Commercial Vehicle Group Inc (CVGI) 2007 Q1 法說會逐字稿

Good morning, my name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Commercial Vehicle Group's First Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions). Thank you, Mr. Utrup, you may begin your conference.

Thank you, and welcome everyone to the conference call. As usual, before we begin the formal portion of today's call, I'll first read through our Safe Harbor language. I'll then pass the call over to Merv for a brief company update, and then I will take you through our results for the first quarter and our outlook for the full year 2007. I 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.

And now I'd like to turn the call over to Merv.

Thanks, Chad, and thanks to everyone for joining us for the call today. Sorry we were a little late. We were having trouble with our Web cast portion, getting it up on line.

So I'll start into the presentation, I think everyone is aware that we anticipated downturn in the North American Class 8 production levels, due to the 2007 engine emission changes and the prebuying in advance of them which favorly impacted our 2006 business levels. As you saw from our earnings release today, the downturn has impacted us as expected. The downturn has also made our 2007 to 2006 comps very difficult. Knowing that this situation was coming, we had developed a plan to manage through it with the expectation of better demand in 2008 and beyond.

The key components of that plan included continued organic growth in other key markets. Currently North American Class 8 sales account for approximately 50% of our total revenues. Our long-term plans to globalize and diversify our product base would help stabilize our performance through cycles such as the one we are in now, as well as the expected slowdown in 2010. We are continuing to invest in our plans in this area, such as expanding our management team and expertise as well as investing in key development programs. Continuous improvement initiatives are proceeding well through our lean manufacturing techniques and TQPS initiatives.

Leveraging a flexible workforce composed of temporary workers as well as overtime utilization. This is working for us but not as quickly as we anticipated due to mix and schedule fluctuations. There is opportunity for improvement here.

Cost reductions through our global purchasing and sourcing opportunities is proceeding well, but we still have opportunity for improvement. We just returned from India, where we launched a major product--project for sourcing in 2007. While sourcing in developing countries offers us significant cost savings, it also has challenges. I'm pleased to say that we have started to receive production samples and we are back on track for this project.

What we're encountering is the fact that the adjustment from record-level 2006 demands has been very difficult. This is primarily due to customer requirements that have been unpredictable as the market in production level adjustments to the realities of 2007. In the first quarter of this year we have seen accelerated declines in OEM production levels, as expected. However some of our OEM customers are reducing work, not by the occasional work shift or production days, as we expected, but rather by eliminating whole weeks of production.

CVG's flexible and highly variable cost structure handles this type of gradual slope-down--I'm sorry, handles the type of gradual slowdown that was expected. However, the quick and abrupt production schedule changes experienced in the first quarter of 2007 amplify our challenges of balancing our production.

We've also experienced certain supplier issues during this slowing period, which we did not expect, but nonetheless are causing some minor disruptions in costs. We view this as positive and negative. Negative for the obvious reasons but positive in that as the downturn trips the industry's less surefooted players, CVG should spot potential growth opportunities through either acquisition or conquest business stemming from these supplier difficulties.

On the service the total NAFTA build rates are not far from planned levels on the whole. However as we delve more deeply in to the makeup of the builds, we find that export has taken a large share of the overall production. In some of these cases, CVG has little or no content that we enjoy on our core domestic sales. As the impact of EPA regulations on North American demand and production levels continue to evolve, we are closely monitoring the market projections in an effort to align our operations and organization with that -- what still promises to be a highly unpredictable year.

At the same time we remained focused on our long-term strategy growth to carry CVG into 2008 and beyond. These efforts include bringing on board new expertise to assist with meaningful business development, the discovery of new acquisition opportunities and successful integration efforts across our company.

In addition to hiring Kevin Frailey as Executive VP of Business Development earlier in the quarter, we have hired Milton [Ess] as Vice President of Strategic Integration. In his position Milt will be based here at our company headquarters in New Albany and report to Kevin. Milt has 39 years experience in management in the automotive supply industry. Prior to joining CVG he served as Executive VP of Operations for Dura. He also served as President of Control Systems for Dura. He drafted marketing, sales, distribution, and manufacturing activities while there. Milt's expertise in manufacturing and management, along with his international background and capabilities, will be a great asset for us. Milt is a fine example of the expertise and talent that we are adding to the organization for our longevity.

Our other long-term strategies continue on plan. These include pursuing improved cross-selling opportunities, using after market sales as pull-throughs for increased OEM business, pushing globalization and international growth with our customers, diversifying our product folio, and finding strategic acquisitions that make sense. We are continuing to invest in all these areas as necessary and appropriate.

A good example of new product development taking place now at CVG is the introduction of our new series 600 KAB brand seats that is being introduced at the VAUMA 2007 show in Munich this week. It's a major new product that has global potential for vehicles in the construction and on-highway markets.

Another strategic move is being -- is bearing fruit as CVG Shanghai. We began in China almost three years with $4 million in sales. In late 2006 we nearly doubled the floor space. In 2007 we have targeted for $18 million in sales. Logically our start in China was justified by follow-source opportunities as customers from our traditional Western strongholds demanded the CVG quality as they established production bases in China. I'm pleased to report that we continue to grow with these customers.

Meanwhile however, the Chinese domestic OEM market has started moving some production to our CVG Shanghai location. In the past two weeks, in fact, a couple of members of our team were in China prior to traveling to India. The purpose of our visit to China was to market CVG to the heavy truck OEMs as well as identify and pursue potential acquisition candidates. The response was overwhelming. And one of China's local premier truck manufacturers scheduled to visit our engineering and a few of our manufacturing plant in the U.S. in May.

In spite of the near term issues in the 2007 market, we believe CVG continues to be highly sought after, a highly recognized global supplier, and a partner to the commercial vehicle industry, who remains poised for continued growth and success.

Before I turn it over to Chad, I want to spend a moment talking about the complexity of our products and the impact of mix on financial and operational plans. First, cab structures. We supply ITEK, Mack, Sterling, mostly. So there is also volatile Western Star, Kenworth, Peterbilt, Freightliner, etc, that we do not supply KAB structures to. Any market shift between the OEM platforms we can easily track. An OEM can fill a slot with a cab from us, that is a base cab that could be as cheap as maybe $4,000 or a large sleeper unit that can be upwards to $12,000. If the OEM platform as ordered ends up on shifting from our cab to another platform, we could go to $0 in a slot that may have been $12,000 before. We plan past on the OEM input, history, fleet input, and act for unit and mix. Unit is much easier to estimate than the mix.

Interiors. Seats can either be two suspension seats, one for the driver and one fixed, or one fixed for the passengers. They can be a base seat or the top of the line. In other words they can be less than $100 each to greater than $400 each. So we can have a mixed shift that affects a cab that can go from $800 or $900 cab seats to $200. interior panels. We can have a base military that has a total content interior of $100 to a large sleeper unit that has the content of $4,000 each. Wipers, easy. Number of units times the sales price.

As you just heard, our business model has a lot of complexities. Now add 30,000 active skews for the interiors and 26,000 active skews for the seat, most all with different prices. Our jobs require a lot of forecasting and movement of plans due to out-order shifts. A shift from a high-content cab to a low-content cab can cause an $8 to $10,000 shift in actual revenues. When truck build is down we plan our shifts to a lower content mix, which we did. When unplanned major shifts in the market occur, like in drastic increase in exports which may have little or no content, or in a day cab replaces a sleeper unit, it plays havoc on our operational model. This is much of what we've encountered in 2007 so far. And I'm sure there's going to be a lot of questions on that, and we're prepared to talk about it.

With that said, I'd like to turn the call over to Chad for the details on our first quarter financial results.

Thanks, Merv. Our revenues for the first quarter came in at $198.8 million, which is down $30.5 million or 13.3%, versus the $229.3 million recorded last year. This decrease resulted primarily from the decreased production levels in the North American Class 8 levels, as Merv said, and was again further impacted by the mix in content of those production units compared to last year.

Operating income decreased to approximately $10.6 million, or 5.3% of revenues for the quarter, versus a $25.5 million or 11.1% recorded last year. Primarily as a result of the decrease in revenues and the negative impact of lower content units for our products.

When comparing operating margins year over year, there are several general business and operating items to be considered or in fact excluded for a true comparison. Those are the impacts of the curtailment gained from our pension and post-retirement plan changes from the first quarter of 2006, of $1.4 million. The impacts from currency fluctuations in translating our foreign operations into U.S. dollars. Those costs associated with our increase in staffing levels and development programs that remain vital to our long-term growth strategy, again as Merv indicated too. And the incremental costs related to the Class 8 markets decline and production shifts of our customers.

Excluding these items for a more accurate comparison to the prior year indicates that our operating contribution margin is in the range of 35%. While this is a little bit higher than what we've historically and typically estimated to, we are definitely satisfied with our operating performance for the first quarter of 2007, while realizing that we also have room for improvement.

SG&A for the quarter was $15.6 million or 7.8% of sales, as compared to $13.2 million or 5.7% from the prior year period. This increase is primarily attributed to cost of increase of staffing levels and development programs, as well as a gain in our pension and post-retirement plans recognized in the first quarter of 2006, as I previously mentioned.

Depreciation was approximately $3.6 billion and amortization was $103,000 for the quarter. Capital spending was approximately $3.1 million for the quarter, and our estimate for the full year 2007 remains in the range of $23 million.

We recorded a pretax expense of approximately $2.2 million or approximately $0.06 per diluted share, from marketing to market our forward foreign currency contracts in the first quarter, compared to a pretax expense of approximately $200,000 in the prior year quarter. This is a non-operating and non-cash valuation of our contracts, which can vary significantly between periods.

It should also be noted that this impact, which is included as Other Expense in our financial statements, is different than the effects of currency fluctuations and those impacts related to translating our foreign operations into U.S. dollars, which are included in various other line items in our financial statements.

Interest expense improves to $3.6 million for the first quarter of 2007, compared to $3.9 million from the same period last year. Our effective tax rate was 36.4% and is generally in line with our estimates for the full year.

Our diluted EPS for the quarter is based on approximately 21.7 million diluted shares, and came in at $0.14 compared to $0.62 from the prior year, which was based on approximately 21.5 million shares. Excluding the non-cash, non-operating impact from marketing to market our foreign exchange contracts, our diluted EPS would have been approximately $0.20 for the quarter.

Our net debt at the end of the quarter was approximately $144.4 million, and our net debt to book capitalization was approximately 35%. Our strong balance sheet and debt position continues to be a part of our ability to capitalize on future internal growth and development programs as well as potential growth through acquisition.

As indicated in our press release, we have revised our full year 2007 estimates. While we expect overall units to remain in the range of 215,000 to 250,000 units, we have adjusted our estimates downward to reflect our revised assumptions on the mix and content of these units, as well as the increase in number of units produced for export.

Our expectation for revenues has been lowered to approximately -- lowered by approximately $30 million and is now in the range of $712 to $757 million. Our operating income expectation has been lowered by $10 million and is now in the range of $44 million to $61 million. And our revised EPS expectation is in the range of $0.85 to $1.35 per diluted share, based on 21.7 million shares. All of these figures include our actual results for the first quarter and our revised estimates for the remainder of the year, including the negative impact of marketing to market our foreign currency contracts from the first quarter.

We anticipate our revised free cash flow to be approximately $20 to $30 million during 2007. This is down from our previous estimates of $30 to $40 million and is directly related to our operating adjustments for the year.

As we look towards 2008, we have not made any adjustments to our previously disclosed estimates for the year, based on a range of 280 to 320,000 North American Class 8 units. Our expectation for revenues for the full year 2008 remains in the range of $865 million to $915 million. Operating income in the range of $91 million to $108 million. And diluted EPS remains in the range of $2.35 to $2.85 per share.

In summary, our first quarter operating results were negatively affected by the reduction of Class 8 units compared to last year. However this was an anticipated event. We are aggressively monitoring the overall production units, mix and content of those units, and scheduling fluctuations from our customers in order to capitalize on our flexible cost structure as we move through the balance of this year. At the same time we remain very focused on our long-term growth and diversification efforts during this transition period in 2007, and our strong financial position is a positive factor that will continue to allow us to be poised for continuous growth opportunities, whether that be through organic growth targets or acquisition-based growth.

With that, we'd like to open up the call for any questions.

Thank you. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of David Leiker, with Robert W. Baird.

Good morning, everyone.

Good morning, David.

I'd like to start with if you could talk about the working capital number. I'm surprised with the drop in revenues the way they are that working capital has gone up. It looks like it's all at the inventory line. If you could walk us through that for us.

Yeah, for the most part, if we look at net debt, take it from the end of last year, we basically remain almost unchanged, some of that is due to timing. Our inventory is something that we're working on--we were working on at the end of last year. We're definitely not pleased with where we are with inventory levels, so we've got some pretty aggressive plans to get there. But for the most part, our biggest change in working capital assumption for this year is obviously related to a Q1 to Q2 drop more so than a Q4 to Q1 drop.

David, this is Merv. Think about the mix impact on this too. If we've gone from where we're planning, say, a higher level seat or a higher level interior, and we drop down to a base interior, we've had product to processes put together maybe for a $4,000 interior. Now we're supplying a $100 interior. That's added to our inventory changes just due to the mix and also inventory levels because of the increase in sourcing from emerging markets too, is having an impact. Because if you have six weeks' worth of it on the water and then there's changes in it, you've now got six weeks' worth of it in the warehouse.

Does that mean -- I guess, I'm trying to understand here, in the first quarter even sequentially your inventory went up even though revenues -- the revenue number has come down. Does that mean that you're sitting there with a bunch of finished inventory for trucks and they have no place to go with it?

No, it means that we're sitting there with raw materials that we will -- as the market changes and fluctuates out and some of the lower levels come in, we can take and put some of the product into those products. But originally what we ended up with is maybe a different color of vinyl, where it was switched out, some issues like that. Nothing that's going to be obsolete material or nothing that's going to be not used at some point. And it's not finished goods sitting there, accumulating.

Right, this is primarily, you're talking primarily raw materials, as Merv said, with sourcing and things like that. You have minimum buy quantity changes and things of that nature that impact that more than anything.

Okay, and then, what were you expecting your revenues to be in the quarter? How did that revenue number compare to what you were looking for?

Given that we didn't get into any quarterly gains, I'm a little reluctant to get into that. But obviously the biggest impact to us is going to be that mix -- the mix shift and the larger number of units being produced for export.

Let me explain something on the mix, what it does to us too. Let's take a door panel. If it's a base door panel it might sell for $50. The amount of labor that goes into that panel is really no different than the amount of labor that's going into a $100 panel. The difference is the material content. You might have leather versus plastic versus vinyl versus cloth. And those are changed. So if we planned on a $100 door panel, we've still got the $10 or $15 worth of labor in it, and if it's dropped down to a $50 panel, we've still got the $10 or $15 worth of labor in it. So the labor content stays pretty much the same, for practicality looking at it. It's the material content that changes in it.

Right, I'm just trying to gather -- we're just trying to get our arms around the revenue impact of this mix. Is that a $5 million number, a $10 million in revenue.

Well the change that we made for the year, for full year, David, is as I said, $30 million. That's our estimate at this point for the full year, so that would include even the impact that we saw in the first quarter.

How much of that do you think is Q1, versus the balance of the year?

We're only talking about the full year, so that -- I'm afraid that's about all we're going to get into because we're only looking at the guidance for the full year. Again, because the fluctuations that we don't know at this point, throughout the balance of the year, unfortunately I'm a little reluctant to get into anything by quarter.

What's your assumption for mix going forward, relative to what it was in the first quarter?

Yes, it's fairly comparable to what we saw in the first quarter. That's primarily what's driven us to recast or relook at where we are for the full year.

When we see the over-the-road carriers, the larger fleets, and owner operators starting to place orders for '07 and '08 and a higher rate for '07 deliveries, that's when we'll see content take a positive -- very positive shift for our company.

So for your comparable mix, is it fair to assume that that $30 million is evenly spread across the year.

It's evenly spread across the units.

So you said the units that were up -- and then one last thing here, given the assumption going forward is comparable mix, why is your 35% negative contribution margin going to be any different going forward?

I'm sorry. It's not. The changes that we made for the full year are revenues of $30 million and the operating impact of roughly $10 million, so it's in that range.

But you're at a 35% contribution margin on the downside here in Q1, right?

Correct.

And if I run a 35% contribution margin on the downsides through the balance of the year, that's a number that's a heck of a lot bigger than that.

Well, keep in mind that in Q1 when you start out, you start out with all the negatives of customer price-downs that may be impacting you to have -- normally you have your purchasing savings and your labor savings built in with the least amount of impact in Q1. And they usually ramp up in Q2, 3, and 4.

But that would be comparable to last year, so that shouldn't really cause a variance.

Yes, well, in actuality if you look at 2006--let's look at the full year, okay. Take a look at 2006 full year, versus our revised estimates for 2007 full year, and take a look at -- pick the midpoint of the range that we've given, our low point or high point. You'll actually see that our detrimental or contribution margin on the revenue changes about 25%. So I think what we might be getting hung up on is the first quarter look '06 to '07, versus taking a look at the full year, which includes our savings, our organic growth and things of that nature, so if you look at the full year '06, versus recasts of--or our revised estimates for full year '07 you'll find that it's in that 25% or even a little bit less to be honest with you on the downside.

Okay, I'll let you go. I'll follow up with that if I need. Thanks.

Thank you, David.

Your next question is from the line [Argna Manchilli] of with Credit Suisse.

Hi, good morning this is [Archyoman Manchilli] in for Jamie Cook today. How are you guys doing?

Fine, how are you today?

Hi, pretty good. I just had a couple of questions. My first question is, how is -- now that we're about a month into the second quarter, how is April looking in terms of your expectations for Q2 so far, and have you seen a material change compared to the first quarter?

Well, again, we can't get into anything by quarter, but for the most part I think even Merv mentioned it when he was talking earlier -- we've seen -- the biggest decline that we've seen is probably in the latter part of the first quarter in terms of orders, or production, rather. So we're obviously well into that, even towards the end of the first quarter, and that's been the biggest -- that alone with the scheduling changes and the mix changes have been the biggest impact or difficulty for us for the downturn.

When you normally have gone through these in the past you see the customers take out a complete shift, which still allows you to balance your lines on the working shift. What we've had this year is some of the customers taking a week on and then a week off for the whole plant. And what that does is really just wreak havoc within our organization, which is a just-in-time facility. Shutting down a week, working a week. And we've got more than one customer in each plant. So the customers aren't getting together and saying, we're going to shut down this week, so we end up with partial plants working, unbalanced lines. It's really been a difficult time.

Okay, and my second question is about your 2008 guidance. You guys didn't change the guidance for '08, and I was just wondering, what makes you remain comfortable with your guidance '08? Do you expect your mix will change, or what's the reason for the confidence?

Historically, as the people that order the trucks, the fleets that have the high-content over-the-road trucks, as they come out of the downturn and get more comfortable with the new engines and everything, they start they're orders again. And those are much higher content. They obviously have the sleeper box and everything on them, than what a normal construction truck or a day-delivery truck is, or an export.

So we see the content go up as the orders come in.

Okay, and my last question is about when you expect the pick-up in demand for orders. Do you expect it to be more of a Q4 '07, or is it more of a Q1 '08 event?

We think it will be more in Q4, but I think our industry right now is showing how unpredictable we are. I don't think that there's anyone out there that's got a good grasp on what's going on in '07, frankly, and our business is a lot tougher than most. It's not like a door handle, where there's going to be -- or a door, where there's going to be two on each truck. With us, it could vary from nothing on each truck to a huge content on each truck.

Right, so for example, our range for this year, for example is staying at 215 to 250,000 units, but obviously we've made some changes downward because of the mix and really to look at the export units, which as Merv said, we tend to have very little content or--in comparison to a normal year, rather. Or no content on those production units at all. So if for example 2007 is going to have an increase of, say, 30 to 40,000 additional export units, and we say we have little to no content on those, that really in essence takes out 30 to 40,000 units, out of our, I guess what I would call our average mix of Class 8 units.

Where historically we've always talked about we have an average of $1,000 or $1,300 per unit, but when you add in another 30,000 to 40,000 export units, just as an example, that really has an impact. So if we use those numbers, take a 215, take the low end of our initial range 215,000 Class 8 units, and take away another 30,000 -- add 30,000 of export units, that really equates to a year of 185,000 Class 8 units on a comparative basis to what we would have been talking to before.

So I don't know if I made that more simple or more complicated, but when we say that our range is 215 to 250, but we have an increase of, call it, 30 to 40,000 additional export units, that really means a range for us of 180, 185 to 200, 210, if that makes sense.

Yes, that makes sense. So you're expecting 30 to 40,000 for '07, do you--how does that make sense?

The last year, for example, there was only I think 23,000 export units on a 380,000 truck build.

Okay.

This year, you've got 30 to 40,000 on a 210,000 build.

Okay, that makes sense. Thank you, so much.

The next question is from the line of [Sig Almar], with Soundpost Partners.

Good morning, I have a question on changes to the '07 guidance. Before when you approve guidance, you give very detailed guidance on revenues from Class 8, for medium units, for construction markets, organic growth, etc. My question is have you seen other sort--drivers of growth beside Class 8. Have conditions changed in those markets, or is it just revenues and EBITDA by the Class 8 market doesn't change?

Class 8 has had the biggest impact. Class 8 has had the impact with the mix.

Right, you're breaking up a little bit, so I'm not sure if I let you finish or not.

I'm sorry. So the other -- the guidance for the other drivers are [technical difficulty]?

Well, what you've had in North America, for construction for example, has been somewhat flat. But what we're seeing with the rest of the world in construction is a good solid growth. So we're doing fine there, and you know we are the world's largest construction seat manufacturer. And we're seeing that growth, as I pointed out, in Shanghai, in China. So if you look at the growth there, you've gone up basically about 8 or so million dollars this year. And if you look at organic growth that we've had in our other lines of business, it's going good, and that's the reason you're not seeing as big a drop in the revenue line as you might anticipate with what we've just gone through on the mix numbers.

Right, so for example, you talked about our '06 to '07 numbers, the last -- I think when we talked in January, I went through our initial '07 estimates, we said we had a target of around $67 million of organic growth this year, or basically 9% of our underlying 2007 business. So those things are still intact. Those things still -- the growth in the construction business outside of North America that Merv talked about -- those are all things that are still intact. But by and large the biggest change for our 2007 numbers is that mix shift and export shift for Class 8.

What were we last year on Class 8 business, as a percentage of the company?

62% heavy truck was our numbers in '05, and in '06 it was 60%. It's in our annual report. So in a year where we increased 30 to 40% from '05 to '06 in the Class 8 market, our percentage of total revenues essentially remained flat. So that gives you an indication of where we grew outside of the heavy truck market.

And if you look in '07 the first quarter, it was down to what percent? 55%?

Yes, it would have been down because of the drop. But that gives you a good indication of the growth outside of Class 8. The Class 8 specific piece is only 50% of our business. The other 10 or 12% to make up to 60 or 62% is in really the 5 through 7. So in a year from '05 to '06 of drastic increase we basically remained flat, so again, not to be repetitive, but this gives a really good indication of the growth we've seen elsewhere.

So basically the guidance for those other drivers remains the same by and large [technical difficulty] the Class 8 content is the primary reason for lowering those guidelines.

This mix issue has been really, really tough on us. It's like when I went through earlier. When you've got a total just on the interior, over 60,000 skews at different prices that can hit on it, it makes an operational financial model very difficult to manage during the radical changes that we've seen this year in the industry so far.

One more question. During the last call you guys had also mentioned that you were quoting on the large scale business for '08, '09, '10 [technical difficulty] million. I was just wondering if there were any updates on that progress.

We continue to work with -- we're within -- I can't go into details on that, but we're progressing very well with it.

Okay, that's my last question. Thank you for your time.

You're welcome. Thank you for calling.

Your next question is from the line of Gregg Fisher, with Stansfield Capital Partners.

Hi, thanks for taking my question.

Our pleasure.

I just wanted to translate a little bit the effect of the exports on the mix shift, and kind of translating that into the contribution margin. The way I'm understanding it, and maybe you can correct me if I'm wrong, is that essentially the export market -- you're not making the same kind of profit margin if the content is not on those units. When do you see the exports running off, and when that happens does the content normalize? For the second half of the year you -- that's when you kind of get back to your contribution margins, the 25%.

Well, we've always been at that 25%. If you look at the change that we've made today, for example -- we've changed our revenues by $30 million, changed our operating numbers by $10 million. So it's in that, call it 33% range, which is 5 to 8% higher than what we've historically talked about. We talked about a contribution margin in January of this year, from '06 to '07. About 28% is what I indicated our year-over-year number looked like.

So we do have an impact from the mix shifts and things of that nature, but when you say getting back to the 25%, it's really always been there. And in fact it's actually a little bit less than that on the downside when you look at '06 to '07. So it hasn't really changed. The only thing that's changed is we've got a little bit higher detrimental margin that we are assuming because of these mix shifts.

But you've also got other things. You know, I think we're getting so hung up on comparing quarter to quarter, that we're not looking at -- any time you've got a downturn in the market, you're automatically going to have detrimental margin, because you're handling a reduction of workforce, which is causing severance issues, which is causing movement around in your plants, loss of efficiencies. People getting a little panicked, so they leave the company to go for another company, so you're bringing in new people to replace a certain specific job type, like a journeyman for electrical work. So there's major changes that you go through in any downturn market that's different from when you're on an upswing. And those are just things that are not being taken into consideration that we need to look at.

You've got to look at this whole year in general. We've always gone into '07 -- everybody's discounted '07 from day one. That's affected everyone and the market's stock price in this area. And now we're getting into '07 and we're understanding it's a very choppy year. And there's not any consistency that we've seen so far in '07. And we knew there was going to be very little, and it turned out to be less than what we thought.

And we've got to make sure that we maintain the company's longevity, and building up on these new products and preparing for a market that's going to take off, we believe, drastically back in '08 and '09, because again in 2010, there's the change in the emission controls that are even considered more severe than they are in '07. So this market has got to accelerate, we feel, drastically in '08 and '09 again for the pre-buy. So I think we've got our company focused very well and progressing very well on the long-term issues, and we all understand '07 is going to be what we've always thought it was going to be. Not a great year.

How do you guys currently see the export volumes trending for the rest of the year?

We see it running on about the same basis it has been, and that's going to be somewhere between 30 and 50,000 units for export, and normally that's -- in a banner year like last year, it was only 23,000 units. But then we'll see exports trend down drastically, we see in '08, because there's not going to be slot openings for that type of business.

Yes, let me -- to answer the export question a little bit differently. I kind of touched on this earlier. Let me put this another way. Our previous range was 215 to 250. if the export units would not have increased, our new range for today's call would be in the 180 to 210 range, said differently.

Does that make sense?

Yes. I'm just trying to reconcile also -- I guess some of the guys in the industry who throw around the 215 number for '07, and maybe I'm wrong. I assume the export number is in that build rate?

Yes.

So your range, all in, your lower range -- the 215 of the low end of your range is consistent with what everyone things the number is, so I'm just trying to understand where the rest of the potential volumes that you guys -- and you haven't changed that range. So where are you seeing -- I mean, you just said, nobody really knows. It's too hard to predict. But you are at the higher end of some of the other guys that have come out.

Well, then if you look at what [ACT] come out with, I don't think we're at the higher end of it. I think that what the big impact is on us is what we've just said. The mix and primarily a lot of that's due to the export. I think when you look at the number of units that we've predicted since the start, I don't think we've been severely off on that. I think that it's the mix that has just really -- because the export number has just really affected us strongly.

I mean, you know the fear is that now you have this mix issue, and I guess if production numbers are off, it's just another thing. But it's fine.

I mean, as you look at the mix issue, keep in mind, this mix issue that's hurting us right now also makes us one hell of a company when things are going high. When you're putting in two $400 seats, a $4,000 interior, and a $12,000 cab into a unit, there's nobody here complaining about mix.

Okay, just on a point you guys mentioned earlier. I'm just curious what you're doing -- have the OEMs changed their one-week on, one-week off? I mean do you see that normalizing? Or if that's consistently what they're going to be doing this year, because it makes sense for them but it hurts you guys, what are you doing to roll with that?

Well, I think what we've seen them do is trying to work themselves out of it too, because their preference would not be to do it, also, is my opinion from talking with them. They've had some issues that caused them to do that, and I'm not prepared to go into it. That's something they have to go into. I think their preference is not to do that, and I think you will see that slowly -- or you will see that go away. Their preference is to eliminate shifts, but sometimes they have other parties that help negotiate and don't want to eliminate shifts because of eliminating workers, and they prefer to eliminate weeks.

And that's what our customers have to work around, and we have to figure out ways to work around it and work smarter with it. And you can do that once you have a little bit of planning time to do it. But when you get a three-week notice, you don't have that effort -- or less than that sometimes.

And the last thing just to get off the heavy truck a little bit. Can you just talk about how you see construction and after-market OEM service? I think those are two next largest portions of your business. How those are trending -- how do you feel for the rest of the year?

Construction for us is doing very well, on a global basis especially. And we're winning conquest business around the world with our construction business. So we see that as a very bright spot. In North America, you see somewhat flat construction. Fortunately with the products that we're on, we're still seeing some growth, so that's very positive for us.

After-market business we see picking up. We continuously are winning new distribution channels, and we feel very positive with our after-market business. What we see on the OE service business, is obviously we see stronger pull-through in a down market with the OES business, so we see growth there. Obviously our plans are to continue to go after the after-market business.

We've taken another area that we've added to the after-market in the U.S., basically under the same guidance of the same people, which is office seating, which we are a very strong provider in Europe and we just brought the product over here and started marketing through some of the same channels and have been picked up by Bizchair, Staples, several leading retailers of office chairs. So we're seeing good growth there. So we're seeing growth in almost every segment of our market other than Class 8.

Great. Thank you.

Your next question is from the line of Adam Plissner, with Credit Suisse.

Good morning, Adam.

Hi, how are you doing. This is Chris [Nolt], for Adam Plissner. I just have a quick question. I'm just trying to understand if this is a general mix issue, meaning away from the exports. Can you guys quantify the content shipped per vehicle at the peak versus now? So are people taking a $100 seat versus, say, a $1,000 seat. We're just looking for some color, again away from the exports on that.

Well, we're seeing right now more of the lower end, the day cabs, more small fleets, which have a smaller, lower content normally than the big fleets do. And again, if it's day cab or construction, it's obviously going to have less content, and a lot of it, Chris, is going to depend on if it's a Mack truck that we've built a cab for, and maybe have some of the seats but none of the interior. Or if it's a Sterling, where we have the cab structure and a lot of the interior business, and the seats. So, ours is not like a typical automotive industry where I can say, we always have X number of dollars per content per vehicle, and due to maybe ordering a base line Corolla, versus a high-end Corolla, my content went up $75 a vehicle. We have so many different components, it's not quantifiable really.

Right I understand. But within that, let's just say on the Mack truck, are you seeing a shift toward the lower end seat within that? I realize you don't do the interior there, like you said. But within each segment. So on the Sterling, you do the entire interior. Is the entire shift coming down?

We see some shifts down. Not as severe, probably, in the Sterling as in some of the other units.

Yes, I think there's a trend or a shift down in terms of the -- I'll call them the creature comforts, the luxury items, and the type of content that we have in those vehicles. But the bigger impact--outside of the exports, the bigger impact is going to be mixed shifts within even the OEM customers, where at International, we may sell, as Merv had indicated, a $4000 to $12,000 cab, versus a Volvo, where we don't supply the structure's piece, where we may supply seats only. So you may have $400 to $500 content. So that's really the breadth of the variation that we have between OEs.

Okay. All right, thanks guys, I'll follow up on that. Thank you.

You're welcome.

You have a follow up question from the line of David Leiker, with Robert W. Baird.

Good morning, again, David.

Good morning again. I'm looking at the SG&A line, and that's up pretty meaningfully, year over year, Chad. What should we be looking at for that going forward?

It's up meaningfully if you're looking at Q1 '06 to Q1 '07. Remember the $1.4 million pension change that I had mentioned earlier. There's about $900,000 of that in SG&A, so you've got -- it's apples and oranges a bit. So take that out of it.

You're still up 10%. Is that what we should expect for the year?

No. We did have some unusual things. For the year, it's probably around that 8% range I think we had said, somewhere close to that at least, a couple of months ago. But it will be around there because of the sales change.

You mean up 8%, or 8% of revenues.

8% of revenues.

8% of revenues. Okay. And then, If I go take the midpoint of your guidance and drop it through a model, I'm showing a negative contribution margin for the balance of the year of 20%. Is that, given you lowered your guidance in the range of 20 to 25, and obviously that includes something from the first quarter. Is that consistent with comparable mix, going forward?

I'm not sure how you're getting the 20%.

So you're saying for the next three quarters, your contribution margin is, on the downside is what?

You're comparing it to last year?

Yes, year over year. Same thing that you --

Yes, so what would be included in the balance of the year would be the pickup or increase from the organic growth we talked about and the cost savings, the sourcing, those types of things. So yes, I would expect it to be less.

So, in your guidance of 85 to 135, the marked to market accounting, do you have only the impact driven the first quarter, or are you assuming something else?

No, first quarter only.

So everything in there is going to be plus or minus that. And, let's see, what else? We kind of talked about it a little bit, but can you give us some perspective on how the different end markets are performing for you? The non-Class 8 truck? The other parts of your business?

Well the construction business on a global basis is performing extremely well. I went through a little bit of that with what was going on in China. In North America, with the products that we supply, we're actually seeing a level to some slight growth. And we're winning conquest business worldwide on construction business. With after-market and OES we're seeing pickups there, opening new channels frequently. So we see a very bright prospect there on an international basis. We're being sought after for the heavy-duty trucks, which is a very positive experience for us. We're basically--just about every international corporation that built heavy trucks, we're dealing with on a basis of quoting business. In Japan, Western Europe, and Eastern Europe, and China. And we have visits coming over -- visitors coming over from China, truck OEM, next month.

As well as some of the marine-type new business opportunities we've got, those are progressing. Actually this is a much better conversation than talking about Class 8s. Everything outside of the Class 8 market for us right now is progressing well and as planned, so it's very positive.

Okay, I'll stop asking questions on that one then.

Well, keep in mind that this group here has lived through 2000. In August of 2000, we were 95+% Class 8 truck in North America only. We saw 67% drop in our business in one month, and survived it, and come out and flourished. This is a speed bump. This and '07 too will pass, and we will come out in '08 with very strong build rates and high content. '07 is what we've always said it was going to be, not a wonderful year.

Okay, thank you.

You're welcome.

Our next question is from Alan Weber, with Robotti and Company.

Oh, good morning, a few questions. One is, can you just talk about, given the changes, just the perception in terms of acquisitions? What are you doing and, kind of, the mindset of the sellers?

Myself and Kevin Frailey and Chad, to some extent--Kevin and I spent time in China and India working on potential acquisitions and customers with the OEMs in those countries. And Chad spent some time in China and Australia doing the same thing, looking at acquisitions and potential customers. I have to say it was probably the most exciting trip that I've ever been on with any company. The acceptance level of our company is extremely good in those countries, because we're already working in them. They've seen that we've made inroads to the market. We're starting to be sought out in those countries, and we're seeing a high level of quotes and a high level of activity of them wanting to visit and look at our products.

I think acquisition-wise, we're seeing some very good opportunities. As always, we're looking at anywhere between 3 and 5 to 7 candidates for acquisitions. We go through the process very thoroughly. Sometimes, some of these acquisitions, we've gotten up to the date that we think we're going to do the deal and found issues with them. And when we find major issues, we back off. We don't want those for our company.

Okay, and this is not meant as a criticism, but just kind of a question. When you talk about the lower content, given the market declines, when you look at it -- and I understand you've been in an up market for several years now prior to this. But is it really surprising that the content or the pricing -- you talk about lower-priced seats would happen in a down market. Isn't that kind of the norm in every business?

Oh, absolutely. Do you want to tell me what level I should take it down to? I mean, do I take it to a $50 doorpad, or do I take it to a $56 doorpad, or a $75 doorpad, or do I leave it at $150? No, I took it down to what I would have seen in the past as a normal range. There was no way I could predict that there was going to be 50,000 export units in a year that we just came off of, the highest year that we've ever had for exports at 23,000. And it wasn't taken as a criticism.

Okay, I just -- because, it is as you said, and then when things turn you'll get higher priced content. I mean, every market works that way.

Yes, but I don't know -- I can't tell you for sure that it's going to go all the way to the top content. I can just tell you what it's done in the past. I can tell you in the past in October, sleeper units occupied 67% of our slots. This October, I don't think it'll be that high. And it's just because I've seen the trend downward so far, but I can't tell you for sure what the sleeper content units going to be.

So to answer the question differently, yes, we definitely do make assumptions in our estimates and our planning that the content and shifts will change. We make assumptions on market shift, where the customers are going, the product, the content, this and that. We did include that. But it's obviously taken a different turn from what we originally planned.

Okay, my last question was, when you talk about some of the changes in product, are there any products specifically where, when you take a step back and look at it, that market perception of product has declined?

Will you ask that in a different way? I'm not sure I understand what you're asking.

In other words, as an outsider, you talk a lot about the market shift that can be -- a certain product. You don't sell a certain -- there's certain products you have higher content on than others. And some of the sales are out of your hands. I was just wondering if the perception of your products -- have any of those taken a negative hit over the last few quarters.

No actually, the perception of the products that we have, you take National Seat Brand, for example, it's North America's leading manufacturer of seats on the OEM market, and it's gone up. We've actually had conquest business there. You take KAB seating, which is the global standard for construction seats, we've won conquest business there and have a growing market. You take Monona Wire Corporation for our wiring harnesses, we have now been awarded contracts in Western Europe -- in different countries in Europe, for our product to be manufactured in their products in Western Europe.

So I don't see any of our products that have taken a negative hit in the marketplace, that "we don't want your products in our products -- in our OEM trucks or after-market vehicles."

Okay, great. That's it for me, thank you.

You're welcome, and thank you for calling.

There are no further questions at this time. Mr. Dunn, are there any closing remarks.

We appreciate all of your calls, all of your questions. There were some very good questions today. And I guess I want to leave the focus that 2007 is 2007, and it's already coming close to half the year over. And as we've said in 2006, when we were out with most of you guys talking, no one really wanted to focus on 2006 because they wanted to see what was going to happen in 2007, so we could get on to 2008. Well, we're seeing what's happening with 2007, so we need to get on with what's going to happen in 2008 and be prepared for it as an industry. And that's what you see this company doing.

And certainly if any of you want to talk, feel free to call Chad or myself and we'll be happy to walk through anything that you need to walk through. Thank you very much.

Thank you, everybody.

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