Commercial Vehicle Group Inc (CVGI) 2006 Q2 法說會逐字稿

Good morning. My name is Jodie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Commercial Vehicle Group's second quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you.

I would now like to turn the conference over to Mr. Chad Utrup. Please go ahead, sir.

Thank you, Jodie, and welcome, everybody, to our 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 our company-wide overview, and then I'll take you through our financial results for the second quarter of 2006 and our outlook for the third 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.

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

Thanks, Chad, and thanks to everyone who has joined us on the call today. As you saw from our earnings release this morning, we reported solid growth for yet another quarter, as worldwide demands for our products remain strong. Our OEM customers are forecasting global construction production to continue to grow well into 2007. And in North America, the heavy truck markets, production remains quite strong in advance of 2007 engine emissions change.

There were over 67,000 vehicles produced in Class 5 through 7 categories and over 90,000 in Class 8 vehicles produced this quarter. Keeping pace with this strong demand has been a challenge for the entire industry. The heavy truck market experienced supply disruption this past quarter resulting from labor disputes with one major supplier and machinery failures with another supplier. These disruptions not only affected the OEMs, but they caused a ripple effect throughout the entire heavy truck supply chain as OEM production schedules shifted, yet I'm pleased to report that our quality and delivery statistics have held up well in the face of these challenges, though not without cost.

Our continued success is a testament to the hard work and dedication of all of our employees, and our team is well positioned to tackle the challenges ahead. Perhaps one of the greatest challenges lies in maintaining our strong quality and service record as the industry continues a record pace this year while remaining lean and disciplined in anticipation of the 2007 production drop. It relies on our culture of continuous improvements and through our productivity and efficiency on the shop floor.

In some cases, we have focused on bearable cost areas, such as overtime and temporary labor, as a means to address certain challenges. But some of the inefficiencies are inevitable through this approach. A drop in production is also inevitable. Therefore, we feel we are making the right move in order to be prepared for 2007.

We continue to deal with demands from our customers for price decreases, while we are experiencing cost pressures on raw materials, particularly copper. We're continuing negotiations with our OEM customers to secure relief in these areas, and we hope to resolve these negotiations and partnerships with our customers in the third quarter.

As we've said in the past, we are working every day to position our company towards achieving our vision to become the preferred global supplier of complete cab systems for the entire commercial vehicle industry, including heavy truck, [inaudible], construction, agriculture, marine, recreational and specialty vehicle markets worldwide. We believe we continue to be a highly sought after, highly recognized global supplier and partner to the commercial vehicle industry.

This past quarter, our interior systems division was recognized by Freightliner with their Masters of Quality Award, given annually to top suppliers who exhibit outstanding professionalism and quality. We are proud to be recognized for superior performance in all that we do, but particularly in the areas of safety, quality and delivery, where we've received many awards over the past year.

With that said, I'd like to turn the call over to Chad for the details on our second quarter financial results as outlooked for the rest of 2006. Thank you, Chad.

As you may have seen from the press release today, as Merv said, our financial achievements were extremely strong for the quarter as both revenues and EBITDA are the highest ever achieved in the history of the company, and our EPS was above our expectations, while overall end market bill rates remained in line with expectations for the quarter.

As we look at our revenues, the quarter came in at $234.8 million, which is up $38.7 million, or nearly 20%, versus $196.1 million recorded in the prior year's quarter. This increase resulted primarily from the addition of the Monona and [Inaudible] operations, which accounted for approximately $22 million of the increased revenues over the prior year. And the balance being largely attributable to increased content and both organic growth and market share growth in our key end markets, which we are proud to report is in line with our stated 4% to 6% annual goal.

When comparing revenues to our guidance for the second quarter, which was modified for the effects of the sale of the medical business during the quarter, reported revenues were approximately $5.9 million above the middle range of our guidance. Primary factors resulting in the favorable revenues versus our estimates relate to increased content, organic growth and market share improvements in our end markets, as North American Class 8 volumes production volumes were approximately 91,000 units and in line with our estimate for the quarter.

Operating income for the quarter was $26.8 million, or 11.4%, compared to $25.8 million, or 13.2%, last year, while EBITDA was $30.7 million, or 13.1%, compared to $29 million, or14.8%, for the same period last year.

As we have previously discussed, it is very difficult to compare periods where such a vast difference in the business has occurred. Multiple events since last year, such as acquisitions, product pricing and raw material pricing, and surcharges during the past 12 months for CVG have skewed such comparisons dramatically.

To better explain our current results, we did record a net gain during the quarter relating to the change of certain retiree benefit plans. This event equated to approximately $1.8 million in increased operating income and EBITDA. However, this gain was more than offset by certain unexpected copper pricing- and supplier-related costs of approximately $1.5 million as well as other operational and administrative cost increases of approximately $900,000 during the quarter.

For comparative purposes, excluding the one-time net gain of $1.8 million as well as the offsetting events previously mentioned, our true EBITDA was approximately $31.3 million, compared to the mis-point of our guidance of $29.9 million, which equates to approximately 24% contribution margin on the $5.9 million change in revenues. We are extremely pleased with this performance during the quarter of unprecedented production volumes in our core markets.

SG&A for the quarter was $13.2 million, or 5.6% of sales, as compared to $10.2 million, or 5.2% of sales, from the prior year period, and was slightly better than our estimate for the quarter of approximately [inaudible]. Depreciation was approximately $3.7 million, and amortization was $103,000 for the quarter. Capital spending was approximately $3.9 million for the quarter and is expected to be approximately $24 million for the year, which is in line with our estimate provided earlier this year.

We did experience a slightly favorable pre-tax impact of approximately $1.3 million from the mark-to-market of our foreign currency contract in the second quarter, compared to a favorable impact of approximately $400,000 in the prior year quarter. This was a non-operating and non-cash valuation of our contracts, which can vary significantly in any one period.

Interest expense was $3.9 million for the second quarter of 2006, compared to $3.3 million for the same period in 2005, and with higher expectations due primarily to the timing of the prepayment of a portion of our long-term debt during the quarter. As a result of this early payment of debt, we did have a charge related to a proportional non-cash write-off of our deferred financing fees of approximately $318,000 during the quarter.

Our effective tax rate for the quarter was 35.4% and includes the effects of our R&D tax credit analysis, which was performed during the quarter. Our diluted EPS for the quarter is based on approximately 21.5 million in diluted shares and gaining $0.72 compared to $0.78 from the prior year, which was based on approximately 18.3 million shares.

Given the fact that there still seems to be some general confusion regarding this comparison, we would like to clarify this point again. The share count from the prior year quarter has changed. It equates to approximately $0.12 negative impact this year versus last year, which is too significant of an EPS impact to be ignored if comparing to prior year. Combine this with the non-cash and non-operating mark-to-market of foreign currency contracts, these two key factors alone account for $0.09 of impact when comparing to the prior year.

We generated approximately $15.4 million of free cash flow during the quarter, and as a result, our net debt position at the end of the second quarter was approximately $148.3 million, which is still 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 ratios to be less than one time. Our net debt-to-EBITDA as of the end of the quarter was approximately 1.3 times, and our net debt-to-book capitalization was approximately 39%.

As we look forward to the balance of 2006, recall that holidays and seasonality can impact portions of our business for the last half versus the first half of each year. Also note that programs such as our Ford GT platform, worth nearly $25 million in annualized revenues, will feed production during the third quarter. Although the effects of these events were included in our previous estimates for the year, we would like to remind everyone that these can be key elements when comparing to 2006 quarterly run rates as well as year-over-year comparisons.

That said, the following information should provide additional insight into our revised estimates for this year. Given no effects, positive or negative, for any impact of mark-to-market of foreign exchange contracts, our tax rate assumption is approximately 37.5% for the third and fourth quarters and 36.8% for the full year. Our interest rate on senior debt is assumed at 7%, and our rate on $150 million Senior Notes is at 8%.

We have assumed approximately 21.5 million diluted shares outstanding for the third and fourth quarters and full year of 2006. We had assumed 90,000 Class 8 units in the third quarter, 89,000 in the fourth quarter, and 362,000 for the full year; SG&A expense in the range of 5.9% of sales; interest expense, including non-cash amortization of deferred fees is expected to be approximately $14.5 million for the year; depreciation of approximately $15.5 million for the year; and amortization of approximately $400,000 for the year.

In addition, our revised expectations for the third and fourth quarter did include the following: a $3.9 million increase in revenue, or approximately $0.03 diluted EPS related to a 3,000 unit Class 8 increase for the third quarter. If you recall, our previous estimates were 87,000 units. We have revised our estimate to 90,000 units for the third quarter.

We are using approximately $1,300 per Class 8 unit as an average content per vehicle, which has increased from our previous estimated range of $1,000 to $1,100, due to our organic growth and market share improvements. An increase in revenue related to content and market share growth of approximately $6 million in revenues, or $0.04 EPS, for the latter half of 2006 has also been included. A pre-tax increase in the copper material costs of approximately $2.5 million, or $0.07 diluted EPS has been included.

And finally, we have adjusted our estimates for the remainder of the year for currency translation impact due to currency fluctuations during the quarter. This results in an increase in revenues by approximately $3 million for the last half of the year, or approximately $0.01 EPS.

Given the above-mentioned changes in our estimates for the remainder of the year, and along with our second quarter actual results, our revenue estimates for the full year 2006 is in the range of $917 million to $925 million. Our EBITDA for the full year is expected to be in the range of $122 million to $124 million. And assuming 21.5 million diluted shares, our diluted EPS expectations for the full year is in the range of $2.73 to $2.77 per share.

As we look forward to the third quarter of 2006, we believe that our revenues will be in the range of $227.5 million to $231.5 million. EBITDA is expected to be in the range of $30.75 million to $31.75 million. And assuming 21.5 million diluted shares, our EPS expectation is in the range of $0.68 to $0.70 for the quarter.

We have estimated our fourth quarter 2006 revenues to be in the range of $225 million to $229 million, EBITDA in the range of $31.5 million to $32.5 million, and diluted EPS in the range of $0.71 to $0.73.

On material pricing, supply pressures and unprecedented industry volumes may temporarily minimize the contribution of our revenues. We began 2006 with specific goals in mind around the organic growth, content increases, productivity and cost-saving objectives. These are key elements of our long-term growth, development and sustainability as a company. Through our YTD results, we have demonstrated our ability to achieve these goals in support of our underlying growth strategies.

During this time, we have also divested a non-core portion of our business, announced consolidation efforts of certain manufacturing facilities, expansions of other facilities in cost-effective locations, and further integrated our acquisitions from last year. We are extremely proud of the progress we have made to date and have positioned ourselves in a manner that will allow us to continue to remain flexible both financially and operationally and in a position to take advantage of future growth opportunities while being prepared for any slow down in our markets.

With that said, we would like to open up the call for any questions you may have.

Jodie, would you take the questions for us?

Yes, sir. [Operator instructions] Your first question comes from Jamie Cook of Credit Suisse.

Hi. Good morning.

Morning.

My first question is just a clarification. The $1.8 million gain -- where is that showing up in the statement?

It'd be in the operating income. It'd be in cost of sales.

Cost of sales?

Yes.

Okay. And then I guess my second question – material costs continue to be an issue, and I guess I just want a little more clarification on your strategy going forward. It would seem you would have more pricing flexibility given the strength in the markets in 2006, so if you could address that, and then I guess into 2007, should this be more of an issue just because demand is supposed to fall off so much?

Well, our strategy hasn't changed. In fact, the only change from this quarter that could be different from our expectations since we last spoke is copper, copper increases. That's basically 100% of the $1.5 million that we referenced. Again, our strategy is the same. There is a lag period between when pricing for materials comes to us to the time that we have agreements with our customers. It was no different with steel 18 to 24 months ago; it was no different with gas or oil prices or resin impacts to the CVG, so we're in that lag stage right now. We did have an impact in the second quarter. We expect an impact in the third and fourth quarter. But we expect it to minimize as we gain agreements with our customers, and that's been included in our recasted guidance.

Okay. And then any insights on how we should – I mean, does this become more of an issue in 2007?

No. I think by the time you get to the end of 2006, we'll have substantially all of our agreements in place. In fact, we're expecting to have most of our agreements in place in the third quarter, so I think it becomes another one of the recovery items, which we've been talking about for some time, regarding steel and resin and things of that nature. We can't predict what the prices are going to do, but I think – well, we know where copper is today, and we basically have been able to subside on the steel and the petroleum prices to date, and copper is just a new one that came up this quarter.

Okay. And then last quarter you did provide some of your insights into how you think the industry demand will play out in 2007. I recall you being more bullish than the consensus view out there that we'll see at least a 40% decline. I'm just wondering whether you're still sticking to this story, has anything changed, and what you're hearing from your customers.

We're hearing the same things from our customers that you guys are when we're on the calls listening to them. Basically, everyone sees a drop in 2007, and there are still guesses on how much it's going to be and how many engines are going to be carried over from 2006 and when that impact will hit. There are predictions it'll hit in the second quarter, slow down, and then there are predictions it'll pick back up in the fourth quarter, so right now we're still at the same point we were.

We think that '07 – there are still going to have to be trucks produced because of the age of the fleet and a lot of people that have not been able to get slots into the '06 engines built, but whether it will drop 40% or 60% we really don't have a clear [inaudible]. I think when we indicated our estimate was $220 to $260 [million], somewhere in that range, for '07, we really haven't put that stake in the ground, but we probably would lean more towards the higher side, at least at this point. But that's still an open range that we think it will be within.

So you're still suggesting that the economy should limit or mitigate the downturn to some degree?

Well, we think there will be some downturn in the market, whether that's due to economy or due to just a wait-and-see attitude on the '07 engines.

Okay. So the high end was $260 [million], you suggested, so the downturn is more probably like a 20% decline or so?

Well, the range of what we're hearing – obviously, we see lower and higher, but the range of where we think is probably in that $220 to $260 [million] range. Maybe it's a miss, but we haven't really put an estimate out there. That's just a range that we're giving you of where we think it may fall.

Okay. And then just my last question in terms of your forecast for 2006. I don't recall from last quarter, is there any change in your currency forecasts? Do we get a benefit now versus before we didn't?

In the second quarter, there was a benefit related to the mark-to-market, but what we have included in the revised forecasts in the third and fourth quarter is a change. It's basically translation is what it is. A significant portion of it would be British pound to U.S. dollar translation, and our previous assumption was about $175 [million], and we revised that to about $185 [million] translation rates, which gains us about $3 million in revenue and the equivalent of about 10% on the bottom line, so it's about $0.01 if you pick up $3 million in revenues.

Okay, great. Thanks very much.

So, yes, it's an increase.

Okay.

Your next question comes from David Leiker of Robert W. Baird.

Morning, David.

Good morning. How are you all?

Fine.

Good.

It's a numbers-related question, then I just want to follow up on the acquisition. What was the contribution from Monona on the revenue line here in the quarter?

It was around the 14-15% range.

14 to – on the $227 [million], you mean? What do you mean percent?

On the $227 [million] –

On the revenue line, how much of it was –

Oh, Monona was $22 million of acquisitions; it's 17-18%.

So $22 million, and did you say there was a currency impact here on the revenue line in Q2?

Very minimal for Q2.

Okay.

But we did recast Q3 and Q4.

And going forward here, we're apples-to-apples on an acquisition basis, right?

That's exactly right. Q2 was a bit difficult, but the third quarter, next quarter, will be really a pure comparison year-over-year. I think if you look at the contribution from our estimates out there, I think it even shows that.

Yes. And you'll be over the hump on the position from the equity offering as well?

Exactly, right.

Is there a way to quantify the year-over-year change in operating margin and how much of that is mix-related from the acquisitions and the different business models versus anything else going on there?

Well, I think there are a couple of things. If you take Q2 of last year to Q2 of this year, from an operating standpoint, you've got, obviously, the pro forma adjustment for acquisitions of $22 million, and call it a 14% attribution there, but the biggest impact – there are a couple other key impacts. You've got the FAS123, the expensing of options, the $400,000 to $500,000 a quarter, you've got these one-time adjustments, the net – I'll call them the net effect – the $1.8 million, the $1.5 million and the $900,000. That's about $600,000 for the negative for this year. And again, they're significantly one time in nature, so excluding those.

But the biggest thing is pricing. What you've got year over year is recovery for material cost increases in your pricing for your products, so you get a gain in your pricing, but you've got a negative impact on the bottom line, and if you include year-over-year price reductions in that, you'll probably have a $2 to $3 million gain year-over-year for this quarter in revenue and a $4 to $5 million negative impact.

Right.

So that's probably more of a key difference than anything. And if you act those anomalies out, what you get to – what you should get is a 25 or even greater contribution margin from an operating standpoint.

But isn't the margin done in business today different than a year ago before the acquisitions, or are we through all of that [inaudible]?

I'm sorry, David, say that again?

One of the acquisitions diluted some margins because of the lower capital nature of the business. That's not an issue here in this quarter, is it?

No. We're substantially through that.

Okay. And then what was the $1.8 million gain?

The $1.8 million gain was a change to retiree benefit plans that occurred during the quarter. We just changed [inaudible].

Okay. And then the $900,000 was what?

The $900,000 is related to – now, it's several things, give and take, but we've – as Merv mentioned, we did have some issues with production being shifted around. There's some of that. We did have some contract negotiations, I think everybody is aware of, during the quarter. There's [inaudible] to that. And we had some one-time issues related to pre-existing – by "pre-existing," I mean back to '98 – open litigation items that are substantially closed that we've reserved for. And then you've got some other net gains or positives to offset that. When you include those things, really will not because they're not related to the operations for the quarter, and that's about the $900,000.

Okay. To me, it sounds like a lot of those things – now, you can always go through a quarter and say this is a one-time item, this is a one-time item. There's always a bunch of one-time items in there. They all seem to be operating-related issues, though, no?

I'm sorry? They all seem to be operating-related?

Yes.

Actually, not really. I mean, they may be operating-related, but they're – if you look at comparisons to where our previous estimates were, I mean, we had a cost associated with contract negotiations, we did have costs associated with OEM production shifts and things of that nature, which are included in that, but pre-existing litigation items and things of that nature – and copper. I mean, nobody saw copper going where it was going to go. So I think you have to exclude those items if you're going to exclude the gains of, say, the $1.8 [million]. You have to take and get the true operating performance of the core operations and where we expected it to be, the pattern –

Isn't there a difference between the return in benefits of non-cash and the other ones that are cash?

Yes, there is. I mean, there's definitely a difference. I mean, the $1.8 [million] gain is essentially non-cash immediately. I mean, it obviously would be long-term cash, but the $1.5 million is going to be cash, yes, definitely.

And then one last thing here, then I'll let you go. Is there an update you can give us on the synergies you've gotten from putting the businesses together on a revenue side of being able to penetrate additional customers and product lines and geographies?

Well, I think that's shown, and we had an estimate – take Class 8; we had an estimate for the quarter of 91,000 units. Actual came in at 91,000 units, and we had an increase in our revenues because of organic growth, content growth, market share growth. We revised our forecast for the balance of the year because of content, organic growth, market share growth. I think that demonstrates where it's coming to fruition.

Yes. I mean, we calculate that number as we strip out the various items that – the new business piece of it, as we call it, is 9% growth. Is that a number that is --? I mean, that's higher than what we talked about at the time you guys went public. Is that a number that's sustainable going forward, or is there something else going on there?

Well, I think the number that's sustainable going forward for sure is that 4 to 6% range. You take out certain – there are certain market fluctuations, customer market share penetration issues that are helping that a bit, but I think by and large sustainable is the 4 to 6% as you look out next year and beyond. That's something that's sustainable. You've got an anomaly in some of the market share shifts right now.

Okay, great. Thank you for your time.

Your next question comes from Joel Tiss of Lehman Brothers.

Morning, Joel.

Hi, guys. How are you doing?

Good.

I have a little bit of a weird question, but I'm wondering if you're hearing anything from your customers about 2008, because I know it's 100 years away and all that, but it just seems like the premise that '07 is going to be weak and '08 is automatically going to snap back – it seems to me that it depends more on what happens in the economy than just sort of some of the structural issues that are causing the dip in '07. So I'm just wondering if you've talked at all to your customers or you're hearing them talk about what some of the dynamics are for '08 beyond the economic impact.

Well, I think one of the things that we're hearing a great deal about '08 is that '07 – a wait-and-see attitude on some of the major fleets or trucks. Their age of the trucks are still going up, so they will have to replace, probably starting the ordering by third quarter of '07 to maintain the fleet base they would like to maintain. We also – when you look at the overall economy, if the economy takes a shift, I guess we have to decide does that mean that we'll be buying less products from the Far East, or more products, or the same amount, because a lot of our shipping [inaudible] come from shipping on those that are delivered to the West Coast from Asia for low-cost products that are transported over to the Midwest and to the East Coast. Your guess is as good as mine if that's going to go down with a strong economy or up. My guess, with a weak economy, it's going to get stronger, or a demand for less expensive products coming from the Far East.

Okay. That's very helpful. Can you also give us a sense, again, what we're hearing from your customers as we go into a little bit of a slow down in 2007? Is that going to help you guys gain a little bit more market share, since your customers ought to have a little more time on their hands to be able to make some of the changes that they can't make now?

We're hoping that that will be the case. Of course, certainly right now there is more demand on trying to get product out the doors than there is on major engineering changes. We also have to look at the people in our market and see how well they're doing during a very good up market. If they're not doing very well during an up market, then I guess common knowledge would lend us to think that they'll do less so in a down market, and that will open up opportunities, like it did in 2000 and 2001 for us, to go in and take over business when people aren't able to compete any longer.

Okay. And lastly, can you just give us a little more flavor – you hinted at strength in construction. You didn't really say anything about ag, but can you just go a little more end market by end market? I guess we can exclude the Class 8 business. And just give a sense of what your customers in construction, ag, 5 to 7, about the outlook for the rest of the year.

Well, I think the outlook for the rest of the year, at least from the construction side of the business, is some moderate increases. The biggest change for us for the balance of the year, though, is going to be seasonality. It's a bit tricky to track the global construction market directly in line with our construction business, because we don't supply every single model or every single customer in that global tracking, if that makes sense. So what we've got included or what we've estimated for the balance of the year is just some moderate growth between now and the end of the year and continued growth into '07. We're seeing that it's obviously single-digit growth, but probably 5% or less between now and the end of '07, if that makes sense.

Okay. Thank you very much.

Your next question comes from [Adam Swisner] of Credit Suisse.

Morning.

Hello?

Morning, Adam.

Oh, hi. I was wondering – I don't want to spend too much time on the Q2 year-over-year. I know it's difficult. But the two items that were somewhat cash-related versus the non-cash retiree medical pension program change – are you saying that those are somewhat non-repeatable, where either you expect recovery of the copper in terms of customer negotiations coming in Q3 or any supply disruptions or OEM production shifts or like that what make up that cash impact start to go away in the back half of the year, or will those sort of continue in the back half of the year?

We see the copper is decreasing as we finalize contracts with the OEM that will recover a major portion of the copper price increases.

And that was the $1.5 million in the quarter?

Yes. And what I'd mentioned was our estimates for the rest of the year is $2.5 million, roughly $1.5 million in the third quarter and declining to $1 million in the fourth quarter, as we begin to get our recovery contracts in place. Our ultimate goal is the same as it has been for steel, resin, et cetera, which is going to be no less than 75% recovery.

Okay. So included in your forecasted EPS and EBITDA estimates of 30, 31 a quarter in the back half of the year includes that – not a net recovery probably, but the hit you just said, the $2.5 million?

Yes, it does. That includes the $2.5 [million] I just mentioned.

Got it. And how about in relation to just changes in OEM production shifts or any disruption in the supply chain? Does that go away, or does that repeat itself?

Those are some things that we cannot plan on ever being there, like we didn't have it in the Q2 plan. We didn't plan on another supplier having issues with their contracts and having to shut down, which ended up shutting down the OEM, which caused them to do a major shift. We honestly can't plan on equipment going down at another supplier, which caused a major shift. It didn't cause a major reduction in the number of units produced, but instead of maybe producing them on a Thursday/Friday, they were produced on a Saturday/Sunday for us, which caused time and a half and double time issues.

It also causes inefficiencies whenever you stop your line for two days and then start your line back up for two days. So those are the types of things that we consider one-time issues, and no, we don't plan on them coming back in the third and fourth quarter, which does necessarily mean they won't, but we didn't have them in the quarter before.

And we need to put that in perspective, too. I mean, we're talking about all these shifts – the $1.8 million, the $1.5 million. The production shifts that we're talking about related to that are minor in nature when you're talking about everything that – between copper and these other one-time adjustments, call it. So I don't want anybody to harp on the productivity issues too much because it did impact us, but we need to put it in perspective in terms of planning for it, which you can't.

Okay. And the non-cash portion, the pension medical? Does that go away in the back half of the year?

Well, with the plan change, that happened during the quarter, so you make adjustments to your future liability. There's no plan for adjustments like that in the third and fourth quarter.

Okay. And then obviously, we tried to get at the contribution margin, and the acquisitions made a little difficult – some of these items made it difficult to get there on the way up, but how about on the way down? Can you remind us, Chad, what your contribution margin estimate is as volumes go away during the dip in 2007, and is there any reason to reassess that relative to the raw material environment as you see it today or any other potential disruptions to the channel as volumes come up?

Well, your contribution margin is based on your variable and fixed cost structure, and given that we're at pretty high levels right now, those margins should be sustainable in a detrimental basis, and I'm talking the 20 to 25%. Typically, you may lose a little bit, and I'm talking a point or two more on the down side because of just a pure adjustment basis, but by and large, pure comparison, excluding anything else that happens in the market, those margins should be sustainable.

Okay. So no change in that 20 to 25% because of the way it's calculated. How about on the – last question – on the Ford GT program? You talked about $25 million. I understand that program unwinds. Is there an operating income EBITDA impact that we should be aware of that was notable, or not necessarily?

No. I mean, it falls in line with the rest of the business. The point of bringing – the point of making sure that everybody is aware of that – we've talked about it in prior calls, but the point being is if you look at comparisons from the second quarter – just take revenues – to the third quarter, a natural question may be why do revenues decrease if the market stays flat? But you've got these now, you've got larger programs, like the Ford GT program, which will cease production, which we knew of when we purchased Mayflower, but it's important to point those things out to help address some of those questions.

And as well as the third quarter and the fourth quarter. We may lose that business partly through the third quarter, but it goes away fully for the fourth quarter, and as you look out year over year, even into next year, that program will be gone, but it was, in fact, in place in 2006. So it's one of the larger programs that at least should be acknowledged because of its impact in the third quarter and, really, out into next year.

And how about just in relation to that business as a whole? Are there new specialty programs that you're currently bidding on that you expect to --? That becomes a timing issue, or is that – at this point, are you viewing it going into 2007 as more of a permanent decline?

No. The specialty programs like the – the GT was a great program for us. It brings us into new technologies and engineering expertise, which we can use to cross over into other markets. We'll always get into those, and it's keeping in mind that those volumes are 4,000 and 5,000 units and they're niched, low-volume specialty customized programs, which falls right into what we do for the other markets in terms of production in Class 8. So we'll always look at opportunities like that if it makes sense.

Our engineering group excels at this type of program, which, obviously, with the Ford GT is able to demonstrate our wherewithal on these types of programs from the engineering expertise, not just from the manufacturing expertise, because this program is so lightweight and it's always [inaudible] aluminum and carbon fiber. I mean, it's just a very unique and very good program to demonstrate our capabilities, and we'll continue to do that.

How long in general does it take? I mean, I would suspect to get on a replacement program, if it was awarded already, it would still be some time out. I mean, are you aware today when the next generation or a replacement of a – obviously not a Ford GT, but the next specialty program would come on? Is that an '08 event, an '09 event, or is it going to be sooner than that?

We obviously continue to quote on specialty programs as each major player in this market comes out with specialty programs, but as with any specialty program, when the economy is like it is right now, they're going to be looking very closely at when they launch the [inaudible], so as far as being able to give you a date for when they would be launched or rewarded, we cannot do that.

Okay. Thanks.

Your next question comes from Gary McManus of JPMorgan.

Good morning, guys. I may have missed this, but did you talk about pricing gains overall of the --? You had, I think, 9% organic revenue growth. If I strip out the $22 million of acquisitions, how much would be pricing, if any?

I don't think our pricing has gone up a whole hell of a lot.

Yes, you've got some – in terms of pricing, you've got year-over-year price reductions of 2%, but then add back onto that the recovery, if you will, for certain raw materials, so you've got some give and take, but if you're looking quarter-over-quarter from this year to last year, it's probably a couple million increase in revenue with a detriment to the bottom line.

What do you mean by "a detriment to the bottom line"?

Well, if you strip out the material costs and your net impact – if we're absorbing a portion of that, you have an increase in your revenue line and you have a loss on your bottom line.

I thought you said the raw material costs – copper was $1.5 million, so if you've got $2 million in pricing, doesn't it kind of --? I mean, I’m just wondering. Your net pricing relative to raw material costs, was it an additive or neutral or negative?

For revenue it's an additive, but the $1.5 million was strictly COGS for this quarter. There's no recovery in revenue for that $1.5 [million], so it's not included in any revenue. But the revenues would be additive for recovery.

Well, I guess what I'm trying to get at, and there have been a lot of questions on this, but the operating margin, as reported, was 11.4 versus 13.2, so you had almost 2 percentage points of margin. You highlight the raw material costs, but then again, you've got the retiree benefit, and they kind of cancel each other out. You talked about inefficiencies relating to another supplier and an OEM shutting for a couple of days and so forth, but you said that's relatively minor. I'm just trying to figure – and then you have some acquisitions, but I believe those acquisitions carry close to the same margins as the overall business, maybe a little bit less, so I'm trying to piece together why there was a fairly big margin deterioration in the quarter.

Did you take into account the share change, Gary?

Well, these are operating margins, so it wouldn't have any – I'm not looking at earnings per share; I'm looking at operating margin.

Well, I think you just touched on the reason why. If you do a pretty simple [inaudible] – I mean, you've got the – the biggest piece of that is you're going to have an increase in revenues with a raw material impact to the bottom line. You're not going to gain any margin. You're not going to gain that 13 or 14% or whatever it is increase from last year on that increase in revenues for recovery of raw material prices. In fact, it's negative. Do you understand? Maybe I need to be more –

We can talk offline, but I'm assuming that price – well, the raw material cost of $1.5 million was absorbed by the $1.8 million of retiree costs, so unless there are more raw material costs you're not – you know.

No, there is. You've got carryover and increases from last year. Recall that a significant portion of the recovery agreements with our customers didn't occur until the latter half of last year. We had some in place in the beginning and in the second quarter of last year, but by and large they've been between now and 12 months ago, so you've got recovery in your revenue line item for those raw material increases versus last year. There's definitely a big change.

Okay. All right. I mean, we can talk more about this offline. I don't want to dwell on it. Another question, maybe Merv. I don't think there were any acquisitions YTD, or not sizable. Is that right, or how would you characterize the acquisition climate?

The acquisition – we've stayed true to our form. We're looking at probably three to four at any given time. Once again, we are looking to focus first upon geographic expansion, second on market diversity expansion, and, yes, we are continuing to look at those, but, no, we have not completed any deals between the first of the year and now.

Okay. And just – I mean, with '07 being down, it looks like your numbers, if I take the mid for it, are around 30% or so. I mean, I know you don't want to talk about '07 earnings guidance specifically, but what do you think are some of the things we should think about in terms of coming up with revenue and margins and earnings assumptions? Do you think you outperform the market downturn – in other words, go down less? You talked about how variable your cost structure is. I mean, just give us some sense on how we should be focusing on your performance next year.

Keep in mind, when you do look at a downturn, that our company is not just Class 8 North American production. Our company is a global company, and it's also a diversified marketplace – construction, marine, and ag to a small point. I think to that point, if you take a look at '05 and '06, it might change just a couple of points, but if you take our revenues at – say roughly 50% of our revenues are Class 8; that's your portion that changes.

And to add to a couple of points of what we already talked about today, we have seen some content shift. We have seen – we used to be in the roughly $1,000 to $1,100 per vehicle per unit, which I think everybody is familiar with. However, we've also increased that through the organic and content shifts and market share gains to roughly a $1,300 per unit. So that's something that has changed our picture since 6 to 12 months ago, so that's something. The Ford GT program I mentioned is another thing. That really goes away next year – or really goes away next quarter. So those are some of the things. I think Merv probably hit on the bigger one, which is the diversification and really only maybe 50% or so of our business is Class 8. The rest are in really growing markets – after-market construction, things of that nature.

Okay. Thank you.

You have a follow-up question from David Leiker of Robert W. Baird.

I hate to do this to you.

Go ahead, David.

In 2007, if you just take out – I just want to throw some math out, and just tell me where you would make adjustments to it. But from 360,000 down to 260,000, that's 100,000 units. At $1,300 [inaudible], that's $130 million. You've got 25% contribution margin, tax rate and everything else. You get to about $1.00 a share in earnings. Is there anything in that math that you would change?

I think you're – given the content that we talked about, using the 100,000 units, that's directionally correct. It follows the assumptions that we've put out there. Now, obviously, there are going to be certain gives and takes, but directionally I think it's probably in line.

Okay. Now, I've seen I don't know how many downturns in different industries over the years, and everybody talks about being able to hold margin into the downturn because of variable, flexible cost structure, and it ends up being the detrimental margins are typically 1.5 to 2 times the incremental margins. It's hard for me to understand how you can take that much cost out when this $130 million hit is going to come essentially in Q2 and Q3 of next year.

I think the biggest factor to that that helps us hold true to our contribution – or detrimental margin, rather, of that 20 to 25% is where we are now with our overtime and our temp labor. We're running a bit much higher than we typically would run because of that exact fact.

Is your plan here to --?

Over time, to stay up with the market, but the market has sort of really pushed us to the brink, and we have used the overtime more freely and the temps more freely than what we normally would, and therefore those will come out quicker than they probably normally would.

To say it a different way, we're paying for it a little bit right now to be able to have that flexibility when that event occurs.

So then from a practical matter, when you go through the second and third quarter next year with these production levels of who knows where they're going to be, is your plan to keep those workers on your payroll? Do you lay them off and risk losing them? How do you manage your workforce during that period?

The temps and – first of all, we'll cut all overtime out, or the majority of the overtime, but maybe for [inaudible], like maintenance or whatever, and then the second thing we cut out is we start cutting the temps out, and we cut them out of the areas that I think right now are the heaviest loaded, which is probably in the highest labor content areas, if that makes sense.

Okay. All right, I'll stop on that. Thank you.

Well, I think, David, one of the things to keep in mind – you're aware of how we performed during the 2000-2001 time period.

Yes. You did well.

Without being able to take the temps and overtime down to remain with the [inaudible] detrimental margin, if that's worded correctly.

No, no, that's a made-up word that we created. All right. Well, thank you again.

Jodie, anyone else?

Yes, sir. Your next question comes from Gregory Macosko of Lord Abbett.

Hello, Gregory.

Hi. David hit just about everything here, but perhaps on some of the – in the same line of thinking, how about the SG&A line, just in dollar terms? Would you expect that to remain relatively flat from these levels, or do you see any downsets from here?

I don't see it going down in '07 or '08 because that's the timeframe when we're bringing on new designs, new programs, introducing new products. And as in the last downturn, we would see no difference in that for our company. In the last downturn, that's where we spent a lot of time designing new products and new programs to be able to launch when the market picked up.

So in other words, it's pretty much maintained across the board. There might be a little mix here and there, but those dollars ought to be pretty constant.

That's the way we have planned.

Okay. And then any update on just Hidden Creek?

I have nothing to do with Hidden Creek.

All right. And then with regard – you did say you have never seen so many opportunities in the acquisition side of things not too long ago. I mean, is it still --? While there's no activity per se, is it still pretty opportunistic and are you still seeing the opportunities?

We're seeing a lot of opportunities in the marketplace, but as with anything, there's no reason really to jump in on a whole lot of North American opportunities with '07 looming ahead. We'll wait until '07 to look at it.

Okay. So the point is that the opportunities are more in North America at this point, then.

No, we're still seeing a lot of opportunities in Europe and Eastern Europe in particular and in Asia, but once again, we've got a criteria they've got to fit into, and like I said before, we're looking at three to four at any given time.

All right, very good. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Utrup, are there any closing remarks?

I don't think so at this time. Merv, do you have anything?

I really appreciate all your time to tune in and all the good questions you asked, and I look forward to talking to you on the next quarter or before if you have questions. Thank you very much.

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