Commercial Vehicle Group Inc (CVGI) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the CVG third-quarter 2006 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Chad Utrup, CFO. Mr. Utrup?

Thank you and welcome, everybody, to our third quarter conference call. As usual, before we begin the formal portion of today's call, I'll first read through our Safe Harbor language and then I will pass the call over to Merv to take you through a companywide overview. Then I will take you through our financial results for the third quarter of this year and our outlook for the fourth 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 currencies in countries and other risks detailed in our SEC filings.

In addition, please note that whenever the Company refers to EBITDA in this conference call, we are excluding the non-cash gain or loss on foreign exchange contracts, which can be found in the table to the press release. The Company believes the financial impact from marking to market its foreign exchange contracts is a nonoperational and non-cash measure, and therefore exclude such impacts internally when measuring EBITDA. EBITDA is a non-GAAP internal measurement used by our management which will provide comparative data as we discuss our results today and going forward.

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

Thank you 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 product remain strong. Our OEM customers are forecasting global construction production to continue to grow well into 2007. Our North American heavy truck market production remains quite strong in advance of the 2007 engine emissions change.

There were approximately 67,000 vehicles produced in the Class 5 through 7 category, and approximately 100,000 Class 8 vehicles produced this past quarter. Keeping pace with this strong demand has been a challenge for the entire industry, us included.

During this quarter we suffered a drop in contribution margin. We dropped the ball on the new product launch, which caused overtime, bringing in freight charges and major inefficiencies in the affected plant, to the tune of about $750,000.

Our ability to rebound without major interruption is a testament to the hard work and dedication of our employees. 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 at a record pace this year, while we are launching new programs and remaining lean and disciplined in anticipation of the 2007 production drop.

We have relied upon our culture of continuous improvement to improve productivity and inefficiencies on the shop floor. In many cases we have focused on variable cost areas such as overtime in temporary labor as a means to address higher volumes. While some inefficiencies are inevitable through this approach, a drop in production is inevitable in 2007, and we therefore feel we are making the right moves 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 have continued negotiations with our OEM customer to secure price release in these areas, and we have resolved those negotiations in partnership with our customers in the third quarter.

As we've stated 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 to the entire commercial vehicle industry and all of its markets.

In the third quarter, we opened an administrative office in Prague, Czech Republic. This office will focus on business development, acquisitions and seeking regional low-cost sourcing opportunities.

We believe that we continue to be a highly sought-after, highly recognized global supplier and partner to the commercial vehicle industry. This past quarter our Engineered Vehicle Structures division was recognized by Ford Motor Company with their Henry Ford Technology award in two separate categories.

First, development and process design -- and this was for the Ford GT space frame; and second, for innovative design -- and this was for the Ford GT body in white. We are proud to be recognized for superior performance in all that we do but particularly in the areas of safety, quality, delivery and technology, where we have received many awards over the past year.

With that said I would like to turn the call over to Chad for the detail and our third quarter financial results as well as our outlook for the rest of 2006. Chad?

Our financial achievements, as Merv said, were very strong for the quarter as our revenue, operating income and EBITDA marked the highest ever achieved in CVG's history. Our EPS was better than our expectations, due to certain tax and currency impacts for the quarter.

Our revenues came in at $235.8 million, which is up $30 million or nearly 15% versus the $205.9 million reported in the prior-year quarter. This increase resulted primarily from the increased production levels of the North American Class 8 market as well as organic and market share growth over last year.

When comparing revenues to our guidance for the third quarter, reported revenues were approximately $6.3 million, above the middle range of our estimate. The primary factor resulting in this favorable revenues also relates to the increase in the North American Class 8 production volumes of approximately 100,000 units during the quarter versus our estimate of 90,000.

Operating income increased approximately 11.5% over the prior year and was $27.4 million or 11.6% of revenues for the quarter, while EBITDA increased more than 13% to $31.3 million compared to $27.6 million for the same period last year.

Both operating income and EBITDA were in line with our estimates for the quarter yet below our contribution margin expectation based on revenue levels. As Merv previously indicated, we did have certain unexpected operational costs during the quarter, which minimized the contribution margin on incremental sales.

SG&A for the quarter was $13.3 million or 5.6% of sales as compared to $11.9 million or 5.8% of sales from the prior-year period, and was in line with our estimate for the quarter.

Depreciation was approximately $3.8 million; amortization, $104,000. Capital spending was approximately $6.6 million for the quarter and continues to be expected to be around $24 million for the year.

We did experience a pretax gain of approximately $1.6 million from the marking to market of our forward foreign currency contracts in the third quarter compared to a favorable impact of approximately $300,000 last year. Again, this is a non-operating and non-cash valuation of our contracts which can vary significantly from period to period.

Interest expense was $3.6 million for the third quarter compared to $4 million from the same period in 2005 and was in line with our expectations.

Our effective tax rate for the quarter was 29.3% and is primarily reduced as a result of the completion of certain prior-year tax credit analysis.

Our diluted EPS for the quarter is based on approximately 21.5 million diluted shares and came in at $0.84 compared to $0.57 from the prior year, which was based on 20.9 million shares.

For comparative purposes, excluding the favorable impact of the marked to market of our forward foreign exchange contracts of approximately $0.05 and our favorable tax rate adjustment of approximately $0.10, our EPS would have been approximately $0.69 for the quarter, which is directly in line with our expectations.

We generated approximately $6.9 million of free cash flow during the quarter, net of capital spending. As a result, our net debt position at the end of the third quarter improved to approximately $141.5 million. This remained slightly higher than our expectations, due to the timing of certain working capital movements.

We anticipate our net debt position to be in the range of approximately $110 million to $115 million at the end of 2006, and our net debt to EBITDA ratio to be less than one times. Our net debt to EBITDA as of the end of the third quarter was approximately 1.2 times, and our net debt to book capitalization was approximately 36%.

As we look forward to the balance of 2006, you may note from our press release earlier today that we have not revised our forecast for the fourth quarter, with the exception of our assumption of fully diluted shares of 21.7 million for the fourth quarter and 21.6 million for the full year 2006.

We have assumed approximately 89,000 units, North American Class 8 units in the fourth quarter, and 372,000 for the full year.

Our revenue estimates for the full year is in the range of $925 million to $929 million, and assuming 21.6 million diluted shares, our diluted EPS expectation for the full year is in the range of $2.88 to $2.90. As we look at the fourth quarter, we believe that our revenues will be in the range of $225 million to $229 million, and assuming 21.7 million diluted shares, our EPS expectation is in the range of $0.70 to $0.72 for the quarter.

While material pricing and unprecedented industry volumes may temporarily minimize our contribution of our revenues, we are again extremely proud of the progress we have made to date and have positioned ourselves in a manner that will allow us to remain flexible financially and operationally, and in a position to take advantage of future growth opportunities while preparing for any slowdown in the market.

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

(OPERATOR INSTRUCTIONS). Arthur Winston, Pilot Advisors.

Rather than read the press release in the conference call and take so much time, I was wondering if you would be able to just go over each of the businesses -- the Mayflower business, Monona, foreign, the basic business, and see how each of them is doing and what's going on and what to look for in these businesses, any nuances about them.

I think, to go through the businesses, we see national continuing to grow and we see market share gains happening with them. Mayflower -- we see that's riding the commercial vehicle market, ups and downs, probably more tide to it than any of the other businesses. We see the Monona wire has been more affected, obviously, by copper than any of the other businesses. Those issues have been resolved.

They have been resolved?

Yes, they have been resolved.

In other words, you've got some pricing to offset what's going on with copper?

We've got some surcharges. We have worked with it as a partnership, as we have with the steel and as we have with the petroleum.

The cab market continues, since it's predominantly construction market on a worldwide basis, with less in North America than anywhere. We're seeing it grow strongly. We have increased the size of our facility in China almost twofold during the past several months by taking the building next door that was a new building.

So we see a very bright future with the companies that we have and very, very strong growth potential. We're starting to push very hard into Eastern Europe with supply to the construction business and to the heavy truck business.

Just one last question. In terms of the new contracts that are starting up in Volvo, when do they start off? Should we assume, [start of a class], so really they won't make any contribution until 2008 or 2009 or something in terms of the profits?

I think that's probably looking closer to 2010.

2010?

Yes. Now, there's other contracts that will be starting up. Obviously, with our growth, I think this year we had -- Chad, correct me if I'm wrong -- about $40 million of startup programs this year. Next year it's probably equal or greater than that we have startup programs on, that's incremental business, not reflection of business.

Joel Tiss, Lehman Brothers.

I wonder if you can give us any sense of the fluctuations in the build expectations for 2007. I don't know if you've given official '07 guidance, but that wouldn't really be guidance. But I don't know. Anyway, just asking.

I'm going to give you some numbers that come out of the Dunn's crystal ball. I would guarantee those to be accurate within plus or minus 30% within an hour from now. In other words, what we're seeing and we're hearing is somewhere between 200,000 and 240,000 units. That seems like it changes almost on a daily basis. I think right now we all need to concentrate on getting through Q4. Towards the end of it I think we'll see some very solid estimates starting to come out. But right now, with so many engines, still unknown number of the engines for the first quarter of '07, it really makes it sort of wishy-washy. We think that obviously, the first quarter is going to be very strong, second quarter is going to be down significantly. Third quarter is going to start to ramp up and fourth quarter will be strong. That's the way we're seeing it.

That was my follow-up to that. Can you give me a sense of what the source of optimism is that gets the second half to be better? Or is it just because the second quarter's so bad?

Well, some of it's the second quarter. But I think we in the industry, as you probably see, if we took and flattened everything across the board, we see the underlying demand to be about 275,000 units. We see the average age of the trucks out here has grown.

With all that and coming off a banner year in the truck industry -- and we see the engine changes -- people are going to have to start buying the new trucks pretty hard in the third quarter, just to keep replacement numbers up.

David Leiker, Robert W. Baird.

I've got a bunch of number-related questions here. I guess where I would like to start is on taxes. Can you give a little more color of what these adjustments are for? It sounds like they were all for prior periods, nothing's really for the '06 tax year. Is that correct?

Yes. The majority of them are related to prior adjustments, yes. They're basically -- as with any tax adjustment, you make a provision or you make an estimate with your returns. This is related to the true-ups. Basically, the credits were higher than originally anticipated. A lot of it goes back to some of the acquisitions that we have taken the time to go through and are comfortable with where those credits have come through. So it's basically a period adjustment.

Where do you think the Q4 tax rate ends up?

That's something that we're still working through. I think we initially came with 37.5%. I think it will be less than that, but I don't know where to pinpoint it at this point yet just because we're still going through it.

Do you have an idea of what we should be using going forward, then?

I think it will be less than that 37.5%. You might use the 37% range, 36.5%, 37% range.

On the contribution margins, a couple of things. If you look at the number year over year, obviously there's a pretty meaningful shortfall from what you would have expected. I think you addressed one issue that was part of it, but it seems like there's got to be more than just that one item that falls into [it there].

Yes, if you look at -- are you looking at year-over-year, or are you looking at compared to estimates, or where are you looking at?

Either one. Maybe do it versus your estimate. Revenues up $6 million, EBITDA is the same number. So --

Yes. Compared to our estimates, revenues are up $6 million, units were up about 10,000. We had some delays. The revenue change is a result of a few things -- some delays in startup production on anticipated new programs that will be pushed out either into Q4 or early next year. So that's part of it.

The other big piece that pushes that down is the mix swing between OEM production from our estimate to where reality came through as. So that's basically those two items probably have a $6 million or $7 million impact downward on our Q3 versus our estimate.

That's getting to $7 million incremental instead of $13 million or $14 million?

Exactly. That's right.

What about the margin side?

On the margin side, Merv and I both had mentioned we had some issues. We basically dropped the ball on one of our plants, and in terms of a model changeover, that cost us some money in terms of overtime, premium freight and things of that nature that we addressed. But frankly, it happened and we fixed it.

The other thing is --

I think any good team strives to not fumble very much, and I think this team has done a remarkable job of fumbling very little with the ball. We're not quite as good as our buckeyes here in the Ohio State, but we fumbled the ball on this one. It cost us money, and we don't like that. But we're looking at it as a nonrepeatable item on this business. It's launched now and it's running. Frankly, it was more of a bill material and systems issue that we did not do correctly in our engineering group and our IT group, and it's what caused the problem. It wasn't a problem that was caused by the design or a problem that was caused by the production of the unit.

In terms of these new programs being delayed, did that [mean] that there's some incremental upside in Q4? Or is it just started off at a later [date]?

No. If we felt that, we would have adjusted Q4, frankly. It's just some delays in certain programs that we had anticipated. We're still on track for the year because we've been up, we've been favorable in the first part of the year. But we're only talking about a couple of million dollars here in the scheme of things.

The last thing here, and I want to do this from a contribution margin looking at gross profit. I know you usually look at EBITDA, but at the gross profit line. If you look from Q3 to Q4, you've got revenues falling, call it $9 million, which is a lower bill number that you have in there. But gross profit, to get to a $0.71 number means gross profit's probably up about $2 million or $3 million, EBITDA is up about $2 million. How does that happen with a $9 million drop in revenue sequentially?

There's a couple of things that are going to be impacting it. First of all, we had capacitized to run about 320,000 units, and we're running at a run rate of about 360,000. If the market does like we think, with the drop in Q4 a little bit, then obviously we will take some of the relief of the inefficiencies that we have. We're not planning on repeating the fumble-the-ball in Q4 with the product and the program launch that we had, because that's out of the way. I think that overall cost reductions -- we see some of those coming through in Q4 that were not, obviously, effective in Q3. Frankly, on Q3 we saw some increases in our low-cost countries, in some of the purchased product.

(OPERATOR INSTRUCTIONS). Adam Plissner, Credit Suisse.

Getting back to your comment or your best guess on what the cadence of production is going to look like next year. I know you talk about first quarter strong, second-quarter down and then ramping up and then getting strong later in the year. How do you work your variable cost structure? I know we've talked in the past about overtime and temp. Is it something, as you approach the second quarter -- can you tell me just sort of what the order in the play book is, dealing first with overtime, then pulling out temp workers?

How much flexibility do you have to respond either -- in two cases, either the production ramp-up takes longer than anticipated, doesn't happen in the third or fourth quarter? Is there sort of a Plan B thereafter, once you deal with overtime and temp that's sort of a more permanent scale?

Well, when we ramp down, I think you hit the nail on the head. The first thing we do is take out the overtime. I think, frankly, most of our people right now would be glad to see some of the overtime go away, because we have been running pretty hard and heavy with it, much heavier than what we would like to. Then with dropping the ball on one launch, that caused the overtime in that facility to even go higher.

So we would cut with, say, at the end of Q1, towards the end of Q1 we would start the cutbacks on over time to bring it in line. And then in Q2, we would hope to run with very little or no overtime, and we would start the reduction of the temporary employees as soon as we see the build actually going down.

Then, as we see it start to ramp-up in the third quarter, we ramp-up with overtime first. Then, as we see it's going to be continuation, then that's when we start bringing the temps back in.

So we run with 30% to 35% combination between temp and overtime. So with that, that any given period of time we can ramp down the 30-35% and the variable cost of labor and ramp-up the 30-35%.

When you talk about 30-35%, I know that's across all businesses. But does it leans towards -- does the overtime and temp issues lean towards certain product areas, whether it's seating or in this case, does Mayflower have less use of overtime and temp? And what does that do to your flexibility in the individual businesses?

I think, if you look at our individual businesses, obviously Mayflower is the ones who have gotten a more capital intensive portion of the business. But we've still been able to manage using overtime to flex up a great deal, and we will be able to use the reduction of overtime to come down. While we don't have temps, per se, we have, in some cases, probationary employees, and some cases we do have temps in Mayflower. So, I guess if you're saying which one is the least flexible, it would be Mayflower.

When that happens, like I asked originally, is there sort of a Plan B after the temporary and overtime flex? I mean that sounds like the easiest and most flexible tool to use. But what's the next stage? Is it some sort of more permanent restructuring? I guess it's more difficult to do if you anticipate the market bouncing back or you just kind of wait out.

Well, I think you've seen that this group has not waited for the market to respond, necessarily, to do the things that we need to do. I think we announced earlier in the year that we were closing one of the facilities for the Wire and Harness group. That has been completed, so we're taking down the capacity there or consolidating the capacity, more than anything, even though that's a very growth-oriented company, because we really did have too many facilities.

We divested basically $3 million in sales of a noncore business -- with Monona. That group is -- we're working very hard to reduce any type of fixed overhead that we can also, and we will continue to do that. If the downturn goes longer and lasts longer than we did, then we will consolidate more factories.

David Leiker, Robert Baird.

A few more things. What are you looking for out to '07 in terms of some other end markets, a medium duty market, where it looks like there's more of a prebuilt going on than a pre-buy, and it looks like there could be some inventory hangover? And then also the construction [egg-off] highway.

First of all, the 5 to 7 is a very small play in our business. It's pretty flat, the way we keep it.

The construction market -- we see it flattening in North America, but we see growth in other regions of the world that we supply. In particular, our products are not the small yardman type thing. Our products are more into the large wheel loaders, graders, excavators and compacting equipment, which is still showing very strong growth in Europe and Asia.

As far as marine industry, we don't have a huge amount of business there, but we're seeing that business -- not necessarily the market grow, but we're seeing our portion of the business grow because of captive new customers.

Would you give us an update on what you think your revenue contribution next year is from new business, market share, those kinds of things? At one point we were talking about a number that was $40 million to $50 million. Is that still -- obviously, the end market is going to be pretty volatile. But is that still a pretty good number to work with?

Yes.

And then a couple, last numbers questions here. This foreign currency accounting, Chad -- at one point you talked about trying to find some way to smooth that out or eliminate that from being such a big swing. Where do you stand on that?

Yes, we continue to look at it, but frankly it's the way that we've got this set up now in terms of how it's identified through basically the P&L and the adjustments for the asset or liability, it allows us to keep an eye on it. Frankly, we would need an army of people to do the hedge accounting piece that we just have not made a priority. That's just giving you the honest truth.

Is that a number that it's just not predictable until where those contracts close at the end of the quarter?

It will never be predictable because of the currency fluctuations. It's at a point in time you use the currency values on the last day of the quarter, and that's where it's set.

What currencies are involved there?

Yen, Euro, dollar and Swedish krona.

Your capital spending number -- you're saying $24 million?

Yes, $23 million to $24 million.

You're only at $15 million year-to-date. That seems like a pretty big jump here in the fourth quarter.

Yes. We've got a lot of new programs coming online. Obviously, we delay spending money to the last possible point that we can. We've got a lot of new programs that are in the final phases -- VEC, for one, which we've talked about before, is a big portion of that as well as some other programs.

Then your depreciation number, let's say, has been closer to 15 (technical difficulty)?

Yes. Correct. As we get into the Q4, back to your capital question, it very well could be some of that could carry over into the first quarter. It's just a matter of timing and leadtimes on some of the equipment.

And as you are aware that we're looking at a new tech center to consolidate a lot of our small tech facilities around the world. There is equipment that we have in there for areas that we need to move our company forward in technology, like acoustical and thermal dynamics.

There is road simulation equipment for the seats and for the cabs, some areas like that that we have capital in that when historically, they're not going to be repeated on the basis that they're being spent at this time.

And lastly, Chad, could I get some cash-flow numbers? Do you have a cash-flow statement, cash from operations number?

I don't have, but roughly the net debt position -- or the bank debt position didn't change significantly. It's all through cash. So, if CapEx was $6.5 million, your cash from operations are going to be around that $13.5 million to $14 million for the quarter, based on the net debt change. You know what I mean?

And are there any other meaningful numbers on the rest of that cash-flow statement?

The biggest things that impacted our net cash flow for the quarter are going to be things like prepaid items, just timing events in terms of prepaying for tooling that will eventually be reimbursed. We did have some inventory pre-buy ahead of some anticipated price increases and things of that nature. We continue to work down the AR and AP side. You'll see AR stay kind of flat, and we offset a lot of that with our changes in payables. So we'll continue to do that. But those are probably the biggest things.

Keep in mind, too, as we move more and more from some of the sourcing to the developing countries, our time to ship the product, instead of being two or three days, is becoming two to five weeks. The inventory is ours once it leaves their factory in China or Ukraine or wherever.

We're still pretty optimistic that we'll be in that 110 to 115 net debt range at the end of the year, like I'd mentioned.

Jamie Cook, Credit Suisse.

What was the actual rising material costs this year of this quarter versus what you were able to pass through on price?

This quarter -- I think what we had mentioned on the last call was we anticipated about $1.5 million net impact, primarily just surrounding copper. It was in line with what we had estimated.

As far as the surcharges back, the surcharges probably started towards the tail end of the quarter, not at the very front of the quarter.

What's our anticipation for Q4?

Q4, pretty much what we had anticipated, around $1 million I think is what we had estimated for the fourth quarter. That's still what we're anticipating it to be, net impact to us, that is.

Before, you guys were more optimistic on 2007, thinking that everyone was too bearish with the 40% decline. We have been lowering our forecast throughout the year, which makes sense, given what we're hearing about the economy. But can you just talk anecdotally what you're hearing from customers out there about 2007? And does that perhaps make -- we always thought '08 would be a good year after '07. Does that perhaps take 2008 and 2009 down as well?

I will go through what -- I've been probably the one that's most in contact and dealing directly with the customers on these issues as well as the end user fleets. We're seeing and hearing anywhere from 200 to 240, 250. It's right now more of a guessing game than it is anything, and it will be until we get closer to the end of Q4, and we start understanding how many engines are actually in place that can be used in Q1 of next year.

Now, what we see as Q1 and what the industry has been telling us is Q1 is going to run pretty close to slight downtick but pretty close to what Q4 is. We're seeing Q2 drop-off simply from the wait-and-see attitude to see how the new engines are starting to perform.

We see Q3 as starting to ramp-up and Q4 as strong simply from the fact that in our tonnage miles and all of our estimations that we go through and conferring with the industry, it's about 275,000 unit underlying demand if you flattened everything out, took the valleys and the peaks out.

We see the average fleet age has increased, so we feel like that there's going to be a force of pressure -- and talking to the fleets, there's going to be a pressure to start replacing the trucks in the third quarter of '07. Now, '08 and '09, what we're hearing, are going to be very, very solid years again. Frankly, '07 -- if it drops all the way to the 200,000, the low end that we're hearing predicted, it looks like a hell of a banner year compared to what we saw in 2001.

Just my last question to follow-up. I know someone asked this but in terms of the other end markets, but I don't think you ever answered the question on what you're seeing or how you look at ag in 2007. (multiple speakers).

Ag is so small on our business that it really does not have a bearing, much of a bearing, if it went through the roof or if it fell through the bottom. So ag is not one that we put a lot of effort into analyzing.

As far as construction, I went through that I think we're going to see North America pretty flat for our products, and we're seeing growth in Europe and Asia for our products. Our products, once again, are in the heavy end, the excavating, the front-end loaders, the large wheel loaders and the compacting equipment.

Joel Tiss, Lehman Brothers.

I think you sort of answered this, too. The receivables and the inventories are both up, sort of like 25% to 30%. Anything unusual in there?

I'll deal with the payables -- the inventories, rather. The inventories are up simply from the fact that we had understood through every one of our intelligences that the Chinese market on supplier was going to go up about 10%. We did a pre-buy, pre-shipment. We have a whole lot more inventory than what we need in the products that we get from China, and those will be worked off in Q4 and Q1 down to a very manageable level.

We also experienced some problems with one of our startups in China -- suppliers. So we ended up almost draining ourselves, and then we had to put a safety stock in, which increased it. That problem is now resolved.

We have increased our buy from developing countries, and we will continue to increase our buy from developing countries. So you will obviously see inventories grow from the aspect of as we increase buys from those countries we take possession of it from when it leaves their factories. So that gives us anywhere from two to four weeks on the ocean, or longer.

As far as the receivables, they are pretty flat from the last quarter. We have taken a lot of steps to remedy some of the system problems that we've had over the last couple quarters and are making some pretty good headway with that between now and the end of the year.

If you look at payables, you'll notice both AR and -- the increases in AR and inventory are actually offset by with how we've managed our payables.

David Leiker, Robert W. Baird.

I just have a few more last things here. As you look at 2007 with the volume drops in our -- more of a guess than anything else, but it seems like you could take $20 million, $25 million out of working capital. Is that a reasonable number?

From the third quarter, yes. We have had this question before, not just from you but just in terms of --

Internally.

Yes, internally -- well, and externally, for that matter, in terms of where we see our cash flow for 2007 and frankly, that working capital that you're talking about is exactly what will help us be extremely cash flow positive next year. So, yes, I don't know if $25 million is the right number but I actually would not anticipate it to be much less than what we generate this year, to be honest.

As you look at the new business that you're launching, particularly with the Volvo and other programs, do you see a step up in capital spending as you go out 2007, 2008, 2009? Or are you going to be able to stay around this low $20 million level?

I'm hoping that we'll see a flattening and possibly a drop in 2008 and 2009, because 2007 is a pretty big year for launching of new products. It's also a pretty big year as far as starting up a tech center with some of the capital equipment that we need to put in there.

Has 2007 pushed 30 million?

No, no, it's --

Yes, yes, as a percentage of sales it's obviously going to go up. But we don't see it pushing 30 million.

I think it will be in that 20, 22 to 25 range again, I think, what we have seen this year. Because of what Merv is saying with our tech center. We have talked to you guys about the Mexico facility that we're setting up. Those are the things that are kind of the one-time items, as well as product launches.

I'm sorry?

Are you going to drop back down to 20 million for a few years? Or not.

I think we're hoping to drop below that.

Yes. Ideally, we'd like to drop below that. But on the flip side we'd like to spend money for a lot of new programs that we bring in as well.

You're cursed, right?

Yes. So it's Catch-22, I guess. But ongoing, ex-new programs are large programs, it could reasonably be around that 20 mark in the 2008-2009 timeframe.

I think Chad hit on one key item, and that's the plant in Mexico that we're building a new one. We are seeing a tremendous amount of growth in the Monona Wire Corporation as far as potential and already awarded business. So for us it's essential to get that building completed, get it set up in a very professional manner. We feel that with the new facility we have a chance to create a world-class business. If you look in this type of business right now and you look at the way Monona Wire and CVG are performing, and compare it to our competitors in this industry, I think we're performing extremely well.

One last thing. Guys, we're going through these build rates, and not everybody is keeping up with parts and stuff, and you're getting trucks that are getting red tagged. Are you causing any trucks to get red tagged on your end or are you able to meet all your production schedules at the time your customers want it?

Yes, we did cause some trucks to be red tagged. I think I spoke of it when we spoke about dropping the ball on the new program launch, and that cost us a lot of money in premium freights. We had a whole lot of planes going back and forth, and it cost us in efficiencies and working seven days a week in the facility and 24 hours a day to get it out.

Alan Weber, Robotti and Company.

Did I misunderstand? Did you talk about CapEx in 2007, kind of in the low 20-something million? Was that 2008-2009?

Yes, we did. We said at this stage, obviously we will update everybody when we go through 2007, but at this stage we could reasonably see 2007 CapEx being about the same level as this year, because of new programs and facility set up. And then probably dropping down 10% to 20% from that range in the 2008-2009 timeframe.

And then you said in 2007 you should get pretty good -- some benefit, at least, from improvement in just working capital?

Yes. With a down year that's typically the trend, yes.

And just two kind of general questions. One is acquisitions -- where does the Company stand today and what you're looking at, areas of the world and that kind of thing on acquisitions?

Well, we have stated before on these calls at any given time we've probably got three or four more acquisitions that we're looking at. We, I think, have proven that we do a very good job of due diligence and we walk away from an acquisition if it doesn't meet -- if we find an issue in it that does not allow us to meet the criteria that we have set forth on it.

I think, in the past, since we have been public, you've seen Cabarrus, you've seen Mayflower, and you've seen Monona Wire Corporation. Those have all been purchased at attractive multiples and have shown a tremendous amount of growth. I think what we will continue to push, and as you saw that we have also opened the office in the Czech Republic, you'll see that we have a great deal of focus on Eastern Europe right now. As you have seen us increase the size of our building in China, you'll see a tremendous amount of activity for that area.

For North America in 2007, there's a lot of companies in the heavy truck business that have not done as well as Commercial Vehicle Group. If they haven't done well in the best of markets, we don't expect they'll do very well in the low markets. That offers us opportunities for acquisitions there.

If you look at it at a high-level, too, just take the few things that Merv had said -- opening office in the Czech Republic, expanding our Mexico facility, expanding our China facility, developing a new central worldwide tech center -- these are all things that we're putting in place for the long-term.

I know your question was specific to M&A activities, but these are a lot of the things that we're putting in place for the long-term. So hopefully there's some reassurance for people -- you can take a step back and look at a lot of the things that are happening for not necessarily next quarter but for the next several years and beyond.

We're very active in M&A activity.

I was really curious, given what you talked about with new offices, there's almost an increased focus or hope that you can complete an acquisition in Europe or outside of North America.

Well, as we started the business we were 100% North America and about 95% or greater Class 8 truck. Our stated goal has always been to diversify the Company so that when we have a downturn in one region that it doesn't affect the Company as severely as, obviously, the downturns did in 2002 -- in 2001. So, our goal is to have this company structured in a way that, when we have a downturn in business in North America or Asia or Europe, that the Company is not in jeopardy in any way.

My final question, I think, Chad, I may have asked you this -- as to Merv, looking back on some of my old notes, when you went public, you [talked about] an opportunity in the aftermarket with good margins. Can you just kind of, and there's very little discussion any more about that, I'm not clear what has really changed?

Our aftermarket business, since we went from private and public, has basically overdoubled. We are continuously putting new products and new programs into place. We have got a group that has been aligned about six months ago, that their total job is nothing but aftermarket growth business.

We have brought in probably 180 distribution point channels in the last year and a half. We have started bringing -- we have the best friends in the business when it comes to Moto Mirror, Prutsman, and National Seating. We're taking some business that is not our core, say, an antenna that goes on to a mirror, and branding it under the Moto Mirror brand and selling it along with our mirrors. So we are very active in that. It's something we should probably bring everyone up to speed at more on these calls. But yes, we're still very active with it.

I guess maybe what really is the rest of the Company with acquisitions have grown that much faster. So, although it has doubled, it's a pretty small part of the Company.

Okay. We also took the --

-- new high-performance seat we just rolled out to the aftermarket this month, which is our next-generation seat with superior base for reducing vibration and ergonomic issues in the truck driver. We rolled it out this month. The first order shipped this week. I think it's going to be a big seller next.

Okay. Do you need some more follow-up on that or is there more that we can answer?

(multiple speakers). I understand; basically, the bulk of the Company has grown so much faster, and the aftermarket has not been through acquisitions. So it has doubled, which is impressive. But it's small compared to the rest of the Company. I guess --

Oh, absolutely.

Yes, there's no doubt. It's definitely a smaller portion versus the rest of the Company.

And in 2007 it should actually be a little bit higher percentage? Okay.

Also in a down market you normally see the aftermarket grow anyway, because people are keeping the equipment a little bit longer, wiper systems need to be replaced a little more often, seats -- obviously, with the driver retention even in a down market we still struggle keeping an abundance of drivers. So those should be replaced more often. The average age of the truck has gone up, so obviously every item on it has. And like I said, we're putting a lot more focus on the aftermarket.

At this time there are further questions.

Thank you and thank everyone for joining us today. We appreciate your time and patience with us getting the answers to the questions out to you, and look forward to the next quarter.

Thank you, everybody.

This concludes today's CVG third-quarter 2006 earnings conference call and webcast. You may now disconnect.