Commercial Vehicle Group Inc (CVGI) 2007 Q2 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the CVG Second Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS.) At this time I would like to turn the call over to Mr. Chad Utrup. Please go ahead, sir.

Thank you, Amanda. And welcome, everyone, to the conference call. As usual, before we begin the formal portion of the call, I first would like to read through our Safe Harbor language. I'll then pass the call over to Merv for a company update, and then I'll take you through our results for the second quarter of 2007 and our outlook for the full year of 2007. We'll then take time to answer your questions.

I would now like to remind you that this conference call contains forward-looking statements. Actual results may differ from anticipated results because of certain risks and uncertainties. These may include, but are not limited to, the economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

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.

Although CVG remained profitable in the first half, the expected return of increased volumes in North American Class 8 truck industry is taking longer than anticipated. Corresponding, the return of CVG's historical earning power is postponed slightly as well. I used the word postponed deliberately as all experts in our space agree that this emissions related dip is an '07 issue and is anticipated to rebound in '08.

While we anticipate the volume recovery will occur in 2008, meanwhile, CVG continues taking steps to provide geographical and market-related counterweights to our decreased reliance on North American heavy truck. Nonetheless, the volumes realized in the first half of 2007 require that we revise our expectations for the full year, and now anticipate our 2007 earnings to be in the range of $0.18 to $0.46 per diluted share.

We expected 2007 would be a lean year due to emissions changes and, therefore, we deliberately guided our capital structure to not only endure such a dip, but to provide enough resources to continue to pursue strategic opportunities as they arise.

Yes, the high content truck buyer has stayed on then sideline during the first half of buying season. But, he will be back in 2008 and, when he returns, he will need our seats, trim, cab structures and solutions. 2009, too, we feel will be a likewise a better business climate for CVG.

In the meantime, we have focused on bringing increased cohesiveness to our management team, diversifying our business to compensate for the cyclical nature of the traditional NAFTA truck business, and we did celebrate some key achievements in the first quarter -;in this quarter.

For instance, our modular construction seat program found a new slate of Asian located customers. We cleared significant launch related hurdles for our first production programs for our virtual engineering composites, or VEC technology.

In addition, I would also like to salute Jerry Armstrong, President of the Global Truck Group and his team who, despite the dramatic reduction in volumes in North America, kept his sales per head ratio consistent throughout the temporary dip in volume that we have experienced.

Now, allow me to comment further on the second quarter, reiterating the theme we discussed in last quarter's call. Yes, we saw declines in OEM production levels and, yes again the decline was exacerbated by the fact that non-Mexico volume was impacted more severely than the lower content trucks destined for Mexico and other exports.

The resulting situation has been that our OEM customers have reduced their production schedules sporadically. They are now reducing production by weeks instead of days. As our customers have unevenly adjusted their production schedules, it has been challenging for us to balance production needs and capture efficiencies when compared to a more gradual or a more complete shutdown.

All of this is the part that CVG cannot control. So instead, we chose to focus on the aspects of our business over which we have control.

One, we are working with our plant managers to better manage our response to the situation, while attempting to take care of our employees and keep our skilled labor in place for the time when the turnaround starts.

We are positioning the company to be more resilient and diverse. As most of you know, overall North American class 8 vehicle production currently accounts for around 50% of our revenue stream. As recently as 2001, this ratio was much more stark at 90-plus percent. This metric shows plainly that we are making progress in our plans to diversify our business and decrease CVG's dependence on this volatile segment of the market.

Three, we announced the closure of our Seattle facility.

Four, we took advantage of the slowdown to host an off-site leadership development meeting to bring the next level of leadership closer to the vision we have (inaudible) for the company, with an emphasis on secession planning and building unity in the company purpose.

Talk a little bit about Seattle. On May 22nd we announced our intention to close our Seattle, Washington manufacturing facility. We will transfer its operations to other CVG facilities by the end of December of 2007. This action is expected to improve our customer service and strengthen our long-term competitive position by rationalizing our facilities due to taking on new locations and the acquisitions we made.

Seattle has produced interior trim products, heavy truck and marine products. The work currently performed at the Seattle facility will be distributed to existing CVG plants throughout the United States.

The decision to close the Seattle facility and redistribute the work was the result of a long-term analysis, changing market requirements, which included the consolidation of product lines and putting our operations closer to our customers' operations.

The closure of the Seattle facility eliminated 115 jobs by the end of 2007. The decision to close Seattle was not an easy one. It was taken only after serious consideration of our alternatives, and the long-term implications for our entire company. We regret the impact this will have on our Seattle employees and their families. We will work hard to assist them during this difficult time and transition.

We anticipate the annual pre-tax savings of approximately $1.9 million to result from this closure, with no negative impact on our products or service. In fact, we expect our service to improve. Chad will provide some financial details on this during his portion of the call.

Management symposium. Although CVG is experiencing a slowdown in business volumes, we are continuing to invest in our people. Our goal is to build a deeper, stronger team that is better equipped to manage the future or CVG. We believe that using this slow period is an opportunity to lay the ground work for long-term development projects is a good use of this moment in the economic cycle.

In June, CVG managers, 80 of them from around the globe, got together. We met for five days to share information and receive developmental classes from outside experts, as well as each other. We developed an ongoing plan to practically guide four issues that we feel are critical to our company.

They include enhancing and expanding our continuing total quality production system and its application throughout the company on a global basis; keeping CVG viable as an innovator and competitor by becoming a learning organization; three, maintaining plant standards that promote the importance of consistent shared measures and performance at all levels in the area of CVG as a growing company that needs to integrate different cultures and systems to the past and future acquisitions; and leveraging communications effectively to enhance our performance as we grow into a larger, more complex, diverse and international company.

During the week we focused on discussions and presentations on how to work better together and share CVG's guiding values of integrity, teamwork, innovation, continuous improvement and passion. The team also participated in classroom presentations to designate the established common understanding of our strategic plan, the tenets of basic supervision, how to use financial measures, including a presentation by a Wall Street executive on how the street evaluates a company, analyzing new business, CVG's acquisition strategy and many others.

For many of our business leaders the symposium was a chance to talk strategically about our future face to face instead of via phone or email. Not only did we begin the foundations for a new of team, we came away with a good list of things we need to do to better secure our future.

In summary, overall, our business strategies remain the same, our long-term plans call for us to globalize and diversify our product bases and geographic footprint. These actions should help stabilize our performance throughout cycles such as the one we are currently in.

As mentioned, we continue to be focused on continuous improvement, cost management initiatives that are proceeding through our Lean manufacturing technique and TQPS initiatives.

Finally, we intend to pursue the right type of acquisitions. We see the right opportunity, one that meets our criteria to expand our customer base, our product line and our geographical reach, we remain in good financial position to move on it.

Despite the near-term issues of the 2007 market, we believe CVG continues to be a successful, highly recognized global supplier in the commercial vehicle industry and we are investing in the future. We feel we are positioned for continued growth and success.

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

Thanks, Merv. Our revenues for the quarter came in at $158.6 million, and our operating income was $752,000, which is a decrease of approximately $26.1 million versus last year, or 34% as a percentage of the change in revenues.

This decrease resulted primarily from the decreased production levels of the North American Class 8 market and the impact of the mix and content of production units compared to the prior year.

SG&A for the quarter was $14.6 million as compared to $13.2 million from the prior year. This increase is primarily attributed to the cost of increasing our management depth throughout the company and stock-based compensation expense from the same time last year.

We recorded restructuring costs of approximately $1 million related to the closure and consolidation of our Seattle operation, which Merv mentioned. This was announced earlier in the quarter. Our full-year estimated impact for the closure remains in the range of $2.9 million.

Depreciation was approximately $3.7 million, amortization was $259,000, and our capital spending was approximately $3.5 million for the quarter. We have reduced our capital spending outlook for the year to a range of $18 million in an effort to further align our costs with the market impacts for this year.

Included in other income for the quarter was a pretax gain of approximately $1.7 million from marking to market our forward foreign currency contracts, as well as a pretax gain of approximately $500,000 related to the reversal of estimated withholding tax penalties and interest on prior period debt activities.

Interest expense improved to $3.5 million for the second quarter compared to $3.8 million from the same period in 2006. And as a result of our early payments of our term debt, we did write off a proportionate amount of our deferred financing fees of approximately $149,000 during the second quarter of 2007 versus the $318,000 recorded in the same period last year.

We did have a higher favorable tax rate for the quarter, primarily due to the impact of greater estimated annual tax credits and lower effective foreign tax rates when compared to the prior year and to our previous estimated provision rate for the quarter.

Our diluted EPS for the quarter is based on approximately 21.4 million diluted shares, and came in at a loss of $0.01 compared to a gain of $0.72 from the prior year.

Our net debt, calculated as total debt less cash and cash equivalents, improved by approximately $18.6 million for the quarter, and our net debt to book capitalization was approximately 32%. Our strong balance sheet and debt position continues to be a key part in our ability to capitalize on our 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. This is primarily based on the following four factors. One, we have experienced impacts from the increase in Mexico and export units, as well as product mix shifts within the U.S. and Canada.

We have adjusted our outlook for the remainder of the year based upon the mix which we have experienced during the most recent quarter and through the first half of this year. Overall, our revised outlook is based on class 8 build rates in the range of 145 to 170,000 units, excluding Mexico and export units.

Two, adjustments related to our material cost savings and sourcing programs, which are being hindered by the lower volumes and product mix.

Three, customer production scheduling has further impacted our outlook on productivity for the remainder of this year. And as we've discussed in the first quarter, and as Merv previously discussed on the call.

And lastly, the $2.9 million estimated impact of the closure and consolidation of our Seattle operation.

As a result of these items, as well as our actual results through the second quarter, our expectation for revenues is now in the range of $680 million to $712 million. Our operating income expectation is now in the range of $20 million to $30 million, and our revised diluted EPS expectation is in the range of $0.18 to $0.46 per diluted share, based on 21.6 million diluted shares.

We anticipate our revised free cash flow to be approximately $20 million to $25 million during 2007, which remains in line with our previous estimates, despite our operating adjustments.

In summary, our second quarter results were negatively affected by the mix and content of the North American class 8 units. Our short-term focus has been on minimizing the impact of this year's down cycle, while planning for well beyond 2007, both in and out of the North American class 8 market.

Our global construction and other end markets are performing well this year, and we continue to focus our resources and efforts on further developing those key markets.

Our second quarter revenues have decreased by nearly one-third from that of last year, and operating profit is down only approximately 34% as a percentage of the change in revenues. This compares, and is indicative to us as the management team, that we are doing the right things from an operational and cost standpoint to minimize the impacts of the market fluctuations and utilizing our variable cost structure.

We are disappointed with our results compared to our original outlook for the year. However, considering the drastic drop in the class 8 market, we are pleased with how our management teams and all of our employees are managing through such a tough situation.

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

(OPERATOR INSTRUCTIONS.) Adam Plissner.

Good morning.

Good morning, Adam.

Morning, Adam.

Merv, maybe you could just help me understand on some of the flexibility you have in your (inaudible) structure. We've talked in the past about temporary and overtime, and now you're talking about a more permanent facility closer in Seattle. What's left in the system to adjust out and collect in regards to what your temporary and overtime capacity is? I know at one point you said it was almost 35% of -- I think the number of workers or -- I forgot what measure you used. But, where are you in that adjustment process?

Well, one of the things I commented on about, Jerry, who heads up the truck group where most all this impact is, is that he had been able -- a ratio that we keep in mind are sell dollars per employee. And he's been able to keep that number pretty constant, even with the major takeouts in the business. So, we continue to have overtime that we used to adjust down whenever we have these down periods. But, the big thing that we're getting hit with is weeks down instead of a day down, that type of thing.

I mean, I guess what I'm trying to get at is, is there still room -- do you have to go towards permanent capacity reduction now to be able to flex with the volumes, or is there still room for your to maneuver in temporary and overtime?

This flex down, or taking the factory down, has really got not a lot to do with flexing the manpower because of the volumes. This one, just like the other one that we closed down early -- or late last year, is basically because the acquisitions that we made, we have other locations that are closer to the customer where this needs to be moved to. The products that were made in Seattle, a high percentage of those products are used over on the East Coast. So, for us--.

Yes, Adam, if I can add to that, too. I mean, the plans that we had in place for this year for reducing overtime and temp labor from where we were, say, the last part of -- the ending part of 2006, we've been successful on those. The biggest changes is, other than volumes and product mix, is the scheduling fluctuation. So, it hasn't -- this year hasn't really changed much from what our outlook was other than those few factors.

Okay. So, if I'm understanding this correctly, when production -- if production were shut down on a more consistent basis instead of the lumpy pattern you would have had more of an opportunity to take out consistently the temp and overtime. But, at this point, you have to retain them because you just can't predict the staffing needs?

We've taken it down to a good level. If we take much more, we get into the skilled labor and that's an area that we cannot afford to mess with with an up market coming.

The permanent -- the temporary labor that we have has been adjusted down in a reasonable fashion and in good shape. I think that there's room to take down more, but it's -- we need to get a little bit more consistency. And I think that everyone's predicting the built rate is going to start back up in '08 and I think we're keeping ourselves prepared for that.

Okay. Maybe just looking at the shift in mix. Is there anyway to isolate that impact, Chad? Is there a way to think about it in terms of what your content per vehicle was running before the downturn, what it's running now considering the export issue and Mexico issue, and ultimately the lower, I guess, interior content requirements of the current trucks being orders? Is there any way to quantify that?

Not easily. But, I think the biggest thing for us is really the -- as a total percentage of the class 8 units, obviously this year is pretty significantly high for Mexico and export.

If you look at where our estimates have adjusted since we started out this year, this last adjustment that we just talked about for the balance of this year, which includes the impacts that happened in the second quarter, is roughly $30 million on a $15,000 to $20,000 change in units.

So, there's -- if you average it out, it maybe a couple hundred dollars per unit. But, that's really difficult to get to because of the weighted average and excluding Mexico and exports. That's a good way to look at it, but it's pretty difficult to gauge it that way.

Okay. The last thing I had and then maybe I'll jump back in the queue. Merv, you continually mention -- and this has been part of your strategy for some time -- acquisition opportunities. But, from what I understood, you had certain bank leverage limitations in terms of where you would take the Company.

But, given the earnings shortfall here, regardless of the circumstance, how do you get around that? What are your intentions to follow through on your strategic intentions but, at the same time, have to deal with where the current leverage and bank limitations might stand?

Well, the bank limitations are -- will not be an issue. The limitation that we've set on ourselves at 2.5 times leverage is more of a long-term goal. In other words, if we see the economy, or the truck class 8 rebounding in fourth quarter or the first quarter of '08, then our leverage (inaudible).

I don't know if any of that came -- I heard a lot of feedback.

Yes, I'm not sure where that's coming from. It's not on our end.

So, you're saying that the bank limitation today is something you're not concerned about? It's a long range goal? Is that what I heard?

The bank limitation is not something we're concerned about today. Now -- and the second portion is we've always said we wanted to stay less than 2.5 times, and that's been a management decision, not a bank decision or anyone else's. And we always look at that 2.5 times. We will not look at it against '07 particularly because we feel that the rebound is coming in '08 and we will use those numbers as our guideline.

In other words, have to spend a half a year that's over 2.5 times then we might do that if the acquisition looks to be a very favorable acquisition and one that's going to be accretive, that fits into our overall strategy and moves us away from being as dominant -- or as 50% of our business in class 8 market in North America.

You guys are aware of the difficulties happening in the corporate capital markets. Is there an issue? Have you thought about how you might finance acquisitions going forward?

Like Merv said, Adam, we've got a good relationship with our banking group. And we've got the bonds in place, obviously. And our net debt is about $125 million. So, we've got excess cash right now to be able to fund anything in that area, as well as -- like I said, the relationships that we have with our banks and the fact that we currently don't have any funded debt with our -- under our credit facility, we don't anticipate it being an issue.

Great. Thanks, gentlemen.

Alan Weber with Robotti and Company.

Good morning, Alan.

In this presentation or press release you talked about guidance for '08 for EBITDA. Where does that stand today and what are your thoughts?

Our guidance for '08 we do not plan on changing today. We're having a lot of difficulty in this market determining what '08's going to be. We think that where we drew the line in the sand and put our estimates are still good. But, we're still seeing a lot of fluctuation in what people think about '07 and will that push more units into '08 than what we have. So, at this time we're going to stand pat on where we're at with '08.

And can you talk about, like, what evidence there is that in '08, kind of the content per vehicle would be substantially higher to kind of reach those '08 levels that you talked about previously?

Well, the only thing that we have to go on is historical data that helps us look at things. And each time there's a kick back up in the market, and especially with the emissions changes as much as we're hearing about in '10, we feel that to keep the 8 where it needs to be with the trucking industry, and to satisfy the driver demand at that time in peak periods, you have to go with a higher content vehicle. And they have to have more of the vehicles. We've always in this market, I think, adjusted the underlying demand in the marketplace to be about 265,000 units, something like that. If it was a flat line.

Yes. And to discuss '08, I mean, we're really focusing on '07 here. Said differently, Alan, we don't have any additional data or more relevant data today to discuss or to look at our '08 previous estimates, to make an adjustment to those.

Okay. And in the second quarter, in the 10K I think you talked about your replacement business was like 10%, or was it aftermarket was 10% of revenues. Do you know what that would have been roughly in the second quarter?

No, I don't. Presumably, if that's running at a flat rate, I mean, you can run it out. It's presumably a little bit higher given the downside in the class 8 market, but I don't have an actual number for you.

Okay. Thank you.

Mark Bishop with Boston Company.

Hi. I had a couple of things. First of all, on your covenants, given your outlook for free cash flow, it seems like most of it for the year you already got. And the -- so, given where your debt is, my read on your 10K is that your senior debt also has the covenant of 2.5 times debt to EBITDA which, given your forecast, you wouldn't hit.

So, I was just wondering if you plan to go back to the banks to -- or if not the banks, the bondholders to change that and do you anticipate any problems given the current environment for this widening debt spreads and whatnot? It's not the best time to do that. That was my first question.

And then my second question is what -- if you can give any kind of thoughts as to what the savings from your various cost cutting programs might be eventually, and when you might start to see some benefit and what the ultimate -- and when you get the full benefit?

Regarding the covenants and the bank structure, like I said, we do have a good relationship and the level of the fund to debt today, which is essentially zero, we don't anticipate any issues. We will, as needed, go back to the banks and work with them. We've done that historically. We've got a good relationship with them so we don't foresee any issues there.

Regarding the cost savings, there's two pieces of that. There's the Seattle closure and consolidation. We've got the impact of the restructuring -- a majority of the restructuring expense for t his year, which I mentioned is about $2.9 million. That's included in our revised estimates for this year, obviously, so that's an impact for this year.

But, we anticipate an estimated pre-tax gain from that of about $1.9 million. And that's really guided more towards the '08 side of things because of the activities of the closure for this year. So, there's an extremely favorable financial payback for that with the expense this year and the gain we're expecting for next year.

And finally, the -- when we talked early this year, when we set out guidance out in January or February when we first talked, we had estimated that our net savings for this year related to material cost savings and sourcing and productivity of about $19 million, which was net of inflation and net of annual givebacks. So, gross that up and you're probably talking closer to $30 million of improvements, realizing that we had some inefficiencies in '06.

So, the adjustments that we've made today in regards to our '07 outlook are really -- we're talking about $6 million to $8 million due to volume and mix impacts on that $29 million or $30 million target that we set out for ourselves. So, it's not a significant change but it is a change from where we previously estimated.

So, said differently, if we were at $19 million of net productivity and cost savings for our previous outlook, we're now maybe closer to $10 million or $11 million of net impact.

And that's a lot of words. But, when you look at it year-over-year, whether the second quarter or the first two quarters of this year compared to last year, that's why we're still in that favorable or reasonable range of contribution margin. In this case detrimental margin of the 30% or so. In the time where our market's down, our revenues are down one-third. So, that's hopefully a lot of words that gives you some idea around the numbers of cost savings.

I just want to clarify that because I didn't quite grasp it. So, the productivity -- so, you're going to get -- the cost savings are going to get you $1.9 million of benefit in '08. That's from the closures and whatnot, that has the $2.9 million cost this year. Is that correct?

Yes.

And then the productivity -- so that, you save money but then you give some back with pricing. Is that right?

Correct.

And so your net benefit is not 19 this year, it's 10 to 11, but that's already baked into your forecast for the year.

Correct.

And then is that something more than normal? Like, would you get a similar amount next year as well, or is that kind of a one-time effort then -- and we're done after this year?

No. I mean, that's in line with kind of where we've been historically. We typically target 3% to 4% material cost savings and 4% or 5% productivity. And this year was a little bit higher. Our initial expectations obviously impacted by the volumes and the scheduling fluctuations.

So, what we have in our last estimates provided for '08 is somewhere integrate the range that we've historically achieved and that we're comfortable with. And not significantly far off from where our current estimates are from '07.

Okay. And I just want to clarify on the debt. I understand you don't have any bank debt so it doesn't really matter what the covenants are and you can change them if they want to lend you any money, that you wouldn't need, I would think. But, on your term debt or the debt that you do have also has the same covenant, is my understanding. Would that not be in violation?

If you're talking -- the only debt we have would be the bonds, if that's what you're referring to. And it follows the covenants and requirements of the credit agreement -- the senior credit agreement.

And so, you're saying that the current debt might in fact, given your forecast, might in fact be in violation. However, your thesis is that you can go back to the banks and change the covenants because you don't have any money outstanding anyway?

Yes. We're not in violation today. We're not in violation as of the second quarter. And our intention will be to revise those, if needed, with the banker of debt we have, yes.

Okay. So, you would -- so, if you hit your forecasts you would eventually, maybe this quarter or the fourth quarter, be in violation of your covenants on your existing debt. However, you think it wouldn't be a big deal to go back to the banks and change them. Is that a reasonable--?

That's correct.

Okay. Thank you.

Keith Hogan with Pioneer Investments.

Hi. My questions have been answered. Thanks.

Mr. Hogan, your line is open.

Yes, my questions have been answered. Thanks.

David Leiker with Robert Baird.

Good morning.

Good morning, David.

I've got a handful of numbers first. How much revenue contribution with currency?

Compared to?

Year-over-year in Q2.

Compared to year-over-year. Let's see. About $3 million.

And then what about this acquisition you made at the end of last year? How much did that contribute?

From a revenue standpoint, about 2.7.

Okay. And then the last thing is, if you look at your non-truck end markets, the other 50%, maybe you can just run through for us in the quarter how that -- those parts of the business performed for you? You're up (inaudible) construction. You probably -- my guess is you don't look at Mayflower and [Minona] as separate anymore.

No, we don't. But, we do look at our -- the global construction group and our aftermarket and things like that. And those sides of the business are performing very well. The markets are tracking to what our original outlooks were and we're extremely pleased with the operations and the cost savings goals that were set out for those parts of the business.

Could I get you to quantify performance there in terms of what revenues have done year-over-year and what margin trends might be?

Not segmented out by the truck in construction group, no.

Okay. So, we don't really understand right now how well the other parts of the business are doing.

Well, we haven't quantified it before regarding the breakout of the construction and the truck group. So, I wouldn't have a good comparable to give you.

Okay. Could you tell us how much your truck business was down?

The truck business--.

(Inaudible) 50% drop in class 8 truck build. Were you down more or less than that?

For the truck side of the business compared to last year?

Yes. Are you down more or less than the end market, which was down about 50% year-over-year in North America.

No. We're -- because of the product mix we're down more than just the volume drop. I mean, the product -- or the mix and the content is really a significant portion of really why we're adjusting more than just the volume.

Okay.

For example, we've got -- we can talk about one of our higher truck content businesses, which is the structures business. I mean, that's down nearly -- a little than 50% through the first six months. So, that gives an indication of where it is compared to the pure volume reduction.

Okay. On your guidance, it sounds like you're leafing what you have out there for 2008 in place.

Yes.

I mean, that's build on a class 8 (inaudible) number 2.80 to 3.20, correct?

Yes. WE have not adjusted the volumes.

Okay. Because, I mean, we're below that. I think ACT is below that and other people are below that. I mean, at what point do you look at that and put a number out there that would be more consistent with what most other people are looking for?

Probably next quarter. Like I said before, we don't have enough information with the volatility that we're seeing in mix and things like that for '07. That's kind of where we stuck with. So, we don't have any additional information to update '08. The range that we have out there is 2.80 to 3.20. We do expect some positive impacts from the Seattle restructure, but we've left '08 alone for now.

And that -- talking about Seattle, that savings of $1.9 million, when do you start realizing that?

It's early part of '08 is what our estimate is.

And when would you hit a run rate on that, hitting -- running at the half million a quarter?

By second quarter.

Okay. Let's see, what else did I have here.

Merv, give me a perspective in terms of what -- leave the mix issue out of the equation as it relates to Mexico. But, give me a perspective on the production schedules and the run rates of how that compares back to 2001, 2002.

To me, back in 2001, 2002, we had a little bit more control out of the OEMs about taking down, like, taking days out of the shifts or taking shifts out of the business. And today, with some of the guys being more unionized, we're seeing more of a month out or two weeks out because of the way they get their benefits. And for us, being non-union, it makes it pretty tough on us. So, we're seeing much more of the abrupt shutdown for extended periods of time versus what we saw in '01. I mean, we're managing through it and I think we're doing a good job of managing through it.

I mean, the production rates are about the same as what they were back then if you exclude Mexico and export.

Yes, they are. I mean, it's -- but you know, our business has changed drastically since then, too, though David. We did the Mayflower acquisition, which we're seeing more of -- the downturn is affecting more than what it did with the trim businesses and the seat business.

Yes. I guess it's just hard understanding that 12 months ago we're sitting and talking and we've got this downturn coming but we've got a flexible schedule. In 2001 we had a drop and our margins went up. We don't think we're going to have that big of a problem. Now all of a sudden it's 180 degrees opposite of that.

And I think people are trying to get their arms around what's going on. Because the production numbers -- the production numbers in U.S. and Canada are down about 5% from what they were expected to be six months ago. The volumes are about -- aren't that far off form what people were thinking.

What we've seen, and I know you said leave Mexico and the exports out of it, but that's very hard to do. We're also seeing the (inaudible) level of the business not as high as what we saw in 2001. The interior components at high level as what we saw back then.

More, we're seeing less sleepers today than what we saw back then. And just overall, the -- instead of a 70-inch raised roof you might see a flat box sleeper. So, it's just a lot of it in the mix and lot of it is the export. Back in '01, I think we had maybe 10,000 units for export and Mexico, and today we're on a run rate of about 55,000 units for export and Mexico.

Yes. Well, I mean, back in 2001 you were billing 9,000 or 10,000 trucks a month for U.S. and Canada and that's what we're building now. So, I mean, U.S. and Canada, part of it is comparable to what it was in 2001. We're not down from 2001.

The export units are higher than 2001.

They're a higher percent, but in terms of absolute units the U.S. Canada market's about the same as what it was back then. I'm looking at--.

Yes. If you're trying to compare the margins back to 2001 from the build rates, there's -- I think you've got apples and oranges. There's -- the business is also 180 degrees different and you've got copper, steel, freight, petroleum. You've got all those impacts year-over-year that are not even close to being in those numbers, as well as the business is completely different. I don't even think that's a -- without sitting down and going through a complete analytics, I don't think that's even close to being the same comparison.

That's right. That's understandable. But, as recently as last year's third and fourth quarter conference calls, you and Merv both were talking about how you flexible structure and you talk about how well you did in 2001. And that's -- because remember everybody was pushing you on why your numbers weren't going to be lower.

Yes. No, no. I agree. And I think if we pull this back to looking at year-over-year--. We always talk about a contribution margin. We've always historically said -- we've used the EBITDA range of 25%, right? Historically? We've done that for the last three years.

What I would look at -- and we all knew where 2007 was going from our initial outlook and we've made some adjustments to it this year. We did it last quarter and we're doing it now, based on where the mix is, where the volumes are. And we're disappointed with some of our cost savings.

But, if you look at where we are though -- look at second quarter or look at the first six months compared to last year, that contribution margin is there. And that's because we're using the variable cost structure and because we've got these cost savings that we are achieving. I mean, if you take out the anomalies like the gains that we had last year and some of the copper impacts from '06 to '07, we're in that 30% to 31% range.

So, that's -- I know we're trying to -- we're really focusing on the change and where we are for '07 today versus what our original estimates were. But, we also have to look at the year-over-year comparison. And it is in line with that contribution margin given the drastic drop in the market. So, that -- I think we have to look at that.

Okay. One last thing. As you guys are looking ahead, what is your -- what are your expectations for when the production rates pick up? When do we start seeing a recovery in production rates? Is it Q4--?

So far we haven't been right this year, so I don't know if you really could appreciate anything that we gave you. But, we think it will kick up starting in Q4, but definitely in the first part of '08.

Okay. Because, I mean, if order rates aren't picking up in the next couple of months, the first quarter of next year's probably still down in build rates double-digits.

That's what we're hearing, but we're also hearing the OEMs talking about a pick up in '07, the fourth quarter of '07 for the run rates. So, David, there's so much information out there and so much of it's useless.

And no one really knows, too. That makes it hard.

And then just a last piece of that. As you see that volume pick up, Chad, if we go back to '05, '06, on those conference calls everybody was talking about how the contribution margin wasn't what we thought it was going to be on the up side. And you talked about raw material costs and you talked about inefficiencies because of strong production rates and everything. You know, there's always something in there along the way. What's going to make it any different in '08?

Well, I mean, if you -- there's always going to be some exclusions. I mean, that contribution margin is all things being equal. So, to the extent -- I mean, on the downside we're in the 30% to 31% compared to last year. As of right now, I wouldn't anticipate us being any different than what we've historically said.

I don't know what's going to happen with those -- with production schedules or anything else. But, right now, we wouldn't see anything different than what we've historically said, which is in that 25 range. On the way up, it's usually a few percentage points lower and, on the way down, it's usually a few percentage points higher. I think we've always talked about that.

But, like I said, I wouldn't expect it to be much different from where we've historically been, when you exclude those types of things.

Okay. Thanks.

Stephen Volkmann with JPMorgan.

Hi. Good morning. This is Sabina Chatterjee in for Steve.

Hi, Sabina.

Hi. I had a question. In the past you've usually provided your build expectations on a North American basis. And this time you've done it excluding Mexico and export. So, I was just wondering how we could reconcile the two forecasts? Like, what percent are you assuming to be export related volumes?

Mexico and export units we've assumed around 55,000.

Okay.

So, it would be the equivalent of 200 to 225, somewhere in there.

Okay. So, that's a bit down from your previous forecast.

Correct.

Okay. And then, as far as the third quarter, do you think that it could be similar to the second quarter given that exports are expected to remain high and volumes are probably not going to pick up significantly, until at least fourth quarter or early next year?

We haven't given our estimates by quarter. It's just for the full year. So, it's a little difficult to talk about that. But, our estimates for the balance of this year are based on the mix that we have seen sort of in the second quarter and through the first half of this year. So, it is based on that. But, I can't give you a third quarter specific response.

Yes. I guess if I could just get a flavor for it because we know how the second quarter played out. And just given whatever production schedules you have and how you estimate export volumes will play out, I would think it would be similar to the second quarter, just in terms of, like, the overall scene at least. Not necessarily earnings or profit margins, but just kind of like export being a significant portion and volumes being as low as they are. Because most -- I mean, the industry is expecting that the second and third are probably going to be the trough of this cycle, right?

Right.

All right. Chad, you had mentioned something about a product mix shift in the U.S. and Canada. Can you talk a little bit more about that?

Yes, sure. The mix that we have, when we talk about product mix it can go from a sleeper product to a cab-over-engine product, and the variation there can be pretty drastic. But, it also can range from a model that we may have with one customer versus another, or an aluminum versus a steel where the value-add or the content may not be there. So, those are the types of fluctuations that we're also seeing on top of this increase in Mexico and exports.

The we'll see--.

The weighted average that we typically use has been, on average, pretty consistent. And what we're seeing now, which is some model changes and some other fluctuations that are impacting us.

Okay. So, is it sort of a cost savings shift domestically?

Well, I think it's hinged on what the end owner/operator is ordering, where we may have content on one of those models versus not the other. So, there seems to be a little bit of a shift and that may be due to price or what have you because of where we are.

Okay. And then my last question is the guidance that you provided on an EPS basis, is that -- I'm assuming that includes all your restructuring charges.

It does. That includes the $2.9 million I mentioned, yes.

Okay. All right. That's all. Thank you.

Richard Close with Jefferies.

Hey, guys. Just was wondering what were the cash taxes paid in the second quarter and what do you expect them to be (inaudible)?

Second quarter was -- I don't have an exact number in front of me, but it was close to zero.

Okay. For the full year? Do you have an estimate?

An estimate for the full year. Our provision is in the range of just a couple million dollars, and given some carry forwards we have, it would be most likely less than that.

All right. Thanks very much.

Jamie Cook with Credit Suisse.

Hi. Good morning. I don't -- most of my questions have been answered. Just one thing. Chad, can you just talk a little bit about -- can you talk more specifically by OEM which ones have surprised you the most in -- I mean, I guess when I look at your forecast reduction, for the industry and for exports, it seems a little more dramatic I guess than some of the other forecasts out there. I mean, are you -- do we need to be concerned at all about market share loss this year? Or how do you feel about your market share relative to historic trends?

We have actually gained market share this year. There's not been a loss of market share, just a loss of maybe some of the OEMs that use a huge sleeper box application. They may end up shipping day cabs right now. And that's a big hit to us. So -- and as far as going into the OEMs' markets here, we're not -- I don't think we're competent to do that. Or would even want to if we were.

Are you gaining share within existing OEMs that you have relationships with, or have you been able to penetrate any new truck OEMs?

We are quoting a lot of new truck OEMs in Asia and in Europe, and also some of the foreign current domestic that have moved to the U.S.

Okay. But, none of the big U.S. sort of truck OEs?

Yes, we're quoting business to them. But I mean, as far as losing any share, we did not.

Okay. And then can you talk about sort of which -- I mean, the OEs that you're -- just so we can track their performance, which ones have surprised you the most in terms of changes in production schedules?

No, I will not get into that. That's pretty much public information. All you've got to do is check with them.

Okay. Great. I'm all set. Thank you.

[Vic Kumar] with Soundpost Partners.

Hi, guys. A quick question. One is what, I guess, changed the most for you -- for your forecast between Q1 and the current forecast? Is it just more exports, mix shift that wasn't expected? Anything else, or--?

Those are the two--.

--Well, the--. Go ahead.

Sorry. So, it's just those two factors is primarily behind it as being worse than you expected in Q1?

Yes. I mean, the volume. We've dropped the volume slightly. But, the biggest change is probably -- or the biggest impact to us is that product or mix shift. Obviously, the restructuring, close to $3 million. That's a change. And then the impacts on material and labor and production scheduling as well. Those are the changes. I mentioned -- those were four. Those are it.

Okay. One follow up question on something you had mentioned before I didn't quite follow. You talked about how your initial productivity gain forecast for this year was $19 million and now it's $10 million to $11 million. I didn't quite follow that. Are you guys not hitting the cost savings you estimated, or what's going on there?

Let me give you a couple of very good examples of this. We have made supplier and design changes to two parts. One has been relocated to India from a source that we had in another foreign country. And each one's been relocated to China.

Now, what happens is those were ordered and placed in the end of '06 and was effective the first part of '07. We have eight weeks worth of inventories between the factory in India and the U.S. operations at the high volume.

Well, anytime you're doing a major supply changeover you build an inventory bank of the domestic material. And what that does, that means that it's going to be at the current build rates we saw in Q1, which was predicted to last a little longer, when that material comes in now we've got basically about 12 weeks or so before we can ever start using that material for the cost savings.

So then, when you cut the market by 45%, or maybe those parts are even higher because of where they go on the truck, on high performance speed, then you end up with a longer situation before you get any of the cost reduction to come through.

So, does that mean, I guess, some of those productivity gains just get time shifted to '08? Is that the right way to think about it?

Yes. Exactly. And anytime you -- if we had $10 million worth of purchasing savings, as an example, purely an example, and the product is cut by 50%, we're -- automatically, the most we're going to be able to have is 5 million.

Right.

So, I mean, those are really affecting the savings, not--. And like I said earlier in the call, Jerry, who manages the truck group on a global basis, has kept his sales dollars per head at a constant.

Okay. Those were my main questions. Thank you.

(OPERATOR INSTRUCTIONS.) You do have a follow up question from Alan Weber with Robotti and Company.

Hi. Something I'm trying to understand, as you look out into '08 and '09, as you talked earlier, a lot of what takes place is out of your control, obviously. Production schedules and some of that. And you talk about the mix change from some of the sleepers to lower margin. When you look out to '08 and '09, how do you see that -- what's your guess over what the trends will be in terms of how it will impact the company? Which I guess really goes towards kind of content per vehicle.

We don't have any additional information today, Alan, to make a guess or to make a change from what we've already put out there for '08, which was our traditional, probably around $1,300 per unit. When we get further along this year and get some additional information '08, we'll address that a little bit further.

Okay. And to that -- so, when you talk about that, that's like not really assuming--. So, I guess I'm just wondering, when you look at it -- and I'm not trying to pin you down to any '08 projections, assuming you didn't have any, just conceptually, do you see greater market share gains in '08, '09, or not? Because you would know kind of -- you would know the areas where you're stronger (inaudible).

Well, I think obviously we've had -- throughout the year we've talked about programs that would kick in in '07, late '07, where we've taken market share from some others. So, those will obviously hit. But, those are baked into the numbers that Chad has looked at. Obviously, things like -- that could happen, like acquisitions or another major conquest in the business will add to that. But, those are really unknowns until they actually develop.

Right. And on acquisitions, has there been much of a change in terms of pricing expectation or kind of -- how aggressively have you -- have you been looking at acquisitions, or are you just focusing more on internal issues?

Well, acquisitions are a key focus of part of our group. That's where we brought in some select players that we've talked about in the past with Kevin Frailey and Milt Kniss and a few like that to build up the strengths so they could focus on the acquisition side while others like Jerry focus on the day to day operation.

And pricing on acquisitions? Has that changed much?

Well, where we -- I think we've said for a while our goal is to diversify what the North American heavy truck, where we're not 50% dependent on it, but less than that somewhat. And so, I think you will see most of our focus positions in Europe and Asia.

Okay. And just my final question is, you made a comment about -- I think somebody asked the question of comparing some of the historical results or margins, and you just made a comment that Mayflower was more negatively impacted with the changes today. Can you just explain why that was, or why that is?

Well, Mayflower builds cabs for certain OEMs. And a lot of it's high end, class 8 over the road. And that right now is not the major thing. It's getting exported and it's not the major -- I think that portion of the business is down a little over 50%, isn't it, Chad?

Yes.

Okay. I wasn't -- okay, great. All right. Thank you very much.

You're welcome.

You do have a follow up question from Adam Plissner with Credit Suisse.

Yes, last thing, Chad. How do you define free cash flow when you talked about retaining your free cash flow guidance at 20-plus (inaudible)?

It's -- I look at it as the change in net debt, Adam. Total debt less the cash. That incorporates all the cash that's generated.

Okay. I mean, I just -- simply if I look at what your revised EBITDA guidance is and what your typical run rate, interest, CapEx, (inaudible) are -- what am I missing, because I'm coming up with sort of a negative cash flow story.

Working capital.

Okay. What's your assumption on working capital?

Well, it's probably in the $10 million to $11 million range. That gets you to about -- on the low side of the estimate, that should get you around $20 million of free cash flow. We're at about 16 through the first 6 months.

All right. So (inaudible) your expectation of $11 million (inaudible) working capital?

Yes. Whatever the number is in your model. I'm -- on the low side is $20 million from our estimates.

Okay. And your cash taxes are pretty close to your [book] taxes?

Yes, pretty close. That's the assumption.

Okay. Thanks, Chad.

You do have a follow up question from David Leiker with Robert W. Baird.

Just one other thing I want to follow up with, if I could. What portion -- and you kind of talked generally that North America class 8 market capped your business. But, what that volumes done versus everything else, I mean, it's got to be a different percentage of your business here in this quarter. Can you give us an idea of how much of your revue in the quarter came from the North America's market?

I could if you give me a second. Let me come back to you in a second, David.

Okay. And would that number have been above 50% last year?

Presumably, but yes, give me a second.

Yes, okay.

You can move to another question and I'll get to you.

Yes. And then the other thing is -- and maybe it will help put some of this in perspective. I mean, you talk about the content and the cost structure, Mexico and export, and trucks versus sleepers and non-sleepers. I don't know if there's a way you have calculated, or you can calculate what your average content would be in the truck market on the U.S. truck, the North America truck build, and give us a perspective of how much that number might have declined to help in perspective what the content change impact has been on revenue.

Well, we haven't looked at it that way from a weighted average standpoint.

(Inaudible) is what it becomes.

I'm sorry?

That effectively is what it becomes.

I'm not sure I understand what you just said.

What your average content was last year versus this year, and how much that fell.

Well, last year we were probably in the 1,300 range. I think we started out a little bit lower at the beginning of the year and were towards the 1,300 range. I don't have a number in front of me but my best estimate is probably it dropped a couple hundred dollars as least.

A couple hundred dollars, so 15% or something?

Would be my estimate.

Okay. Okay. That's useful. When you have those other numbers I'm done.

Not yet.

You want to just email them to me later?

I can do that, yes.

Yes, however you want to do it. I have no further questions. Thank you.

(OPERATOR INSTRUCTIONS.) At this time there are no further questions.

Thank all of you for joining us today.

Thank you, everybody.

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