with this award. It is a great testament of how seriously we take safety in our Company.

In addition, our Interior Systems Division received the Masters of Quality Award from Freightliner which recognizes suppliers who have consistently delivered top-quality products on time to the Freightliner Sterling and Western Star truck manufacturing plants. We are very proud of the quality and safety records of all of our facilities, particularly those recognized by our customers for their stellar performance.

We've taken a huge leap to further reach out to our investors, partners, customers with the launch of a new, enhanced CVG website. The website has been completely redesigned and updated with new content and navigation features. Visitors to the new website will find detailed information on each division within the CVG family of companies, as well as areas specifically designated for Investor Relations, research and development, and Company news. In addition, visitors will have the ability to perform searches based on selected industries or products. We invite you to check out our new website at www.CVGRP.com.

We ended quarter with a high note, unveiling our CVG model truck cab at the annual Mid-America Truck Show. The model truck cab, which highlights our One Company One Solution concept, was made entirely by our staff of talented engineers, comprised of products from each of our divisions. This project not only demonstrates the flexibility of our product line, but the breadth, scope and capabilities with our engineering department. Photos of the cab can be found on our newly redesigned website.

In summary, CVG has made monumental strides in moving towards our vision of becoming the preferred global supplier of complete cab solutions. As always, we have had to make some tough decisions. But through it all we have continued to be highly sought-after, highly recognized global supplier and partner to the commercial vehicle industry. We continue to develop solutions based on concepts that anticipate and exceeds the needs of the markets we serve. With that said, I would like to turn the call over to Chad for the details on our first quarter financial results, as well as our outlook for the rest of 2006.

Thanks Merv. Our operating performance was again strong for the quarter, as our revenues, EBITDA and EPS were all above our expectations. Before we begin discussing our results for the quarter, it is important to point out the change in our prior estimates due to the accounting adoption of FAS 123, as well as our change in diluted share count.

As you may recall, we previously provided EPS guidance for the first quarter in the range of $0.51 to $0.53, and $2.61 to $2.71 for the full year. These estimates were based upon 21.3 million diluted shares, and excluded the expense impact for share-based payments. Including this expense and adjusting diluted share count to 21.5 million shares, our previous estimate ranges should be adjusted to $0.49 to $0.51 for the first quarter, and $2.51 to $2.61 for the full year. Given the reality of these impacts, we will use these figures for comparative purposes as we discuss our first quarter results and outlook for 2006.

As we look at our revenues, the quarter came in at $229.3 million, which is up over 50% versus the 152.4 million recorded in the prior year period. This increase resulted primarily from the addition of Mayflower, Monona, and Cabarrus operations, which accounted for approximately $52 million of the increased revenues over the prior year period. In addition, approximately 13% increase in North American heavy truck production, combined with organic growth, annual price adjustments, and other market and content fluctuations equated to approximately 26 million of increased revenues over the prior year period.

Higher OEM sales in the European and Asian marketing accounted for increased revenues of approximately 1 million, offset by approximately $2 million of reduced revenue from foreign exchange fluctuations versus 2005.

When comparing revenues to our guidance for the first quarter, reported revenues were approximately 11.3 million, or 5%, above the midpoint range of our guidance of $218 million. Class 8 production volumes equating to approximately 92,000 units versus our guidance of 85,000 units and higher than expected production levels in the construction sector were the key factors driving our higher than anticipated revenue level for the quarter.

Operating income for the quarter was 25.5 million, or 11.1%. This is an increase of nearly 53% from the 16.7 million, or 10.9%, reported in the first quarter of 2005. As mentioned in our press release this morning, we did record a onetime curtailment gain during the quarter relating to the freezing of one of our salary pension programs. This non-recurring event acquitted to approximately $1.4 million in operating income and EBITDA, or approximately $0.04 per diluted share for the quarter.

SG&A for the quarter was $13.2 million, or 5.7% of sales, as compared to $9.5 million, or 6.3% of sales, from the prior year period. This improvement as a percentage of revenues is primarily the result of sales growth in excess of SG&A growth, and the addition of Mayflower, Monona, and Cabarrus at reduced SG&A levels. SG&A was slightly better than our estimate for the quarter of approximately 6% of sales.

Depreciation was approximately $3.4 million, and amortization was $105,000 for the quarter. Capital spending was approximately $4.6 million for the quarter, and is expected to remain at approximately $24 million for the quarter, which is in line with our estimate provided earlier this year.

We did experience a slightly unfavorable pretax impact from marking to market our foreign currency contracts of approximately $230,000 in the first quarter, compared to a favorable impact of approximately $2.8 million in the prior year period. This is a non-operating and non-cash accounting entry, yet is a primary factor to consider when comparing year-over-year performance.

Interest expense was $3.9 million for the first quarter of 2006 compared to $2.2 million from the same period in 2005. This increase is primarily the result of the increased debt related to the Mayflower, Monona and Cabarrus transactions, and was in line with our expectations. Our effective tax rate for the quarter was 37.2% and also in line with our expectations.

EBITDA for the quarter was approximately $29 million, or 12.6%. This is an increase of approximately 49% from 19.4 million, or 12.8%, for the same period in 2005. For comparative purposes, excluding the onetime curtailment gain of approximately $1.4 million in the first quarter, our EBITDA was approximately $27.6 million, or 12%, compared to the midpoint of our guidance, including share-based expense, of $25 million, or 11.5%. From a contribution margin standpoint, this equates to approximately $2.6 million of increased EBITDA for the quarter on $11.3 million of incremental sales compared to the midpoint of our guidance, or approximately 23% contribution margin.

Our diluted EPS for the quarter is based on approximately 21.5 million diluted shares and came in at $0.62 compared to $0.59 from the prior year. To reiterate, a significant favorable currency adjustments last year and a change in diluted share count from the prior year are the primary non-operating changes which are masking the truly significant increase in our EPS year-over-year. For comparative purposes, excluding the onetime curtailment gain of approximately $0.04, our diluted EPS was approximately $0.58 per share. This is $0.08 or 16% higher than the midpoint of our guidance of $0.50, including share-based expense and on the same share count.

Our net debt position at the end of the first quarter was approximately $164 million, which is slightly higher than our expectations. However, we continue to 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 .9 times. Our net debt to pro forma EBITDA as of the end of the quarter was approximately 1.4 times. And our net debt to book capitalization was approximately 43%.

As we look towards the balance of 2006, we have revised our guidance for the year from 350,000 to 359,000 North American Class 8 units, as well as a modest increase in the global construction market. We have given no effect, positive or negative, for any impact of mark-to-market of foreign exchange contracts. Our tax rate assumption for the year remains at approximately 37.3%. Our interest rate on senior debt is assumed at 7%, and the rate on our $150 million senior notes is at 8%.

The Company uses a weighted average approach regarding common shares outstanding, and therefore estimates approximately 21.5 million diluted shares outstanding for the second quarter and full year 2006. In addition to these estimates, the following are key figures to give further color on our estimates for 2006. 92,000 Class 8 units for the first quarter, 91,000 for the second quarter, 87,000 for the third quarter, and 89,000 units for the fourth quarter.

SG&A expense remains in the range of 6% of sales. Interest expense, including non-cash amortization and deferred fees, is expected to be approximately $14 million for the year. Depreciation of approximately 15.5 million for the year, and amortization of approximately 400,000 for the year.

We have included the impact of FAS 123R, Share-based Payment Expense, in all of the following estimates, as we have now transitioned into recording the costs permanently on an ongoing basis included in our SG&A. For your benefit, our assumptions for such expenses are approximately $500,000 or $0.015 in each of the remaining three quarters, and approximately $2 million for the full year 2006, or approximately $0.06 for the year.

Given these assumptions, our revised expectations for revenues for the full year 2006 is in the range of 898 million to $910 million. This is an increase of approximately $16.5 million from our previous estimate, and is primarily related to the first quarter actual results, in addition to our anticipated increases in the Class 8 and global construction markets.

Our EBITDA for the full year is expected to be in the range of $121.5 million to $124.5 million. Again, please recall this estimate now includes approximately $2 million of share-based pay expense. This is an increase of approximately $5 million from our previous estimates and is primarily attributed to the first quarter actual results and the incremental margin on our increased revenue guidance for the year. Assuming 21.5 million diluted shares, our EPS expectation is in the range of $2.68 to $2.74 per share. Again, recall this estimate now includes approximately $0.06 of share-based pay expense.

That said, this is an increase of approximately $0.15 from our previous guidance, primarily attributed to the achievements in our first quarter, as well as the incremental change in our outlook for the balance of the year. As we look toward the second quarter of 2006, we believe that our revenues will be in the range of 227 million to $231 million.

EBITDA is expected to be in the range of $29.5 million to $30.5 million. And, assuming 21.5 million diluted shares for the quarter, our EPS expectation is in the range of $0.65 to $0.67 for the quarter.

To summarize, we began 2006 with a midpoint equivalent full year EPS guidance of approximately $2.56, including $0.04 for the change in diluted share count and $0.06 for the share-based payment expenses. Our revised guidance, using 21.5 million diluted shares and including share-based expenses, has been increased to a midpoint of $2.71 for the year. This is an increase of $0.15, or 6%.

While many of the items we have just discussed may seem repetitive or cumbersome, this transition quarter for adoption of share-based payment has had a negative impact on our operating results, and it is important that we make sure that we provide enough color during this transition quarter. On a go forward basis, this expense has now become a permanent part of our cost structure and will not be not be disclosed in such length, except for comparative purposes as appropriate. With that said, we are very proud of the progress that we have made this past quarter, and we look forward to the rest of 2006.

With that, operator, we would like to open up call for some questions.

(Operator Instructions). David Leiker, Robert W. Baird.

I wanted to try and dig through the revenue a little bit. I may have missed this as you said it. How much of the revenue increase came from acquisitions?

If you compare year-over-year on a pro forma basis, there's about -- hang on one second -- 52 million.

52?

52. And the balance of North America organic growth and change in markets is 26.

Okay, and how much -- we've been looking for still from acquisitions another 16 or 17 million in Q2. Does that sound in the ballpark?

I'm sorry?

For second quarter revenue from acquisitions last year 16, 17 million?

From last year?

Yes. It will be the last quarter before you anniversary it.

Oh yes, it's about 19 million for the first quarter.

Apples-to-apples going forward from there at the moment, right?

Yes.

Do you have the cash from operations number -- a GAAP cash from operations number?

It will obviously be negative because of the change in AR. It's around 8 or 9 million, I think.

Negative?

Yes.

Okay. Did you give a CapEx capital spending number?

It was 4.6 million, I believe, for the quarter.

Okay great. And then I like the way that you went through all the numbers. I think it was very useful and it answered a lot of the questions I was looking for. The one item I want kind of walk through a little bit is, if you look at Q4 to Q1, your revenues are up about $30 million, but the operating income is up 3 million. I just want to know if that is a seasonal issue, or if there is some cost issues there, or capacity constraints, or -- just kind of understand why that's only a 10% contribution to margin sequentially?

Probably the biggest piece on that is your annual price reductions year-over-year are typically on January 1st of each year for most contracts.

That's the biggest issue (multiple speakers)?

That's probably the biggest issue. As well as we have got a lot of our operations aligned to where annual performance reviews for hourly and salary are adjusted actually in latter December or early January. So you have the inflation or wage increases effective January 1 as well. So those two combined are the primary factors.

Great. Thank you very much. Nice quarter.

Joel Tiss with Lehman Brothers.

I wonder if you guys can talk a little bit about sort of the flexibility that you been building in, and how much flexibility can you build into your operations for fluctuations in the cycle in the future?

If you look at the pure direct labor and indirect labor content, we run about 20% temps. And on the overtime we are somewhere close to 15% overtime. So at any given reasonable period of time, say over a two-week period, you should be able to take out temps as the jobs go down one by one, or increase if the jobs go up.

On the overtime, that's an automatic cut off on the day that the product drops down. So we remain flexible that way. We've obviously have taken steps with the closure of one of the plants to consolidate and be further prepared for when those '07 drops, if it drops to the degree that people are predicting. And, you know, we are still seeing strong build and the ability to take cost out of our business through emerging markets, purchasing, and through emerging market building.

Would it be fair to think that 2007 costs down might be a little bit more aggressive than '06, just given all the other increases that are coming through -- you know, the engines and all the pieces that are required to house those engines, it seems like there's going to be a big price increase coming for the customers.

I don't think that -- I don't think that we will see any more pressure than what we have been seeing. Simply understand that most of our contracts are three to six year contracts with it already specified what our costs downs will be each year.

Okay, well, the last two I will just glue them together. Can you just give us the number or a range of expectation for free cash flow for this year? And also, can you talk a little bit about the raw material costs increases, other than you already spoken about wage inflation? And can you just talk about what's going on with other raw material prices, and maybe throw in availability supply chain stuff as well?

As far as the free cash -- this is Chad -- as far as the free cash flow, it stayed the same from our previous call. We are expecting in that 40 to $50 million range. Our net debt at the end of last year was 150 million. And I mentioned we still expect to be in that $105 million range at the end of this year. So 40 to $50 million of free cash flow for the year is within what we are expecting.

As far as the material increases, the material increases we started seeing towards the end of Q4 last year that had not been there as strong before, has been the petroleum-based chemicals. Those will continue to go up for awhile, we think. We are working with our customers, working with our suppliers to minimize the impact as much as possible.

The bottom-line with it all is if we get price increases -- if our suppliers get price increases because of petroleum, they have to pass them onto us. We have to be able to pass them onto our customer. And the ones that can't, and right now we're having very good luck with our customers and our suppliers to minimize it. But the bottom-line is that if we can't buy it because of the price because the customer won't pay it, then we have no ability to supply that part.

Is that actually happening, or is that something that you are just worried about in the future?

Right now, it's been accepted by all the customers, except for one. And we are working diligently with them to get a satisfactory answer to it so that there will not be any cutoffs to us from our supply base.

Okay, I lied, I have one more question for you. Can you talk a little bit about the ability to generate cash even in a downturn -- in a scenario that people are predicting for 2007 -- is there still some strong ability for you to generate free cash flow in the first year of getting more aggressive on collecting receivables, etc.? Or does the free cash flow generation ability start to decline in line more with the earnings changes?

No.

No, I mean, the base model of the Company doesn't change. Obviously, you are going to have some working capital adjustments as you go from -- if a Q4 2006 to Q1 2007 changes, you're going to have some working capital changes there. But the model doesn't change. It's in terms of EBITDA, and adjusting your CapEx levels, and relate your cash interest and cash taxes. And, no, I mean we've got a good model. Obviously, it will go down to some degree linear but, no, it certainly still in a good position.

David Leiker, Robert W. Baird.

I want to look at the year-over-year in Q2 your guidance -- you've got revenues up 25, $30 million, $35 million, and the EBITDA number is essentially flat. It's up 0.5 million, $1 million. I just want to walk through why there's not a bigger gain in EBITDA with that type of year-over-year revenue change.

Do you have the non-cash comp cost in Q2?

I give you 0.5 million. So, you're up 1 million to 1.5 million on a $30 million revenue increase.

I don't have it in front of me, David. I would have to walk through it.

I mean, okay -- I mean you are at -- I just want to follow up on that at some point.

No problem.

It doesn't look like you are generating any anywhere near a contribution margin you should be on that revenue.

Some of it may be related to steel pass through in terms of revenues, recording revenues that way. I mean, it's not going to be one or two things. There's going to be several factors. So that's why it's a little bit difficult to pinpoint it here. But, we can walk through it. (multiple speakers)

And then remember we have had some further guidances coming in here ahead of where the estimates are out there. Q2 is coming in below that. So is the offset there, do you think that's more a third quarter or fourth quarter as we go through and try to massage our numbers?

You know, I think we stated on the last call too remember, a lot of our productivity comes through the latter part of the year. A lot of our organic growth with starter production comes through the latter part of the year, and that's where you get some contribution margins. As you look at our year, we've got 92,000 Class 8. Just take that for example, and 91,000 I think is what we said for Q2, down to 87, and then down to 89. But a lot of the productivity and sourcing savings and things of that nature come through obviously through the latter part of the year.

Your negatives usually hit the hardest in the first part of the year with material changes, with the labor changes, and with the price down to the customers. And then towards the end of the year, you're building those back up through continuous improvement and engineering changes.

So you are looking at this as making essentially $1.27 in the first half of the year, and somewhere around $1.40, $0.45 in the second half, even though the production rates are going to be lower?

Correct. Keep in mind the production rates may be lower. That's kind of where I was going. Is 91 -- you're only talking it goes down from the first two quarters Class 8 from 183,000 units to 176 or so, something like that. So it doesn't go down significantly. Meanwhile, you've got, as we mentioned on the last call, 35 million or so of organic growth coming in, as well as changes in other markets. I mean that Class 8 is 50% or so, and then you've got Class 5 through 7. So there is a lot of other factors, not just the Class 8 piece. Obviously, you've got (multiple speakers)

(multiple speakers) got growth of 35 million. Is that pretty evenly spread through the quarter, or is that in the second half as well?

No, no, no. That's similar to productivity, as that the year progresses, that increases.

Adam Lesner, Credit Suisse.

Chad, can you tell us, what was the Q2 pro forma EBITDA last year, Q2 2005? Something like 31?

In Q2 2005, 32.

Okay, so it's sort of like in a similar scenario that David was talking about. Here we are in Q2, the revenues are up, but the EBITDA is slightly down year-over-year to the guidance you just gave?

Yes, and again there's a lot of factors that go into to that. I don't have them in front of me. It's something that we can also follow up with after.

Okay, what was the 23% contribution margin number you quoted earlier?

That's apples-to-apples comparison using the midpoint of our guidance, including the share-based expense. Actual Q1 to our estimates for Q1.

Then maybe one more. I was just thinking about some of the restructuring efforts and the plant facility closures you just announced. As we roll into 2007, is it fair to say that some of the changes that you might have plans for, are you being sort of held back by the function of the peak volumes that we are experiencing in 2006? And not only will you use the overtime and temporary workers flex opportunities when volumes come down, but you probably have a plan in terms of further restructuring that you intend to roll out?

Well, obviously, with the high demand that we're seeing right now, there's not a customer that we have would sign up for shutting anything that we have down, even taking the chance on a move, unless it's very very well-defined. And it's a guarantee that there is not going to be any interruptions. And that's the reason we've done one to date for this year.

So I guess that's (multiple speakers).

So clearly you can see with our -- I think clearly you can see with our Company that when we have opportunities to do cost reduction and improvement in the efficiency of our Company, we take those actions, even in a very tough time to take them.

Agreed. And how would you characterize the extent of the plan that once volumes were to come down and the customers would potentially sign onto moves that in a peak volume environment would be disrupted, but not so much in a lower volume environment. Is it a large-scale process that you intend to initiate or something slowly is going to roll out?

Well, I think it will slowly roll out because we have plans in place that are dial up plans and dial down plans. And just because it is a dial down plan does not necessarily mean that we're closing all factories. It could mean that we are closing one and increasing the size of another one. Because we have to still be prepared for a '08 upswing which everyone is predicting which is going to come very hard and heavy -- even predicting that in the probably in the third and fourth quarter we will start to see increases again.

And, Chad, anything in terms of the cost related to those plans that we should think about in our cash flow models for 2007 that would be anything significant?

No. Similar to our capital structure for ongoing maintenance and really start up facilities, I mean, the closure, obviously the biggest piece is going to be anything that might be employee related but nothing of significance.

Joel Tiss, Lehman Brothers.

I just thought of another one. Based on your experience, do you think that -- or what is your review on production carrying over into the first couple of months of 2007? You know, just sort of based on you've probably been through a couple of these different emission changes. What would you guys be thinking about early 2007?

I think that and past history tells us that there have been carryover in the engines that have been -- not been able to get into all the '06's. Let's put it that way. And do we know of any of the OEMs that is building up engines and sitting them in a corner, no. We don't. But history tells us that that sometimes happens.

I think when you look at the 2007 compare of prebuy to an '01, you've got major changes that are in comparison between the two years. The U.S. economy is much stronger. The fleet age is older. And the only thing they have in common really is the EPA changes. And also in 2001 there was a gluten of good quality used trucks, and 2007 there is not, 2006 there's not.

Okay. And can you talk a little bit about acquisition opportunities you are seeing outside of the U.S.? Is there anything that is sort of the backlog, or anything that looks interesting valuation-wise and fit-wise that's outside the U.S.?

We're seeing a lot of companies outside the U.S. that we have spent a great deal of time looking into the different regions, that we've always committed that we would. And we're seeing good opportunities for valuation and good opportunities for bolt-on companies. I don't think you'll see anything to the extent in size as what we did with Mayflower. But yes, we are seeing good opportunities, and we're spending a great deal of time with them.

Gregory Macosko, Lord Abbett.

Just with regard to inventory, just how does -- is that kind of an ongoing level and kind of what are we seeing there?

Well, we've seen it go up over the last 12 to 18 months. Obviously a lot of that related to sourcing -- through sourcing from emerging markets and taking possession. Depending on taking possession, you've got some increases on the boat, so to speak, as well as increases in steel and petroleum related products, you're naturally going to increase your inventory balance. So is it an ongoing balance? Obviously that's depending on the markets and the sales levels, but we definitely have a plan to increase our turns. The difference in terms of our turns, which you may compare to other industries, is the service oriented side of our business, which really lags down our overall turns as a Company. So is a permanent position? No. We definitely intend to increase it or improve.

And then finally, with regard to just new programs, new products, etc., on trucks going forward, is there -- can you just give us a feel for the 2007 calendar year, what kind of new programs will be implemented during the year?

In terms of customer contracts or you're talking organic?

Just general organic additional add-on growth 2006 versus 2007. Just give us a sense of it, if you can, some of the products that are going to be added in for the year.

I think one of the things that we have mentioned before is with one of our customers, we have been assigned the standard seat position which starts in 2007, which is with Freightliner. And so that, we should see significant growth in that area. And we have been awarded construction wiring harness business for 2007. That will contribute heavily to organic growth. And we've got several other projects that we really can't go into right now, but that has got the organic growth going quite heavily because of customer sensitivity to other potential suppliers that are out there.

But it's -- I guess -- is there much fall off in the year in terms of changeovers and things like that?

Not what we're seeing right now. We are picking up (multiple speakers).

So the idea would be that '06 over '07, we should continue to see increased content per cab per vehicle?.

Yes.

David Leiker, Robert W. Baird.

Just one last one here on this depreciation number. The number you gave was what about 14 million?

Depreciation, 15.5.

For the year?

Yes.

And does that means if you -- that means you're running about $0.5 million per quarter higher than you did in the first quarter.

Correct. We actually had that flat line initially in our estimates, but we've got programs that are in CIP right now that will begin amortization when they are completed. Initially those were in the first quarter, and they've just been pushed out of couple of months. So that is correct.

Do you end up at the fourth quarter that depreciation is running at more than 4 million a quarter?

Right around there, yes.

Okay, and then did you update a capital spending number for the year?

It stayed the same, at 24.

(Operator Instructions). There are no further questions at this time. Please go ahead.

Once again, I think when you look at the first quarter our Company has made significant gains in all aspects of our business. And we will continue to do that with our intentions and our cost improvement and our continuous improvement that we have on hand. We see the Company and the industry as a very strong industry. I guess we are probably not as negative in 2007 as what you're seeing some of the people. But once again 2007, the commercial vehicle equates to about 50% of our business in North America. And we have strengthened the Company by moving out of 100% Class 8 in North America, which we used to be when we started. So there have been great strides made in these companies to lessen the dependence on any cyclical business, and every business we are in is cyclical. Everyone, anyone in it is cyclical.

So we would like to thank all of you for joining us today, and look forward to talking to you on the next quarter or before.

Thank you.

This concludes today's Commercial Vehicle Group first quarter 2006 earnings conference call. You may now disconnect.