Commercial Vehicle Group Inc (CVGI) 2007 Q3 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Commercial Vehicle Group Q3 earnings conference call. (OPERATOR INSTRUCTIONS.)

At this time, I'll turn the conference over to Mr. Chad Utrup, CFO. Please go ahead, sir.

Thank you, Crystal. And thank you, everybody for joining us today on the conference call. As usual, before we begin the formal portion of the call, I'll first read through our Safe Harbor language, and then I'll pass the call over to Merv for a brief update, and then I'll take you through our results for the third quarter and our outlook for the full year 2007. And then we'll take time to answer your questions.

I'd now like to remind you that the 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'll turn the call over to Merv.

Thanks, Chad. I thank all of you who have joined us on today's call.

As you may have seen from reading the earnings release we issued this morning, our third quarter results were generally in line with our internal expectations for the quarter. Also, we have adjusted our outlook for the remainder of this year to reflect our assumptions on production levels and product content, as well as our acquisition of PEKM, which we announced a few weeks ago. Chad will take you through these changes and other financial details of our revised outlook for the year in today's call.

We have slightly increased our projected production levels from our previous provided estimates, although we expect to continue to see the impact of the content fluctuations related to the customer market share, as well as even farther increases in production levels for Mexico and export units, which as we have noted previously can have a large impact on our overall content for vehicle.

Due to the current Class 8 market conditions and the overall uncertainty that remains in the market, we are not yet comfortable providing or updating our 2008 estimates. This is only -- the only reason we have chosen to withdraw our previously provided earnings guidance for 2008.

As we progress through the upcoming months and get a better view of where the market may be going for 2008 and as we finalize our internal estimates and complete our discussions with our customers and partners in the industry, we will finalize our outlook and update you as quickly as we can.

In the meantime, we are vigorously looking for additional opportunities to reduce costs, but doing so in a manner that will not impact our ability to respond when the market does recover. These actions have included the reduction of 1,200 equivalent positions since September of last year. We have also previously reduced internal capital expenditure estimates by over 20% for this year and have been reducing spending across the organization.

We have addressed fixed costs through actions such as closing our Seattle and Tacoma operations, as well as our Redgranite, Wisconsin. These actions have not been easy, but we are proceeding with them, and they're expected to be significantly completed by the end of the year.

Despite these measures and the uncertainty about the timing of the recovery, we continue to take a long-term view of CVG's prospects, and we are working to ensure CVG is prepared when the recovery begins.

To that end, we are continuing to pursue our primary strategic -- such as expanding CVG Group geographical reach and diversifying our product offering. We are doing this with the expectation that it will lessen our overall dependency on the North American Class 8 market and especially cyclicality. That, in turn, should provide our investors with more stability and less volatility in the future.

We are continuing to support our aftermarket and cross selling strategies to increase sales and fuel growth. We are continuing our quality training programs and lean manufacturing process to further reduce costs, improve customer satisfaction, and increase profitability.

We will also continue our modular construction seat program and emerging market purchasing programs. Our investment in VEC, our virtual engineering composite technology, continues, and we anticipate the delivery of our first production in VEC parts to customers involved in this project before the end of this year. We also expect our investment in VEC to provide us with new product and market opportunities in the future.

On October 1 we announced the acquisition of PEKM Kabeltchnik for approximately $21 million. PEKM is an electronic wire and harnass manufacturer, primarily engaged in the commercial truck market. It has two operating facilities, Liberec, Czech Republic, and one facility in the Ukraine. PEKM also has a German sales office.

PEKM provides products to a variety of customers, including [Mann], Mercedes, and [Skoda], and delivers product primarily in the central, eastern, and western European regions. PEKM complements our existing product offering and provides us with another well positioned platform to continue our global expansion and sourcing efforts. This acquisition demonstrates on how our globalization strategy works.

It further expands CVG's global footprint and provides us a new customer base outside of North America. In addition, we have identified new opportunities for CVG construction, wire and harness products, which have been awarded to be manufactured in the facilities we acquired with this acquisition. We believe PEKM will provide us with the ability to capitalize on these opportunities and allow us to avoid significant startup costs for the new construction business we were awarded.

In summary, through three quarters we have experienced an uncertain year. The downturn caused by the '07 emissions regulation, the '06 pre-buy, has gone deeper and longer than many expected, and getting a clear view of the timing and quantity or quality of the recovery of the market remains difficult.

Despite these issues our strategy remains the same, as evidenced by our consolidation in North American plants and our recent PEKM acquisition. We will continue to look for meaningful opportunities to globalize and diversify our business. We will also continue to focus on continuous improvement and cost management initiatives.

Finally, despite the difficulty of the 2007 market, I want to reassure you that we believe CVG continues to have the strategy and resources to be successful, competitive global suppliers to the commercial vehicle industry. Although we have had to take actions to control costs and manage this downturn we are continuing to position our Company for the future, whether that is the heavy truck construction, after market or commercial, other commercial vehicle markets. These efforts should help us ensure continued growth and success over the long term.

I'll now turn this call over to Chad for details on our third quarter financial results and an outlook of our revised estimates for the year.

Our revenues for the quarter, as you saw, came in at $160.9 million and our operating income was $2.8 million for the quarter. This is a decrease from the same period last year, primarily from the decreased production levels of the North American Class 8 market, yet was in line with our internal expectations for the quarter.

SG&A was $14.7 million for the quarter versus $13.3 million from the same period in 2006. This increase, which we've discussed before, is primarily attributed to the increase in management depth and changes in costs associated with future growth and new business initiatives versus last year.

Depreciation was approximately $3.9 million, amortization was $169,000, and capital spending was approximately $4.7 million for the quarter. Our capital spending outlook for the year is in the range of $19 million, which includes our estimates for the additional requirements of the PEKM acquisition.

Included in our other expense for the quarter was a pretax expense of approximately $4.5 million from [mark-to-market] our forward foreign currency contracts. Recall that this is a quarterly valuation adjustment of our contracts at a point in time and is a hypothetical non-operating and noncash entry. This expense was not included in our previous estimates for the year and is the equivalent to a loss of approximately $0.13 for the quarter. If you exclude this hypothetical valuation our quarterly diluted EPS was approximately breakeven versus the $0.13 loss recorded in our financial statements.

Interest expense improved to $3.2 million for the third quarter of this year, compared to $3.6 million from the same period last year, primarily related to the overall reduction in our outstanding indebtedness. We did experience a favorable tax rate for the quarter, primarily due to the net impact of certain tax credits and reserves and the lower overall tax rates in countries in which we operate.

Our diluted EPS for the quarter is based on approximately 21.4 million diluted shares, and came in at a loss of $0.13 compared to a gain of $0.84 from the prior year, which was based on approximately 21.5 million diluted shares.

As previously mentioned, the impact from the hypothetical mark-to-market of our foreign currency contracts was a loss of $0.13 in the third quarter versus a gain of approximately $0.05 for the same period in 2006.

Our net debt calculated as total debt less cash and cash equivalents improved by approximately $2.2 million for the quarter and $18.6 million YTD. Our net debt to book capitalization was approximately 32%.

We did have approximately $38.1 million of cash and $11.6 million of bank debt on our books at the end of the third quarter. This was due to the timing and preparation for funding of the PEKM acquisition. The PEKM transaction was then funded using this cash balance.

Overall, our third quarter operating results were generally in line with our expectations. We now look to the fourth quarter, which includes our estimates of approximately 42,000 Class 8 units and continued higher volumes of Mexico and export units.

Our construction market business remains strong on a global basis. While the overall North American construction market business has remained relatively flat YOY, we have experienced good organic growth in this region, and our European and Asian construction market business has continued to grow with that of the local market. This has ultimately helped us minimize the fluctuations of the truck market for this year, and we'd like to continue this same path as we move forward.

As indicated in our press release, we have revised our full year 2007 estimates, this is primarily based on our revised Class 8 build rate outlook in the range of 208,000 to 215,000 units for the year, which includes approximately 60,000 Mexico and export units. This is a change from our previous estimates of 200,000 to 225,000 units, which included 55,000 Mexico and export units.

Also included in our estimates is the anticipated impact of the PEKM acquisition from October 1st through the end of the year. We have included the impact from mark-to-market our foreign currency contracts from the third quarter of approximately $4.5 million on a pretax basis or $0.13. And, finally, we have adjusted for our revised outlook for tax provisions to be approximately 35% for the fourth quarter and 13.5% for the full year rate.

As a result of these items, as well as our actual results through the third quarter, our expectation for revenues is now in the range of $697 million to $704 million. Our operating income expectation is now in the range of $22 million to $24 million, and our revised diluted EPS expectation is in the range of $0.12 to $0.18 per diluted share, based on 21.6 million diluted shares.

Simply put, however, and in comparison to the low end of our previous range, our revenue estimates have increased by $17 million. This is a result of approximately $13 million for the acquisition of PEKM and $4 million for the increase of our estimates for total Class 8 units.

We have increased the low end of our range for the year from 200,000 to 208,000 units, however, 5,000 of this increase is related to our expectation for additional Mexico and export unit, which as we've previously discussed contain much lower content for CVG products.

Our operating income estimate has increased by approximately $2 million, which is comprised of $800,000 for the PEKM acquisition and $1.2 million for the increase in estimated Class 8 units.

And our diluted EPS has actually increased by approximately $0.07, going from $0.18 on the low end of our previous range, to $0.25, however, is then reduced by the $0.13 as a result of the mark-to-market of our currency contracts in the third quarter.

We anticipate our net free cash flow to remain in the range of $20 million for the year.

Outside of our normal financial update, we did announce earlier this month the acquisition of PEKM, which Merv mentioned earlier and I alluded to, and in addition we also announced certain changes to our credit agreement, which primarily revolved around temporary covenant relief in light of the current market conditions and our desire to continue to have the capability to grow during this downturn.

As discussed on prior conference calls, we were confident in the relationships with our bank group and our financial position to be able to achieve any adjustments to our credit agreement that were necessary for our continued success. We are very pleased with our revised agreement, and look forward to continuing to work with such a dedicated bank group as we move forward with our growth strategy.

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

Crystal?

(OPERATOR INSTRUCTIONS.)

Your first question comes from the line of Adam Plissner with Credit Suisse.

Good morning, Adam.

Good morning, guys. Sorry. Maybe I could just start out on the PEKM acquisition? Merv, can you give us a sense of what the M&A environment looks like? It looks like you paid almost a little over six times, and I guess in the past you've talked about being opportunistic and suggesting that these somewhat depressed multiples in the marketplace to take advantage of. Is this six times plus multiple more indicative of an offshore asset, and would you be interested in looking at domestic assets, and how do those multiples look in comparison?

From what we've seen on the domestic market it is considerably below that, but if you also look at the stocks that are public in this same sector and the European and Nordic countries are trading much higher multiples, you know, 12 and 13 in some cases. So buying companies in eastern Europe, this is, I would consider a very good multiple that we paid for it.

In the U.S., if we were buying the same thing, you know, when we bought Monona, I think we paid 4.3 multiple, so it's a difference. The market also doesn't fluctuate as much in Europe as what we see in the U.S.

Okay. And, Chad, we talked about -- for the bank covenant [stress] on the less quarter call, did you need a covenant waiver to get this acquisition done?

For some -- not from a true covenant perspective, but we did from a technical standpoint from inter-Company transfers and set-ups, some things of that nature, so this acquisition would have had no weight on our covenant waivers whether we did it or not.

And maybe, Chad, just from a standpoint of liquidity, I guess, you talked about how this was financed, cash and revolver, is there a minimum liquidity balance that you're looking to maintain as you try to balance that with the context of acquisition opportunity?

Well, if you look at from a covenant perspective, I mean the minimum leverage that we can achieve is really what's outstanding with our bonds, $150 million, so anything that we can achieve below that is kind of really where our sweet spot is at this point, at least for this cycle.

Okay.

From a net debt perspective.

Great. And then, Merv, I don't know if you've talked separately about the way the separate businesses have handled the downturn, and if I were to break it up by product category, trim, seats, maybe together versus structures, have you shown that some businesses are that much more flexible in handling and meeting your 30% variable margin target on the way down, and you have to compensate for others that are less flexible? Maybe you could just give us some insight into which businesses are handling the downturn and are somewhat more flexible?

I think when you look at any of the businesses, the structures business is the most capital intensive, and when you're dealing with bigger pieces of equipment, more capital, and less labor, it's obviously not as easy to flex down when you go from three people to two people, or three people to one people -- one person. And the same thing when you have indirect, and you have a lot of capital equipment, the indirect is not as easily flexed down. So in cut-and-sew operation, which is high labor content, you're able to flex the labor down one-to-one a lot better.

Okay. So you're suggesting that at least in that business it's somewhat less flexible, and it almost sounds like you have to compensate in terms to meet your negative contribution margin target to overcome that?

Yes, it's harder to flex down in the structures business.

Okay. And then, hypothetically, when we talk about it -- I know it's difficult for you to talk about the timing of the recovery in 2008, in terms of the [cadences] you thought to see orders return and whether that's, I guess we would have known at some point whether this is a Q4 phenomenon or a Q1 2008 or even beyond that. Are you able to tell from the order patterns, at least from the OE side, immediately whether or not the mix issue is going to get resolved in the early parts of the recovery or is it going to take some time until your content starts to return back to more normalized levels?

Well, I think a key to that is as soon as we start seeing the exports drop-off and maybe some of that pipeline filled up, and we're hoping that '07 obviously filled a lot of that pipeline up with the very high volumes that were sent to Mexico and South America. As soon as we see that slow-down then we'll see the content for vehicle go up. As soon as we see the Class 8 market go up overall we'll see the content go up because then there'll be more trucks going across the road instead of just construction type trucks, or vocational type trucks.

Okay. So you're suggesting -- I definitely understand the export issue, but you're also suggesting that even as the Class 8s come back on the road you'll see almost an immediate impact of upgrade to higher end [CE] tire and trim content or will that also come back? I guess there's two mix issues; right? One is dealing with the exports --

Yes, I think as you see the number of units come up you will always see the number of the -- the content and interior come up, too.

Okay, great. Thanks, gentlemen.

You're welcome, Adam.

Your next question comes from the line of [Peter Black] with Winfield Capital.

Good morning, Peter.

Merv, Chad, how are you doing?

Fine.

I just had a question on the net free cash flow guidance for the year of about $20 million, because if I look at what your adjusted EBITDA was and your guidance for the full year, and maybe I'm wrong but it looks like EBITDA would come in around $30 million plus or minus a million. And if you take out cash interest and taxes and the working capital changes you had at least for the first nine months of the year, I'm coming out with a number that would be negative on a free cash flow basis. I'm just wondering what I'm doing wrong and whether or not you expect a big shrinkage in your working capital in the fourth quarter that gets you to that number?

No, we're about $18 million or so net free cash flow through the first three quarters, Peter, so, you know, we're kind of estimating maybe a couple million dollars of additional gain in the fourth quarter. And our estimate, you know, just give or take a couple million or two, so understand that, because of the timing of working capital. But, you know, you're using -- if you said EBITDA of $30 million, it's -- you've got depreciation of like 15.5, 15.7, so you're closer to the 40 number, so that could be a portion of it. And then tax provisions are fairly, you know, it's fairly minimal, so you don't have much of a tax, a cash tax impact, and then working capital really coming off of the high volume from last year is where a lot of the change is.

Okay. All right. Well, that's great. All right. That's my only question. Thanks a lot.

Thank you.

Your next question comes from the line of Alan Weber with Robotti & Company.

Oh, hi. Good morning.

Good morning, Alan.

A few questions. One is can you talk, you know, you talk about the construction market being strong, is it possible for you to break-out kind of the P&L from Class 8 North America and the balance of the Company?

We do that at a high level, Alan, just in terms of revenue. We don't break it out in terms of segments from a profitability standpoint, but from a revenue perspective if you take total heavy truck, you know, in 2006 it was about 60 %, roughly 50% of that was Class 8. This year it will be probably closer to 40%, with construction going from about 18% last year to maybe somewhere in the ballpark of 25% for '07.

Okay, and --

Of our total revenues.

But you cannot then break that out in terms of the P&L?

We don't break it out, no.

Is that something internally you do?

Internally? Yes, of course, we do internally.

Okay. I wasn't sure if it's kind of some of the same facilities it can be done? Okay.

No, it can be done. We do have truck and construction business in similar facilities, but it's nothing that we break-out publicly.

Okay. My next question is in regards to the acquisition that you made, can you just talk about, not really projection, but if you look out, you know, I don't know, three, five years, what you hope to accomplish from the acquisition? I do notice that the EBITDA margins from your guidance is much -- is quite a bit lower than you've done historically as a Company. I was wondering if there's an opportunity to improve the margins and the cost, selling, how you hope that will evolve over time?

Of course, we expect and will demand of our group to improve the EBITDA margins. That's an opportunity that this company provided us. It also provided us with their largest customer, Mann, and that gives us an open door to start cross selling, and we've already been active in that role with Mann, even during the period right after due diligence.

So we're starting to obviously, that was one of the big things for us was to gain Mann as a customer and to be able to cross sell our other products into it. The other opportunities that it does with the large buying power and the materials that are common with the Monona Wire acquisition, it gives us the opportunity for a little bit stronger buying power.

And the second thing we'd been awarded, construction business, to be produced in eastern Europe for western Europe, and we had to, to be global, we had to be able to do that for our customer. And this provided a place for us to do it without having the startup costs of a new plant, without revenues coming into it for 15 to 16 months, and being able to have a management team that was well qualified in place.

And I, you know, to add on that, I think that's a big piece of the pie that should definitely be considered, that was a big piece of our decision for this acquisition because a Greenfield, as Merv said, for business that we, frankly, had already been awarded and needed to get moving, to move on a global basis with some of our customers.

Because really, you know, you could be talking anywhere from $4 million to $5 million for a startup for what we needed to do and, you know, 12 to 18 months to get it there. And this really is a cost -- you know, an opportunity cost to avoid that investment.

And when you talk about the [costs on the] products, is it possible you can talk about what specifically which products you hope to initially sell, putting aside the construction for a second?

Well, obviously, our first one would be to try to move into seats.

Right.

And then after the seats, we would probably look at interior trim to a certain degree, the hard plastics maybe. It's really hard to predict, Alan, because we don't -- the seats I think would be the number one product that we would try to cross sell to start with.

Okay. And what percent of that facility (inaudible) currently is non-truck?

Non-truck?

You previously said the bulk of it I think was commercial truck. I was just curious?

Yes, it is for this year. You know, the commercial truck business has grown substantially there. I don't have it in front of me. I'm going to say less than a third, roughly.

Okay. So just so I understand, there's nothing inherent about their business, their margins really should improve over time. And then you said there's the other benefits of the construction that you're going to use the facility instead of putting up a Greenfield, and you'll cross sell over time. So three, five years out it just sounds like this is a great acquisition for you.

I think so. It's -- it was a very solid company. They had moved a lot of operations from Germany to Czech Republic and then recently to the Ukraine, so as we get all those shifted around and things get settled down I think you'll see an improvement in margin right away.

Okay. My last question for now was, Chad, you had mentioned in the -- in your comments about SG&A being higher due to you talked about more management and initiatives to expand the business. Can you talk about any evidence that content per vehicle, assuming the mix is flat, you know, excluding changes in the mix, do you have any evidence that you do see content per vehicle higher over the next few years? You said (inaudible)?

I think one thing, Alan, I think that one thing that you will see is a lot of the projects we're working on today are for future opportunities with current customers in countries, such as Japan, China, and western Europe. And we have to have products to be able to provide to them that we're being quoted on heavily, and we see a very bright future for the Company in supplying those products into Japan, into China, and into western Europe, and which will reduce our dependency on the Class 8 market in North America, so, you know, that's where a lot of our engineering resources are going in. I obviously can't divulge the projects that we're working on, but we're working on real projects, it's not a hunting expedition.

Right, and at the same time are you expecting your content per vehicle in North America to improve also?

Yes, I do expect our content for North American vehicles to improve as the market goes up and as we have people that shake-out in the marketplace, competitors, and we just were awarded the and have started shipping the new freightliner truck, the [P3], the seats on it we will put in standard position, so that's a good bump for us.

Okay, great. Thank you very much.

You're welcome.

Your next question comes from the line of [Tom Foraty] with [Silverstone Capital].

Hey, good morning.

Good morning.

I had a question about quality, and I'm just wondering that with the significant reductions in capacity you've had to take and the fluctuations in your customer production schedules, whether or not it's -- well, how difficult has it been to maintain quality at a consistent level?

Well, in a market, like ours, which is not a heavily tooled market like automotive and a few of the other manufacturers, we're, you know, rely a lot on manual labor and more soft tooling, that's what you'd call it, and just recently as two weeks ago one of our plants was recognized by a customer for having a quality record below 50 parts per million.

So you guys are really -- you're -- don't feel like you need to make any improvements on the quality side? Everything is --

Jerry Armstrong, President of the Global Truck Group, and he's in here with me.

Actually, we use temporary workforce in the high times, and that leads to a lot of errors, and so as we shrink down and the temps leave our workforce we're with more experienced people, so our quality numbers are running approximately 50% of last year, so significant improvement. A lot of that attributed to the high labor and without the temp workforce it's more experienced people, so we're doing very well in that regard.

Great, thanks very much. Appreciate it.

Your next question comes from the line of Peter Nesvold with Bear Stearns.

Good morning, guys.

Good morning.

Last night the UAW announced a strike at Navistar, which is your biggest customer.

Yes.

You know, what are your expectations, you know, whether discounted specifically into basically the fourth quarter numbers at this point? And perhaps then just more anecdotally, you know, how would you anticipate work stoppage at their UAW plants to impact your production levels in the near term?

I think in the near term there will not be a major impact on us. Our major structures go to the Canadian facility, and that has not been impacted on the strike. Seats would be an impact at the union facilities that are on strike. We supply seats to them, and other than that, that's pretty much it.

Do you know if, you know, will they be diverting production to their non UAW plants so that if even if you're selling into Springfield that that production is made-up somewhere else, so it's less of an impact near term, or it's too early to tell, or do you not have those conversations? Just a little more color on that?

We -- that's something that I think they probably keep pretty much internal. We do -- we have probably the same news you've gotten and that's from the [NEMA] that just came out with a letter on the strike. Jerry, you have anything to add to that?

Yes, the -- of course, we obviously don't know how long it's going to go. The other UAW strikes this year have been very short term in nature, but right now they are going to divert work to the non-union plants and also man critical operations with salaried people is the information that we have.

Okay. And -- okay -- if there were some kind of disruption, I mean how long until you see it in your own production? Do they keep like two weeks of inventory or how does that generally work, I'm thinking from your perspective?

Normally they supply us with a few parts, too, and I think there's 60 or 90 days worth of inventory they've got.

Okay.

On our seats --

A question on the -- you mentioned earlier on taking down some capacity in 2007 into the cyclical (inaudible) Class 8s, do you anticipate bringing back that capacity as production starts to ramp-up and at least modestly in '08 and then into '09, or are you able to kind of change your cost structure here during the downturn so that you have more operating leverage into, or more flexibility going into the next upturn?

We absolutely don't intend to bring it back. Those plants were shut-down and closed so there's no bringing them back. We have, through our lean manufacturing, have made enough room in our existing plants as we consolidate it to be able to absorb this.

Okay. So it's not a loss of revenue, it's just -- it's reallocating the revenue to other facilities?

Right. So when the market comes back up a plant that may have been $2 million will now be $3 million, that's -- so, you know, it's not a loss of revenue, it's just a consolidation of the plants to make it, as we become more efficient.

Great. Thanks for the time, guys.

You're welcome.

(OPERATOR INSTRUCTIONS.)

You have a follow-up question from the line of Alan Weber with Robotti & Company.

Chad, I know I've asked you this before, when you made, and the acquisition you made appears really excellent, but do you even model that acquisition compared to buying back stock five or six years out? This is a --

Yes, you have asked me that a couple of times, Alan. Yes, you know, when we look at acquisitions we obviously model it out several years, and at this point we still consider the reinvestment into the Company and the use of our capital the best opportunity for us for growth. I don't know another way to answer it for you, to be honest, that just continues to be our belief.

Well, the other thing, Alan, too, that keep in mind, we have tremendous pressure to become global or we have global competitors that will become North America suppliers, too. So they're getting the same pressure to either go global or not. So for us we would either have had to do the acquisition, like we did, which we thought offered us significant up side, or we would have had to do a Greenfield which would have been a very costly venture, but we would have had to do it to protect our overall market.

Right, and --

So --

Okay. And when you talked about -- you talked about bidding on -- in Japan and other countries, will you be faced with the same situation that now that you've won some of these bids at some point whether it's '09 or 2010 you're going to have to put up some Greenfield facilities unless you make an acquisition?

Well, in Japan we would ship out of our Chinese facility, which we do today. We ship product to Japan and South Korea and China out of our Shanghai facility, so, no, we would not add Greenfield there. And if we do add Greenfields in western Europe you'll probably see the Greenfields there being more of a small just in time line sequence facility with a few operators, and you would see the Greenfields go up into eastern Europe, tied in with the current plants that we have today, probably.

Merv, my last question was when you talk about pressure, you know, to be global, isn't that really a positive thing for the Company. I mean isn't that positive -- when you talk about pressure, I guess it really does put pressure on you but it's a positive that the customers, you know, that you're going to be -- that you're in that position?

Well, it's extremely positive. It's -- my explanation was more tied into understanding why we did an acquisition versus buying back stock.

Oh, no, I understand it totally in this case. I was just curious. No, I understand. Okay.

Yes, we are very, very proud that we've taken a small U.S. manufacturer in Ohio that was doing, you know, a number of years ago such a high percentage, basically all of its business in North America and almost of its business in Class 8, and diversified it to the extreme measures that we have and have intentions of further diversifying it to not have the reliance on the Class 8 so we won't put you guys through these traumatic swings in the marketplace, because we sure as hell don't like being in these swings either.

When you look at your projections for Class 8, if you take away the export, I mean those levels aren't much different than North American production back in, what was the low -- '99 and 2000?

2000, 2001.

2000, 2001?

You're right on.

And so at some point, I know you didn't give guidance, but at some point you ought to see the positives of those swings.

Oh, I think when the swing starts back the other way you'll -- it's shown, this business has shown it in the past that the up side comes pretty quick, you know, it's unfortunate the down side came quicker and faster and longer than anyone thought it would.

Right. Okay. Most of that should be behind you. Okay, well, thank you.

Yes, I certainly hope so. Thanks, Alan.

(OPERATOR INSTRUCTIONS.)

And your next question comes from the line of [Jane Levy], [LaSalle Capital].

Hi, there. I apologize, I got on the call a little bit late. What was it that changed, which caused you to change your outlook on when Class 8 is really going to take off in '08?

We both, mostly have gotten our direction -- we -- what -- let me start over, since you missed it. What we did was take the '08 guidance off the table because there's still so much uncertainty out there.

Right.

And we intend as we work over the next couple of months with our customer base and our partners in this industry to come-up with as firm a number as you can get in this industry, at the volatility levels that we have today, and come out with new guidance. But, you know, it's obviously changed significantly since we originally put ours together, and there's so many unknowns right now that we will wait till we get our internal guidance lined up before we come back out.

Okay. Is it possible that it's not an '08, you know, it's like second half '08?

I think it's always possible it's second half '08. If you'd asked me the first part of the year if it was going to be second half of '08 before we had the turnaround, I think 90% of this industry would have laughed. I think at best, it has to happen by the second half of '08, you know, but that's just my opinion. I think we could see some of it starting in the second quarter but, you know, so far we haven't -- none of the industry has done a very good job of predicting '07, but I'm not sure how much better we're going to do in '08 on predictions.

Okay, thanks.

At this time, there are no further questions.

I thank all of you for joining us today. Crystal, thank you for your support and coordination of the call, and look forward to talking to you at the end of the fourth quarter.

Thank you.

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