Commercial Vehicle Group Inc (CVGI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Commercial Vehicle Group conference call.

My name is Caressa, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS.)

I would now like to turn the presentation over to your host for today's call, Mr.Chad Utrup.

Please proceed.

Thank you and welcome, everybody, to the conference call.

As usual, before we begin the formal portion of today's call, I'll first read through our Safe Harbor language and then I'll pass the call over to Kevin Frailey, our EVP of Business Development, for a brief update.

And then I'll take you through our results for the second quarter of 2008 and a discussion regarding key factors and drivers for the balance of this year.

And then we'll take time to answer your questions.

Just as a quick update, Merv's unfortunately stuck in a plane, which was delayed taking off, so Kevin will be providing his update for you today and if Merv is able to join us later in the call, he'll do so.

With that, I'd like to remind you that this conference call contains forward-looking statements.

Actual results may differ from anticipated results because of certain risks and uncertainties.

These may include but are not limited to the economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, risks associated with conducting business in foreign countries and currencies, and other risks detailed in our SEC filings.

With that, I'll turn the call over to Kevin.

Thank you, Chad, and thanks, as well, to everyone who has joined us on the call today.

Overall, we had a positive second quarter with truck builds coming in better than our initial estimates and strong construction build rates continuing through the early part of the quarter.

Despite this fact and based on recent events and trends, we believe chances for a significant rebound in the second half of the year are increasingly unlikely.

Despite some of the improvements we saw during the second quarter, several issues point to a delayed recovery for us.

Primary among them is the rising price of crude oil and the overall state of our economy.

Current indications are that oil prices may remain high and, as we all know, a higher crude oil price has increased the national cost of diesel fuel.

In addition to the impact this increase is having on our customers, CVG itself directly feels the effect of rising petro costs in both our revenues and on our cost base.

Heavy duty truck operators suffer as their ton miles decrease while at the same time their cost to operate has increased.

These two forces lower the profitability of carriers, which results in a lower demand for heavy duty trucks.

This, among other factors, is causing our own costs to increase as both inbound freight expenses increase and the piece cost of petro-based supplies and products we use increase.

On the housing front, we're all aware that a continued mortgage crisis has led to the lowest number of housing starts in years.

This is further down force against the demand for ton miles, which ultimately contributes to a reduced need for heavy duty trucks.

As many of you know, the construction industry, especially in Europe and Asia, has been a bright spot for CVG's business mix in recent years.

Disappointingly, however, we're now beginning to see some softness in the European construction equipment market.

Indications are that this will continue and even worsen into the third and fourth quarters of the year.

In North America, fortunately, our construction, machinery, and military market demand remains relatively strong for our products.

Many of you have been asking about the impact commodity prices have had on our company, in particular, those of steel, aluminum, copper, and petroleum related products such as the foam, plastics, and vinyl that we use.

Raw materials and purchase components account for approximately 55% of our cost of goods sold, so increases like we've been seeing this year and over the past two years naturally can have a notable impact on both our costs and our margins.

In the past, we've been generally able to recover the majority of commodity price increases due to contractual agreements with customers, but naturally we handle each customer on a case-by-case basis and continue to actively work with both our suppliers and our customers to manage this issue.

Additionally, we must constantly monitor our low-cost country sourcing strategy as the cost of sea freight is quite susceptible to swings in fuel price.

For instance, CIBC World Markets recently published a paper stating that the overall cost of transporting a 40-foot shipping container from Shanghai to the Eastern Seaboard of the United States was about $5,000 in 2005 when per barrel prices hovered around $50, but at $150 per barrel, the cost of that movement rises to an average of about $10,000 per container and at $200 per barrel, $15,000 per container.

This trend when combined with the weakness of the dollar brings a few new wrinkles to our sourcing strategies.

Depending on the staying power and the long-term impacts of these recent economic trends, we may find it advantageous to use existing CVG capacity closer to home.

In response to increasing freight costs, we decided in February and March to develop some in-house talent and to invest in a corporate freight department.

Previously, we didn't feel the ROI justified such an expense.

However, as we examine the trade-offs of corporate leverage versus plant autonomy, we found that corporate management was now justified.

To that end, our team competitively bid a third-party logistics package and have switched to a new firm that will help increase route optimization and carrier utilization to obtain cost savings that offset what we see in diesel surcharges.

On another subject, we've previously indicated that one of our 2008 priorities is the successful integration of the three acquisitions which we made in the last quarter of 2007.

Therefore, I'd like to provide an update for you here today.

PEKM is progressing, although it is being impacted by significant inflationary pressure in the Ukraine.

Due to this fact, we're behind in our projected savings for the movement of certain operations from the Czech Republic to the Ukraine facility.

In the Czech Republic, we started the building of a new facility in Liberec, which will consolidate some of our key operations for the production of both harnesses and seats and provide a better showcase for our products in that region.

Elsewhere, we are on plan in the integration of the heavy gauge thermoforming business that was formerly known as the fabrication division of gauge.

We recently went live with the new ERP system that is a significant upgrade and will give the CVG Oregon team better information and the tools that they need to improve scheduling, reduce inventory, and increase profits.

Earlier in the second quarter we held our first TQPS workshop there and found the employees to be very enthusiastic for the opportunity to participate in improving their work environment.

We've also filled some key openings in the local management staff that we feel will help lead us to the next level of performance and growth.

In our cut-and-sew operations, which we obtained with the acquisition of certain assets of Short Bark, they're coming in more in line with initial expectations but require some additional effort to get there.

We've hired a new plant manager for this operation and put new line layouts in place to better utilize the space in this skilled workforce.

In addition, we recently embarked on the next phase of our cut-and-sew opportunity, which is to grow the Mexico sewing operation, which we acquired from the Short Bark acquisition.

You may recall when we announced our purchase of certain assets from Short Bark that CVG retained an option to obtain an additional Mexican cut-and-sew facility for no additional consideration.

With that option executed, we believe now that the operation in Capilla de Guadalupe, Mexico can expand beyond seat covers and privacy curtains to include some additional soft-trim sewing opportunities for CVG.

From a market perspective, our expectation is for build rates to increase from previous estimates.

However, we see a significant portion of this year's Class 8 vehicle production destined for Mexico and export consumption.

And as we've stated before, these trucks have much less content for us than a typical U.S.-Canada Class 8 vehicle that typically brings to us our $1,000 of content per unit.

While we do not anticipate a full recovery for the higher content vehicles in the second half, we do intend to continue to pursue our long-term strategy.

We will continue our focus on controlling costs and in addition focus on integration of the acquisitions we made in late 2007, aggressively develop aftermarket opportunities to help balance the cyclicality of the North American heavy truck market, continue our emphasis on cross-selling CVG products, both domestically and in Europe, continue our efforts to develop new products, continue to expand internationally with existing customers' growth patterns, and continue to further diversify our end products, markets, and geographic footprint.

In summary, we're pleased with our positive performance through the first and second quarters.

However, we now believe we will not see a strong recovery during the balance of the year.

We still believe our long-term strategy is sound and that it is the best course for us to follow as we work to build long-term shareholder value at CVG.

At this point, I'd like to turn the call back over to Chad for details on second quarter financial results.

Thanks, Kevin.

Overall, as Kevin said, we're pleased with our second quarter results despite the continued economic pressures which have certainly escalated further since our last conference call.

Revenues for this quarter were relatively strong at $209.2 million, which is up $50.7 million from the second quarter last year.

This is due to a stronger Class 8 market.

The acquisitions we made in the fourth quarter of last year, of course, added incremental revenues, as well as strength in our construction market, organic growth, as well as cost pass throughs.

Each of these inflated our revenues over the prior year quarter.

Operating income was $6.3 million, up $5.6 million compared to the second quarter of last year.

This is lower than our expected 20% to 25% contribution on incremental revenues.

This quarter, however, conversions suffered from material and freight cost increases, margin dilution from cost pass throughs from the prior year, currency fluctuations, and our acquisitions from last year, which, as you know, were not expected to contribute low to mid 20% operating margins.

Depreciation and amortization was approximately $4.8 million, and capital spending was $3.6 million for the quarter.

Included in other income expense is a pre-tax gain of approximately $3.7 million from marking to market our foreign currency contracts.

This partially offset the $9.7 million mark to market expense taken during the first quarter of this year, as you may recall.

Interest expense increased to $3.8 million for the second quarter of this year, compared to $3.5 million for the same period in 2007.

This was mostly the result of the average outstanding debt during the period which increased year over year primarily as a result of our acquisitions made in the fourth quarter.

Our effective tax rate for the quarter was 51.1% and as we've indicated before, our rates can deviate from our standard ongoing rate, which is typically 35% to 36% due to permanent tax adjustments, anticipated results in geographic regions where we operate and those that have different tax rates in those regions, as well as our estimated full year pre-tax income.

Our diluted EPS came in at $0.14 for the quarter and is based on approximately 21.8 million diluted shares.

Our EPS for the quarter includes a gain of about $0.11 from marking to market our foreign currency contracts, which was offset by roughly $0.04 of additional tax provision.

Net debt at the end of the quarter was approximately $163.1 million.

We continue to focus on our balance sheet and working capital management through close monitoring of our capital spending for the year and improvement in inventory utilization, both of which are going well.

As indicated in the press release we issued last night, we, along with most of the rest of the world, are experiencing uncertainty and volatility with multiple variables, which make it difficult, if not impossible, for us to provide definitive guidance for the balance of this year.

First is the Class 8 build rate continues to be largely unknown in terms of customer production plans and model content.

Our previous estimates called for a range of 180,000 to 220,000 units, which included 40,000 Mexico and export vehicles.

Recent estimates indicate Mexico export units could likely be in the range of 55,000 to 60,000 units this year.

Our average content for a typical U.S.-Canadian vehicle is more than $1,000 versus just several hundred dollars for a typical Mexico export model.

This clearly means that such an increase in Mexico export builds can become a significant factor for CVG, especially if these units replace the U.S.-Canadian units.

To put this in perspective, if this year's build rate ends up at 200,000 vehicles, but 60,000 of them are Mexico and export units, we would essentially only see an increase of 20,000 of the lower content Mexico export units from the low end of our previous guidance, which could positively impact our revenues by as little as $6 million to $8 million for the year, again from the lower end of our previous guidance.

At the same time, a market of 210,000 units with only 55,000 Mexico export units could positively impact our revenues for the year by as much as $20 million to $25 million.

Second, we are beginning to see sizeable slowdowns in the European construction market, in some cases up to a 20% to 30% reduction compared to the first two quarters' run rate from this year.

While it is still too early to determine the overall impact for the balance of this year, if these levels of reduction continue, it could negatively impact our second half in the range of $12 million in revenues.

We might expect to see some offset by production increases in our Asian operations, but that is too difficult to speculate on at this time.

Third are the impact of continued raw material cost increases and related recovery of these increases.

As you know, many companies are experiencing significant cost increases for raw materials around the globe.

While we continue to evaluate the overall impact and, of course, continue our efforts for alternative sourcing and other cost-effective opportunities, recovery of these incremental costs could inflate our revenues sizably while having a minimal impact, if any, on our bottom line for the rest of this year.

Fourth are the dramatic fuel cost increases and surcharges which could impact our internal freight cost estimates up to several million dollars over the remainder of this year.

As Kevin mentioned, we are currently in the process of evaluating new freight management programs to limit this impact.

And lastly, we sell and purchase products in various currencies, all of which are not covered under our various forward contracts.

With the current rate volatility since the start of this year, these fluctuations can have inverse impacts to our financials by inflating our revenues while having a negative impact to our bottom line.

We have put additional forward contracts in place to minimize our exposure.

However, the severity of the fluctuations and potential changes in rates also makes it very difficult to provide definitive estimates at this time.

In summary, the uncertainty we have seen in production levels, content mix, material costs, fuel costs, and currency rates make it very difficult for us to predict with any degree of reasonable certainty how all of these may impact us over the balance of this year.

Accordingly, with so much uncertainty regarding these variables, which are completely out of our control, we are withdrawing our previously provided guidance.

While we are actively monitoring the situation and taking action to mitigate the impact of these issues, our crystal ball with respect to them is really no better than anyone else and is, of course, limited.

We realize that the lack of guidance is difficult, but we believe it better not to offer potentially flawed guidance based on incomplete or uncertain information.

When we have more insight and clarity on these matters, we will return to our policy of providing annual guidance.

In short, we have had a strong first and second quarter and we definitely remain positive and energized about continuing our long-term strategy as a way to guide our company through these current unstable conditions.

That pretty much sums it up for this portion.

With that, I think we'd like to open it up for anybody that may have any questions.

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of David Leiker.

Please proceed.

Good morning.

Hi, David.

Unusual to hear my name correctly.

I have the same thing.

Relative -- I mean, it's kind of a difficult question, but relative to what we were looking for, there was a shortfall in revenue, and I'm just trying to get a gauge from you how much relative to what you saw during the quarter was this mix issue with Mexico exports, which doesn't seem to be a whole lot different than Q1 versus some shortfall that particular customers relative to the market such as [Patgar].

Well, I think if you look at the total units for the quarter like around 57,000, something like that, for production, that's what was reported.

Our estimates for the year, David, included the 40,000 Mexico export units, which was the 13,000 or 14,000 for the first quarter and then initially ratcheting down throughout the rest of the year.

So, a sizeable portion of -- I think it was 16,000 actual Mexico export units were built during the quarter, where included in our 40,000 for the year, our estimates would've been maybe around the 10,000 or 11,000 for the second quarter.

So, a pretty significant 4,000 or 5,000-unit impact would've been related to those lower content units versus a higher content U.S.-Canadian model.

Yes.

Patgar's mix was a lot different this quarter than a year ago.

Is that a factor or is that --

Not that we've seen overall.

I'm looking at it from a high level, but it wasn't as significant as probably the Mexico export shift for us.

Okay.

And then we talked about the contribution margins.

Where to -- I guess, three other things here, just aftermarket business, I know you're putting some initiatives in there.

You seeing any successes there where they can get us any assistance in terms of how that market is growing for you or how your business into that market is growing?

Yes, it's been pretty stable right now as far as the aftermarket that we've seen in North America.

It's remained relatively flat for us over the last several quarters.

I think Merv mentioned in either the last quarter or the quarter before we've placed an additional -- or maybe it was at the investor day -- we've placed more emphasis and put more of an infrastructure around that aftermarket business to grow that, but the overall market we've seen has been relatively flat over the last couple quarters.

What do you think the timing might be to see some of those initiatives come through for you?

I think it's probably going to be, anything meaningfully, probably going to be a couple years, I would guess, or at least something -- we would start to see some incremental increases for next year in that particular market.

It's relatively small for us, the true aftermarket business, so that's why we've basically put the infrastructure around it.

I think we could see some smaller gains probably in a quarter or two, but anything meaningful, I think, would be probably in the 2009 timeframe.

But that's still 10% of your revenue though, isn't it?

Yes.

I think you may be looking at some of the smaller OEMs that may fall into that aftermarket and other category, but, yes, I mean, it's a smaller portion of our total business.

But you don't put that in that same category?

The OE side?

I'm sorry?

Do you separate the OE sales from the aftermarket?

Yes.

When we say true aftermarket, we're talking about the distributors and the retail type atmosphere as opposed to small OEM.

Okay.

I'll let you -- I'll let somebody else go.

I'll come back with other -- a handful of other ones.

Thanks.

Okay.

Your next question comes from the line of Adam Plissner.

Please proceed.

Hey, guys.

This is [Chris Noel] for Adam.

Hey, Chris.

How are you doing?

I had a couple of quick ones here.

Can you break down the $50 million improvement on the top line?

How much of that was organic?

The $50 million -- there's roughly -- the biggest piece of that is going to be the acquisitions that we made in the fourth quarter, which was probably $19 million or so of that $50 million incremental.

It was 19?

Yes.

And the Class 8 portion, given the mix and everything, is probably -- it may be $12 million or $13 million of that and the balance would be our construction market and organic growth, as well as cost pass-throughs.

Okay.

All right.

That's helpful.

And then --

So hopefully that breaks it down a little bit further for you.

Yes, that's great.

Then on raw materials, can you give us a year-to-date impact growth and then, if you have it, net of price recoveries?

Maybe we can just sort of gauge how much of a hit that's been.

Not year-to-date.

I mean, year-to-date we've been actually pretty successful at fending off and passing through a majority of what's come through.

But our biggest challenge, and really one of the reasons for our choice in not updating guidance, or withdrawing our guidance, at this time is so we can get a better handle on what's coming through for the latter half of the year, which is most definitely going to be more meaningful than what we've seen in the first half.

I don't even want to give you a number for the first half, but the last half of the year could be fairly meaningful.

I mean, north of several million dollars of recovery that may inflate our revenues and, as I said before, may have minimal, if any, impact to the bottom line.

So, first half -- in short, first half has been I'll call it less significant than we may see in the second half --

Okay.

-- of this year.

All right.

And then a question on mix.

You touched on it, but in the past, when in the cycle do you begin to see that premium mix begin to rebound?

Does it trickle back in or does it come back suddenly?

I know you're saying there's more of a Mexican flare, but when it comes around -- when do you start to see it come back and when the U.S.

starts to come back?

It's not -- it typically doesn't come in.

It doesn't get dropped in.

I mean, it tends to phase in and there's really two types of mix that impact us.

It's the U.S.-Canadian and Mexico export mix and then within the U.S.-Canadian, there's the high content sleeper versus more of a day cap mix, so there's a couple types of those.

And obviously, the current Mexico export mix is really that we're seeing this year and that we saw last year is higher than, as you know, higher than anything we've seen really historically from a percentage of total build standpoint.

So, in both cases, it's hard to speculate, but we typically have not seen them change dramatically from one month to the next, for example.

Okay.

Then my last one, I guess, just what do you -- maybe, what do you see driving it back towards that?

I think in the last round it was driver shortages.

People were looking for a better truck to drive, that's how they were able to get drivers back in the cab.

Maybe do you see anything else driving it this time around, looking ahead a little bit?

Well, I wish our crystal ball was a lot better.

I think that's kind of what we've said earlier in the call.

The biggest thing is going to be housing.

Housing drives a lot of that and fuel costs.

And really the overall condition of the economy is going to -- and the freight companies is, to us, to me, I think, a big driver for where we are now.

So, it's kind of a broad brushstroke, but it's going -- it's really going to depend on that overall return of the economy.

All right.

That's it.

Thanks, guys.

Your next question comes from the line of Mark Bishop.

Please proceed.

Hi.

I just want to check a few things.

You said your average content per vehicle excluding Mexico was like $1,000.

Is that right?

Yes.

Well, I said north of $1,000, so it's --

More like 15?

Yes, between probably $1,100 and $1,400.

Somewhere in there, just depending on how it weights, but yes, somewhere in that range.

$1,100 to $1,400?

So, your -- I'm just -- I'm having difficulty getting your earnings back even if you had a pre-buy as big as 2006, which, I guess, people aren't expecting now.

You wouldn't be adding more than maybe like, what, 100 -- I don't know.

Say you added 120,000 U.S.

trucks to what you're forecasting this year, which looks like still 140 or 150 or something like that, excluding Mexico.

If you add another 120 at like $1,400 and you said the incremental margin's 25%, you tax it, I don't know.

I have trouble getting back to those kind of earnings that you made before.

I was just wondering if there's some other substantial change in the Company.

I mean, I have trouble even getting to $1.25.

Some people have $2 in 2010, which is I thought when the market would be down again versus a pre-buy in 2009.

But that's just -- if it is actually not $2 and it's actually down from the $1.35 people have in '09, that's a big drop from what you had in 2006 in that peak.

And I was just wondering if there's something else that's changed substantially in your business or if 2006 and '05 were some abnormal positive profit for the Company.

It's just hard for me to look historically beyond just this last peak because you came out of -- you became a public company just when things were picking up last time, so I can't look at prior cycles to see if that was kind of an anomalous peak for you in profit.

Well, I think -- I can't give you anything more on future estimates, but I can maybe help pinpoint some of what you're trying to compare to.

2006, if you use that as a baseline, was roughly 380,000 units.

I can't recall off the top of my head how much were Mexico export units.

That's probably one of the bigger changes.

But if you say we were at 140 -- say 140,000 U.S.-Canadian units this year and you -- and 40,000, or 60,000, rather, Mexican export, and you change that -- take that all the way up to 380,000 units for a comparison to 2006, you're going to take 140,000 this year and add -- I guess that'd be 180,000 units to make it comparable.

Do you follow me?

Yes, oh, okay.

So, that's -- it was 380,000 units in 2006, so you would --

Yes, it was -- and I can't recall off the top of my head how much were Mexico exports, but I believe it was in the 40,000 to 50,000 range.

I could be off, so it was 380,000 -- 378, I think, to be exact, for 2006.

So if you run those numbers, use the -- use, like you said, the 1,300 to 1,400, something like that, at a 25% -- I don't want to give you any numbers, but that may be more directional compared to the numbers that you were from a unit standpoint.

Oh, all right.

So, to get back to that number we'd need a really big pre-buy again.

I think I grasp that now.

All right.

I guess that helps me.

Thank you.

No problem.

Your next question comes from the line of [Alan Weber].

Please proceed.

Good morning.

Hi, Alan.

Hi.

Just a kind of a follow up to the last question, Chad.

If you look at '06, and I know you're not giving projections, but since you were going that way, if you can get kind of the peak in '06 to the future, do you think you're in a comparable environment, which we may not have, but do you think your content per vehicle would actually be higher?

Yes, I do.

I think -- but you've got to put it in perspective.

I mean, with material cost increases and pass throughs, a content per vehicle can increase because of your material cost recovery, so you may not see it on the bottom line.

So you may have margin percentage dilution because of --

Right.

-- cost recovery and by default you would have, say, content increase.

I guess I'm even thinking content increase even at steady prices, in other words just due to cross-selling and like that.

Oh, yes.

Yes.

I mean, we have -- we definitely have.

I mean, that's a good part of our organic growth.

I mean, I can't give you any specific numbers, but yes, we definitely would see or feel that we have increased content.

Right.

Okay.

Okay.

What I was originally going to ask was -- and I guess in addition to that prior question is also the acquisitions that you've made, which you expect to contribute more in '09 since they weren't there in '06.

Correct.

That's correct.

Okay.

Can you talk about any specific products or plants that currently lose money?

No, not particularly.

I mean, we've got some facilities that we move around from a capacity standpoint, but nothing in particular.

Okay.

And then my other question was if the raw material prices -- if oil and -- stay at these levels, do you have any products that you have sold that you see really kind of get priced out of the market and to some -- that you actually have to address the product mix?

In other words, even if you could pass on the increased prices, the demand's not there because at some price the option just isn't that desirable.

Yes, I mean -- I think that definitely comes into play in some areas with steel and petroleum and resins for injection molding, those types of things that continue to go up.

I mean, there's always an effort to look for other materials or alternative materials that may have the same aesthetic or structural components that would satisfy the customer.

As far as specifically getting priced out of the market, nothing comes to mind, but it's certainly something that we look at with the customers because of how some of these prices continue to go up.

I mean, in some cases, these things have gone up 100%, these raw materials, from a couple years ago.

And I guess my last question.

Given the markets and given the raw material costs and oil and like that, can you talk at all about kind of what you see from the competitors in terms of your being able to pick up market share and like that?

Well, I think a lot -- I mean, everybody's facing the same thing that we are now.

Our competitive landscape hasn't changed significantly.

I mean, it's still, for the most part, the same competition depending on which product line you're talking about.

As you know, there's not really anybody that has the -- that competes with the breadth of product that we have, but I'm not really sure how to answer your question, Alan.

I mean, it hasn't really changed significantly for us.

Everybody's facing the same raw material costs.

I think the big thing is, depending how financially sound some of our competition are, they may be willing to absorb more of these material cost increases or try to pass on more than us.

I think that's probably the biggest variant today than probably over a year or two ago.

Okay.

All right.

Great.

Thanks a lot.

Your next question comes from the line of David Leiker.

Please proceed.

Hello.

Handful of other things here.

Where do you stand on the MRAP program and that rolling off at the back end of the year?

Well, the MRAP's been pretty positive for us over the first half of this year.

I've got Jerry Armstrong, our President of Global Truck, here sitting with me, too.

He can maybe add a little bit more color on that.

On the MRAP, the way the government releases, they have a projected field that they release it in, in individual releases.

And if our customers are successful, and they think they will be for the MRAP, we should have some additional business released to us later this year, early next year, in line with the expectations our customers plan on having.

So, it's good business.

We've been very successful in bringing product to market very quick to support our customers and help them achieve their results and they're pretty optimistic that, depending on Congress, I guess, and how much they keep allocating, that they'll pick up their fair share of what's released down the road.

And we'll get our fair share of that.

So, is that something that stays at a pretty steady rate or is there a bump-up or a fall-off for a quarter or two somewhere in the middle of that or is that a pretty steady number for you?

Yes, it comes in buckets.

So it bumps up at a high rate and falls away.

Bumps up at a high rate, then falls away is the way that it comes.

So it comes in buckets that we respond to fairly quickly to try to give our customer the most flexibility in them pulling all their pieces together to meet the needs of the Army.

Okay.

If you look at your past record of getting recovery of raw material costs, what percent of that do you think you eventually recover?

Well, right now we've got in front of most of our customers 100%.

I mean, those are the conversations that we're having with them where we didn't have pre-existing agreements for a certain portion.

So, I think in the past, Dave, you're probably referring to, like in '06 and '07, I think we averaged like 80% to 90% recovery, something like that.

We're obviously shooting for higher than that at this point and most of our conversations now are at 100%.

Okay.

Are you doing or do you have the capability at all of doing fuel surcharges to cover your transportation costs?

Fuel surcharges for fuel with our customers?

Yes.

Arvin did that on steel a month or so ago.

They put a steel surcharge on to all their customers.

Can you do anything like that to help offset these energy costs?

Yes.

I mean, those are all part of the conversations we're having with the customers.

Jerry can probably add a little bit more color to that, as well.

With each customer, we have different product mixes and depending on their competitiveness and their game plan on how they recover, we're working through a variety of different methods.

Surcharge is one way to do it.

Rolling it into piece price is one way to do it.

Twice a year adjustment, quarterly adjustments.

We're looking at a whole variety of ways and there's not one way that fits every customer and we're willing to work with the customer to help them achieve their objectives as long as we can still achieve ours.

Okay.

What are you using for your internal workings in terms of oil prices and fuel costs?

We still have it in there at $4.70, which is a 67% increase year-over-year.

If you're speaking about the -- just the cost of a gallon of diesel.

Yes, just your internal planning purposes.

You're expecting these prices to stay where we're at?

Yes.

When we referred to the impacts of fuel, Dave, earlier, it could be up to a couple million dollars for the latter half of the year.

Yes, that's basically what we were using.

Okay.

And then I was doing some rough, back of the envelope number scratching, which may or may not be a good thing, but if you look at -- it doesn't look like you changed your expectations for the Class 8 market, that 180 to 220.

You're still holding to that kind of a number, right?

No.

Well, we didn't -- we haven't stated what our estimates are.

I mean, it's kind of the point of withdrawing at this point because of the fluctuations.

Hopefully what I tried to do was give you a scenario.

I think ACT may be out there at 210 or something like that, so what we try to do is give you guys an idea from the low end of our prior guidance of 180 to 220, so in this case we're talking about using a baseline of 180, the market of 200 including 60,000 Mexico exports, what that impact does and then at 210 with 55,000 Mexico exports, what that does.

We haven't specifically stated what our expectations are other than that they're pretty volatile and uncertain and the Mexico export piece is a big part of that.

So, we're not sticking to our 180 to 220.

In fact, we're withdrawing it and everything else related to our previous estimates.

But, hopefully, we gave you enough directional information to point out where -- at least maybe in the direction of where ACT recently is.

Okay.

So --

(OPERATOR INSTRUCTIONS.) You have another question from the line of David Leiker.

Please proceed.

I don't know if you heard any of that at the end there.

No.

You got cut off.

Yes.

If you had to use like the [mid] plan, say 200,000 and stick with that kind of a number, just general purposes you're losing about 20,000 U.S.-Canada trucks, 15,000 to 20,000, and directionally, I guess, you're saying 1,300 to 1,400 in revenue and we can do the math on what the revenue impact is.

Is there any (inaudible) offset from that process other than ACT's numbers might be a little bit higher?

No.

I think that's in line with what I'd stated before.

I mean, if you stick with the 200,000, really it's 20,000 up from our low end -- prior low end, but they're all really going to -- or appear to be going to Mexico export, which is a couple hundred dollars of content, not the 1,300 to 1,400.

Okay.

And then just the last thing here.

If you could remind us where do you stand on your -- on the balance sheet.

You have a $150 million of term debt out there, right?

Correct.

And then the balance of that $21 million's on your revolver?

The 150 is senior notes, 8%.

Okay.

And the balance is basically revolver.

Okay.

And what's the capacity in that revolver today?

$50 million.

Okay.

And where are you -- I know you've done some amendments to that credit agreement.

Where are you in terms of covenants on that?

We don't expect any issues at this point.

Obviously, I can't pinpoint to anything for the second half, but at this point, don't expect any issues.

You had to have your covenants relaxed for a number of quarters.

Where do those start ratcheting back up again?

They start ratcheting up this quarter and into third and fourth quarter, so our peak was really the first quarter and they'll start to ratchet down really starting this quarter.

And do you have handy what those specific covenant numbers are?

I do not have them in front of me.

But we have them in our notes from in the past.

You haven't had any adjustments to that agreement since you originally did that, did you?

No.

They're in the K, obviously.

I think you have them.

But, no, there has not been any adjustment since we did that in, oh, gosh, I think it was --

A year ago maybe?

No, no.

We did them more recently, within the last couple quarters.

And then are there any meaningful adjustments to EBITDA as we go through this?

Not particularly.

There's --

You don't really have any charges or anything like that running through there?

No, we don't.

I mean, if you recall, we had the $6 million gain from the Seattle facility included in our first quarter operating results.

That would be excluded for credit covenant purposes.

That's really the only thing that comes to mind, David.

Okay.

Great.

Thank you very much.

You're welcome.

At this time, there are no further questions in queue.

I'd like to turn the call back over to management for closing remarks.

Okay.

We'd like to thank everybody for attending the call today.

Hopefully, it was informative, and we definitely look forward to speaking with everybody again next quarter, if not before.

Thank you.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.