Commercial Vehicle Group Inc (CVGI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2008 Commercial Vehicle Group, Incorporation's Earnings Conference Call.

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

At this time, all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

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

Chad Utrup.

Please proceed, ma'am.

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

As usual, before we begin the formal portion of the call today, I'll first read through our Safe Harbor language, then pass the call over to Merv for a brief update, and then I'll take you through our third quarter of 2008 and a brief overview of our outlook for the full year.

And then, we'll open it up for some questions.

With that, I'd like to remind you guys 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 with that, I'll turn the call over to Merv.

Thanks, Chad, and thanks to everyone who has joined us on the call today.

The last quarter has been quite a rollercoaster ride as both our truck and our construction markets have dipped from the levels we just saw in the second quarter this year.

Looking forward, the spreading economic prices around the world creates uncertainty as to the strength and timing of a recovery in our key markets.

If you compare this year's third quarter results to those of the third quarter last year, you will notice that our top line has grown by nearly 20% while our operating line is down.

For those of you who are not familiar with our business, let me remind you that roughly half this increase is due to acquisitions that we made in the fourth quarter of last year which are not performing to our expectations.

This is something we continue to focus on to ensure we get them back on track.

In addition, our top line has grown by the mere pass-through of raw material surcharges and commodity increases with negative impacts to our bottom line.

It goes without saying that this is a pattern which we are determined to break.

The fact of the matter is we simply have not reduced our costs enough to offset the dramatic increases in commodity costs and to neutralize the impacts of annual price-down.

You can tell from our historical achievements that this is the new phenomena for CVG and requires strong tactics.

Despite our declining market production levels, we are pleased to report a considerable improvement in our net debt position to $151.7 million.

This is of particular importance in the current economic environment where credit worthiness and liquidity have become a question in the minds of many investors.

Excuse me.

Chad will elaborate on this a bit further in a moment.

As you can imagine, we are not pleased to see our stock price at its current level, especially as we have not made any changes or experienced any event that would explain the recent activity in our stock price.

The current financial situations in our market are clearly having an impact on many stocks, including ours.

We would hope that our third quarter revenue growth is proof-positive over our long-term strategy and our improved debt position will provide a positive sign to our shareholders about the state of our company.

As I mentioned before, we have some work to do to ensure we contribute further to our bottom line, but rest assured we are energized to do this.

There can be little doubt that world economies, as well as our company, are facing continued economic uncertainty and difficult times.

While we are not currently providing detailed 2009 financial recovery guidance, we currently expect 2009 North American Class 8 truck production to be in the range of 200,000 to 240,000 including nearly 50,000 to Mexico and export units.

Given the slightly improved outlook for '09, we will continue our efforts to manage against an extended downturn.

As you know, many other companies have announced major restructuring initiatives.

This is something we look at on an ongoing basis and will continue to do so.

In the past year, I would like to remind you that we closed three facilities --our Seattle and Tacoma, Washington, and Red Granite, Wisconsin, facilities --and consolidated that work into other plants.

In addition to those actions, we will continue to adjust headcount to reflect volumes and customer needs, maintain tight controls on inventory management, reduce capital expenditures, keep a renewed emphasis on managing logistics and transportation costs, seek full recovery of material and commodity cost increases, continue to explore alternative supply resources, and evaluate the need to use lower cost resource centers --this could include bringing work back to the US, given the impact of the transportation costs and the value of the dollar --maintain tightened cash management policies with customers and suppliers, and optimize employee benefit programs.

While we are taking these belt-tightening actions, we also intend to preserve CVG's ability to remain competitive and continue our focus on long-term growth.

This is not an easy tightrope to walk, but we are committed to doing so.

One impact of the current downturn is the fact that continuing soft build raise will likely bring further consolidation to the supply base.

In the last two weeks, we have seen one competitor exit the business and one go bankrupt.

We expect more will follow these, too.

We anticipate such a consolidation to suppliers will create additional opportunities for CVG to increase its content per vehicle level.

On the positive side, we have achieved a number of new business gains in the local Chinese original equipment manufacturer business.

We are very proud of this additional work as it builds on the strength we have developed with international customers in China.

They include Dalian, Danto Excavator Seat, [Himatsu], [Hangjo], [Willoter] an excavator seat, Tontu EE seat, Belco, Chengdu Seat, [Soni Kumsa] Seats.

We continue to see significant opportunities for CVG in China.

We are in the process of planning the expansion of CVG's Chinese production to include wiring harness products and not just seating.

Initially, our strategic goal in China was to have a based, competitively supplied products to our Korean and Japanese customer.

This has been largely achieved.

We are now focusing our sales efforts to include the Chinese market and targeting up to 40% growth in domestic Chinese sales.

Although this is not a large dollar amount, it demonstrates that CVG is now a competitor against local manufacturers there.

Despite the current economic downturn, we are continuing to make strategic investments in the future of CVG.

In September, we announced the introduction of our new GSX 3000 global truck seat at the IAA Truck Show in Hanover, Germany.

Designed for truck and bus original equipment manufacturers, the new global seat was well-received by our customers and distributors.

Initially, it will be available to after-market customers through CVG's distributor network, and we will also move it to OEM customers.

We expect production to start in March 2009.

This new seat has a common structure that is easily adaptable to different end customers and market needs.

This product's advanced design will us to meet specific customer requirements while leveraging high volume purchasing opportunities to help us keep costs lower.

In addition, we are working on the development and advancement of both new and current offerings such as thermal and acoustical products which we believe can help us increase our vehicle content in the future.

These are prime examples of our continued pursuit of growth through advanced technology and development of product, even during the slow period that we're in today.

In summary, while we continue to delay --to see a delay in the full recovery of the commercial vehicle industry, we intend to continue the pursuit of long-term strategy while taking a stronger position on items such as supplier cost reduction, customer material cost recovery, overall capacity.

We must ensure that we are utilizing each of our facilities to its fullest capacity, or face the decision of further consolidation.

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

Thanks, Merv.

Overall, again, as Merv stated, the Class 8 market and the construction markets were down from the second quarter, and raw material costs continued to be a major focus, along with cost containment and, of course, cash management.

I'd first like to run through our financial performance comparisons, and then spend some time on liquidity and cash flow which has been a considerable focus by many in the past few weeks.

Our revenues for this quarter were $192.9 million which is up about $32 million, or 20%, from the third quarter of last year.

Under normal conditions, we would expect this to contribute, say, 20% to 25% to our operating income.

Unfortunately, these are not normal times.

To put this in perspective, as Merv mentioned, roughly $17 million of this increase over last year is related to our acquisitions from the fourth quarter of last year.

These acquisitions are not performing to our expectations for a variety of reasons, which we are working diligently to fix.

In addition, our revenues have increased by an estimated $5 million to $6 million this quarter over last year as a result of raw material cost pass-throughs which have also negatively impacted our bottom line since last year.

The reason for pointing these two primary factors out is to provide you with a clear understanding of our baseline business year-over-year.

So, again, excluding these two isolated items, our revenues would have been closer to $171 million on a comparable basis versus the $193 reported.

And our operating income margin percentage is actually a little bit more equivalent to the third quarter of last year, excluding those two items.

Now, flat margins year-over-year are not our objective nor is it in line with our historical performance, but it is important that you guys understand the mechanics of year-over-year comparisons and to point that our baseline business remains intact.

The fact of the matter is that since this time last year, we have simply been unable to achieve cost saving levels to offset the overwhelming rise in raw materials, freight costs, and currency impacts of overseas sourcing.

This is what we are addressing in the short-term, and we have been making real-time adjustments to control our spending and conserve our cash wherever possible.

This can be seen by our reduction in SG&A from the second quarter of this year, as well as reduced capital spending and our positive progress on working capital during these past few months.

Our net debt at the end of the third quarter was approximately $151.7 million.

With $150 million of this debt in the form of long-term pay-per-cent bonds not due until 2013, we believe we are in a good position to see through the downturn, of course.

There's been a very large focus lately on our liquidity and ability to meet our bank covenants for the fourth quarter and into 2009 given the fact that our covenants do get tighter as we progress forward.

While we can never give 100% assurance at meeting our covenants, and especially since we have not yet provided our 2009 estimates, we can provide the following points which we believe are critical as you look at our liquidity, cash flow and ongoing funding.

As I mentioned, at the end of September, we only held $151.7 million of net debt, of which $150 million are bonds fixed at 8%; again, not due until 2013.

This leaves just $1.7 million of net debt.

To clarify a few points, our bond indenture does not require us to comply with any financial maintenance covenants and permits us to incur up to $145.3 million of indebtedness under our senior credit facility which, as you know, is more than we are even permitted to borrow today.

While our current borrowing limitation is $50 million under our senior credit agreement, our collateral of receivables and inventory as of the end of September supported borrowings of approximately $102 million.

We held only $9.6 million of revolver debt at the end of the quarter.

Our average working capital needs can fluctuate by $10 million at any given time during the quarter, even during slow times like our current markets.

So, with this in mind, we do not currently see any risk of requiring borrowings above our current availability.

Lastly, I want to point out that we did not have any issues achieving our covenants for the third quarter.

As we look to the fourth quarter and 2009, they obviously do tighten.

And as we have done in the past, we will continue to monitor our performance to covenants and will continue to work with our banks on a daily or weekly basis, whatever it takes, to ensure we do everything possible to achieve or get relief of covenant pressures, if necessary.

That said, we are hopeful that you can see our low level of debt and our ability to work with our bank groups has been a strong precedent of our company.

All of these current events and liquidity discussions aside, our strategy has not changed for the long-term.

We continue to see new business initiatives coming to fruition, some of which Merv mentioned earlier, as well as programs such MRAP which have been beneficial for us and are key indicators of our overall growth strategy.

As indicated in our press release, we are providing guidance for the full-year and I guess, in essence, for the fourth quarter.

We expect revenues to be in the range of $781 million to $793 million, and operating income in the range of $18 million to $21 million, including the gain of our sale from the Seattle facility.

Depreciation and amortization is expected to be in the range of $19 million, and fully diluted earnings per share is estimated to be in the range of an $0.08 loss to a $0.01 gain based on 21.7 million shares.

And we've assumed a 36% tax provision rate for the fourth quarter included in those numbers.

When looking at the fourth quarter alone, we expect positive impacts to our operating income versus the third quarter as a result of some of the tactics we've just discussed.

We believe this to be indicative of the impacts of our recent adjustments and spending and program initiatives, and we are hopeful this is a positive trend for our shareholders to ensure that you all understand the actions we are taking during these abnormal times.

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

(OPERATOR INSTRUCTIONS.) David Leiker.

Please proceed.

Hi, good morning.

Good morning, David.

Good morning, David.

A couple of things, first on the covenants.

Is your covenant calculated using total debt, or is it debt net of cash?

It's total debt.

It's funded debt plus letters of credit, David.

Okay.

And where does that cash reside?

Various of our businesses.

Most of it is overseas in Chek, some in the UK, for example.

So, that cash wouldn't be available to pay down debt?

It --most of it is typically what we call like a one-day float, so it's available the next business day.

That's why it's held in --that you see it as cash on the balance sheet.

Yes.

But, I mean, given that your revolver is in the US and the cash is overseas, that wouldn't --you couldn't really use that reduce the revolver, correct?

Oh, yes.

Yes.

We could.

No, we could.

In fact, we transfer cash back and forth frequently.

So--.

--Okay--.

--Yes, we could.

It may be in one-day float, so it's not available on the last day of the quarter, per se, but it is cash.

Okay.

And then, one last question on this item.

What is the level of your intra-quarter borrowing?

How much of your revolver do you use during the quarter?

We had roughly $10 million drawn at the end of the quarter.

It probably goes up to $20 million on average, something like that.

So, (inaudible - multiple speakers)--.

--So, what would be --to the extent that --I understand you get paid on the debt that the revolver, you have nothing borrowed on it.

But, if you're not in compliance with the covenant, you wouldn't the borrowings intra-quarter, so how would you handle that?

I'm not sure I follow your question, David.

Well, let's just say, for instance, if you violate a covenant, so you wouldn't have your revolver available to you.

How would you handle your intra-quarter borrowings?

Well, we've got a considerable amount of flexibility through our working capital.

We --if you don't have a line of credit to borrow from, I mean, we'd have to just go through our receivables and payables and work it down that way.

Okay.

I mean, we've got enough collateral to be able to do that in a situation like that.

We've got $100 million plus in receivables to really work with.

And $9 million, $10 million drawn, I'm pretty comfortable we could come up with it if we needed to, but don't plan on that event happening.

Okay.

And then, on different items, where --if you look at --and I understand you haven't given 2009 guidance, but is there a way you could walk through --on an assumption that '08 end market demand is comparable --or '09 end market demand is comparable to '08, what would be the different factors there that would cause earnings in '09 to be different from '08, positive and negative?

Well, I think the biggest thing that's impacted us this year has been the overwhelming impact from the raw materials and freight.

If all of those things are equal, I mean, we obviously have programs or objectives going into '09 for additional material cost savings and product cost improvements.

So, I mean, those are probably the biggest things, David, if you have equal market conditions.

The increases this year have just been --they've overwhelmed the cost savings that we have achieved.

So, that's --if you don't plan for those costs to increase like they did this year, that's the biggest difference.

What do you think your unrecovered raw material costs are?

Well, I can mention that for the quarter it's --we estimate it's probably $5 million to $6 million on the top line compared to the third quarter of last year.

It's probably --it could be something like $1 million negative on the bottom line, $0.5 million to $1 million negative, something like that.

So, it's --and a lot of that's timing.

I mean, we've got some pretty good agreements with our customers for getting to 100% and overcoming the lag part of some of these recoveries, but that's probably our best estimate.

It's a little cumbersome to track through, but $5 million to $6 million on the top side, $0.5 million to $1 million negative on the bottom side.

Then, what do you estimate the freight item is?

It's probably a couple of million dollars this year.

It's just --compared to what was there last year and compared to what we had planned for, it's probably in that range.

Okay.

Remember on contracts--.

--And then, what do you target annual cost savings to be?

David, remember on contracts, we're usually working on a contract that was developed a year or two ago--.

--Sure--.

--For '08.

With '09, it's a little different.

Contracts have been looked at differently and spend time to re-change some of them.

It's also the company is different than it was in 2001 because we had no European business that we really had to deal with on the commodity increases as much as what they've been in the US.

And now, that's a much bigger part of our business, and those contracts had to be looked at.

Okay.

And then, the last item here.

What do you think your cost-cutting actions generate in savings annually?

Well, I can give you what we had planned for this year, and it was in the --from a material standpoint, it was probably in the $5 million to $6 million range.

And from a productivity and other cost savings, it was --I think it was another $3 million to $5 million or something like that, very close to the same.

So, as has always been our objective, is we have to --our cost savings have to generate enough cost savings to offset our annual price-downs, as well as put some cost savings in our pocket after inflation.

And we've historically been able to do that.

Now, this year and to some degree last year as well, the changes in commodity pricing and all the other factors that everybody knows about have impacted that dramatically, and we know that.

Our purchasing people spent more time trying to fight off price increases than they did working on cost reduction, so that has been changed.

Okay, great.

Thanks.

I'll come back with a few other questions, but thank you.

You're welcome.

Ann Duignan.

Please proceed.

Hi, it's Ann Duignan, JPMorgan.

Hi.

Good morning, guys.

Hi, Ann.

Hi.

Can we spend a few moments on the operations?

Can you talk a little bit about your acquisitions which underperformed, whether it surprised you or was it something that you had anticipated just going through integration?

Can you just give us a little bit more color on what happened there, and how you expect that to impact your performance going forward?

Yes.

Ann, you may recall from the last earnings call, and it may even go back to the first quarter, we had talked about some inflationary and currency and just restructuring or relocation concerns that we were looking at with especially our PEKM acquisition.

So, that still exists.

Currency is a big piece of that.

I think everybody knows what, at least this year, the euro to the Chek has done.

So, that's been a big impact.

Inflationary items for us in the Ukraine have been a pretty big impact.

And all of this has changed dramatically since the fourth quarter of last year.

So, it is relatively new.

It was not planned for, but it's something that we're dealing with.

So, those people of PEKM we've talked about now for a couple of quarters.

The other acquisitions are smaller in nature.

The cut-and-sew operation of Shortbark is relatively in line.

It's down a little bit from what we want.

We'd like to get some more volume through there to get some efficiencies through a capacity.

Markets haven't permitted us to do that as we had planned.

And the other --the heavy gage thermoforming of Gage Industries just had a short-term blip this quarter.

We think it's back on track.

It's actually performing pretty well but, this quarter, we were down just a little bit for some what we think are one-time reasons which we can address.

But --so, you put all those three things together --and we say acquisitions.

PEKM is probably the bigger one of those.

It's definitely the bigger one in size, and it's definitely the bigger one in terms of the impact to us.

Going forward, we're addressing those things.

PEKM, we're constantly trying to move more business for the labor efficiency programs.

And we are putting some more currency contracts in place from our exposure from the Chek to the euro for that business, but there's really no way to rewind what currencies have done to that business.

We can only protect it and minimize the impact going forward.

So, those are the things we're doing, and that's really --if you strip those out and look at our baseline business year-over-year, that's hopefully what came across.

And what Merv and I were saying is those are kind of isolated, and we are addressing those.

I don't know if that was too longwinded or not, but hopefully that gave you an answer.

Yes.

No, I guess what I was trying to understand was how much of it was outside the control of the operations versus within the operations, and how much of it do you --can you control going forward, so that was helpful.

I appreciate it.

A follow-up question then on your price-downs.

Given what's going on with your competitors and some of the consolidation and bankruptcies, etc., etc., that we're seeing out there, does that give you more leverage when you go back into your customers in terms of getting relief from those price-downs?

And can you talk a little bit about what might be the opportunities out of what's going on around you rather than the risks?

Well, business, we are obviously quoting on it but, in many regards, it's business that has to be moved within a week or two.

So, that offers more time to be spent on how you're going to move them and at what price.

Obviously, we're not going to do any gouging.

We are going to make sure that we get a fair price for what we're selling.

Does that sound politically correct?

Alan Weber.

Please proceed.

Oh, good morning.

Actually, as you were talking about the acquisitions, what is actually the amount that you think that you actually lost for the first nine months?

Compared to what we had thought, it's probably down from maybe $1 million or something like that from an operating income line, Alan.

$1 million.

So, the acquisitions are actually profitable?

Year-to --they're probably roughly break-even through the first nine months of this year on an operating income level.

Okay.

The biggest impact to that, the third quarter we did have some spikes in some one-time items.

But, as I mentioned, PEKM is the one that we're --is the heaviest side of that, which we're addressing.

And can you talk about, by either end markets or some of the specific product lines you have, which areas are actually the weakest?

Because it just can't --it doesn't seem possible that they're all doing the same.

They are not --we're not all doing the same.

The construction market was doing very well up until August, September.

European Class 8 trucks were doing very well until August, September, when they dropped 15% during the month.

Obviously, a weak area for us is the Class 8 North America, and that doesn't look like it's going to get a whole lot of improvement for a period of time.

We've got to start seeing the credit crunch change to be able to allow truckers to buy new trucks when they have the need to.

So, ours is tied into a lot of the other things that are going on right now.

But, from the standpoint of the end market, the construction was real strong, and now it's down.

Class 8 was weak, and it's still weak.

And North America Class 8 was strong in Europe, and now it's weak.

And China seems to be holding its own right now, and we're gaining new business there and that's in construction.

And we're gaining business in other Asian countries in truck.

Okay, that's the end markets.

And what about your specific products that you sell into those markets, whether it's seats, SIM systems, etc.?

Which product lines have been the most difficult?

I would guess structures on the impact because structures are about 50% of what they were in the '06 market.

Yes.

Alan, as you know, the content on structures is significantly higher than any of our other products.

I mean, several thousand dollars versus our other products which are typically a couple of hundred dollars, depending on what you're looking at.

And as we've talked before, structures is obviously our highest fixed-cost business because of the automation and e-coating and things like that.

So, it simply requires more high-cost --fixed-cost structure.

So, it naturally can be impacted negatively and positively more than probably our other businesses.

Okay, all right.

Thank you.

You're welcome.

Adam Plissner.

Please proceed.

Good morning, guys.

Hey, Adam.

Chad, when you were referring before to your collateral base, your revolver, by any way, is not restricted by borrowing base restrictions, is it?

No, our collateral's --I'll give you the end of September numbers just for talking points.

Our collateral at the end of September was --it was like $102 million.

Our credit facility permits us to borrow up to $50 million today.

It's a $100 million facility restricted at $50 million, if you recall from our last amendment.

Okay.

So, the size is still $100 million, the facility, but it was restricted to $50 million.

Right.

I thought they shrunk the size of the facility, okay.

In relation to I guess some of the markets, how they decelerated in terms of the construction market, the European markets, I guess Merv rattled off a couple of instances that are certainly worse in the back half of the year.

The opportunity now to move ahead with a more aggressive restructuring program --I suspect in the past you've been reluctant under the pretense that there was going to be some sort of recovery in 2009 or 2010 or before 2010.

At this point, are we going to expect the sort of --a more aggressive restructuring response?

And if so, can you frame what maybe the cash cost around that would be?

Now, I think Merv mentioned it in his --in what he went through earlier, Adam, we --this is something we've always looked at.

We did three consolidations last year.

The events that we look at for this year and '09, and depending on what we see for the markets, it certainly may accelerate or may cause us to look a little bit more closely at restructuring or something like that.

But, I think the biggest thing to keep in mind is this is --we've always done that.

And as far as the cash impacts of doing that, no, we can't give you anything like that at this point.

It changes.

Adam, it changes kind of daily and weekly.

Probably we would have had the gun loaded if you'd look back a month ago, but that same gun now has to have three barrels on it because of what we've seen going on in the construction market and what we've seen going on in Europe.

So, we have to finally pull all those pieces together which, obviously, is something that we're working very closely on, but now we have two more pieces to the puzzle that we've got to maybe change some things around that we had planned on.

How many facilities overall would you say are running below break-even, cash flow negative?

That's hard to get into, Adam.

I mean, frankly, some of the facilities we constantly move product from one to the other and share resources.

So, it's a little difficult to get into that.

Okay.

But, would it be fair to say that you're going --in the past, you've looked pretty opportunistically at acquisitions, and sometimes those acquisitions are customer-directed because of the distress in the marketplace.

Given the circumstance of the decelerating market and, obviously, the heightened sensitivity around liquidity, is it fair to say you'll put that on hold for a while?

I think our focus right now would be not to acquire the business, but acquire the product.

In other words, have it moved to us because we can run it on current equipment that we have, and I think that works better for the customer also.

Okay.

I'm not--.

--Chad, in terms of sort of cash management, can you outline anything particular on the working capital side or controlling any discretionary spend that you're looking to that you can sort of extract cash out of the system?

One of the things we were doing, we had sourced some product to China and to India when it made sense.

It no longer makes sense.

It makes sense to make it here in the US.

And it's taught us a lesson, I think, we'll start using, to some degree, is maybe double-tool some of the high runners that we have, one in emerging markets and one in the US or somewhere, and be able to play whichever tool is most beneficial for CVG.

And we're seeing some of that business move back which will automatically reduce the inventories by the six weeks that they're on the water and reduce freight costs.

The other things on top of some projects like that, Adam, are --I think when we talked at the last earnings call, I mentioned timing is pretty important.

I think you can see how important that is.

I mean, we've taken our net debt down $11 million, $12 million from last quarter.

So, we've got $100 million plus in receivables.

We've got 80%, 90% of that value in payables.

And inventory, things like Merv had just mentioned, we think we've got a lot of room, but we certainly have a lot of room for improvement.

But, we've got a considerable amount of what we call room to be able to adjust those types of things.

And it's similar to the question that David asked earlier.

We do have a considerable amount of flexibility.

Now, the one thing that we have done over the last year or so is really monitored our payables with our receivables.

So, we have and probably will continue to work our supply base to make sure that we've got terms in line with how we're getting paid.

Okay.

Along those lines, do you expect to remain free cash flow positive?

I guess at this earnings level and considering the market next year not being expected to be much better, do you think at this level of earnings power you could remain free cash flow positive with the initiatives that you have in place?

Well, I think if you flatlined all the markets and didn't have --and don't have major initiatives, I think it would be close.

I mean, maybe plus or minus $10 million, something rather small, just a rough guess.

I mean, we'll get into that a little bit more when we put out our '09 estimates at whatever point we do that, but just a rough guess.

I don't think it's significant changes.

Okay.

The last thing I had, in terms of mix, we've discussed pretty often in the past the content per vehicle difference between Mexico's demands and the US.

But, just looking at the US demand, is there a noticeable impact of trade-down where seats are going from $400 to $200 seats, where customers are peeling back and the content is getting scaled back domestically?

Not really.

The domestic market's still --the people that are buying are the people that have cash or good credit, and we're seeing those trucks in a lot of the larger fleets.

And those guys are sticking pretty much to what they've always done, except looking maybe for things that can add to their fuel economy, which we've been working on some projects for some of them with thermal that retains the interior's thermal capacity so that there's not as much idle time and not as much use of air conditioning when the sun's on it during the summer months.

So, things like that they're even actually looking to upgrade.

Okay.

Thanks, gentlemen.

You're welcome.

David Leiker.

Please proceed.

Hey, it's me again.

I'm struggling a little bit with your fourth quarter revenue guidance.

It's implied in there it's --what works out, I guess, the midpoint, a $5 million to $10 million revenue increase.

I don't think you have a lot of revenue left from the acquisitions last year, do you?

Those happened pretty early in the fourth quarter.

What --you said a $5 million to $10 million increase?

Yes.

Isn't that about what you're implying here for Q4?

Well, $5 million to $15 million.

Compared to the fourth quarter of last year?

Correct.

Our acquisitions were October, November, December.

Yes, acquisitions were throughout the fourth quarter, so there may be a couple of million there, David.

The fourth quarter units last year Class 8 were --hang on a second.

46,000.

46,000, 47,000.

Our midpoint would indicate 51,000, so there's a 4,000 to 5,000 unit increase.

Okay, all right.

So, that explains that in it, okay.

Are you seeing --I mean, it's early in the quarter, but are you seeing any toxin extended shutdowns here at the end of the year and things like that, either in the truck side or construction?

I mean, roll those out today on the construction side.

Yes.

I mean, Merv said it a little bit ago, I think, regarding Adam's question.

It seems to change daily.

What we had put out yesterday in the release with our estimates, talking truck for a second, 05 to 015.

I think ACT just came out yesterday with their new numbers which are closer to that lower end.

So--.

--Right, right--.

--That was our estimate at the time.

We do get some word on the construction side on a daily basis, to be honest, so it's a little hard to peg it, David.

But, that low end that ACT's got out there is kind of in line with our low end, so it really depends where that ends up.

But, yes, we have over the last month gotten the same indications, I think, that everybody has on some shutdowns.

But, since we put that out yesterday, nothing significant.

Okay.

A numbers question, and then one other one.

What would be a most appropriate number to use for tax rate in '09 do you think?

I mean, I know it's volatile, but what would be a --what's a reasonable number to start with at least?

We will probably use 36% like we always do.

Okay.

It's just a guess.

And then, lastly, what can you give us in terms of an update in terms of what you're seeing from MRAP production?

(Inaudible - microphone inaccessible.)

I don't know.

You probably can't hear that.

That's Jerry Armstrong talking.

No, I couldn't.

That some of--.

--It was a good answer.

Awards are still being placed, I think even some in the fourth quarter, if I'm not mistaken, which would obviously be included in our numbers.

But, we are still seeing some positive effects for us.

'08's been a real good year for us; for '08, primarily seats, but we do have interiors and wipers as well in those.

So, even into the fourth quarter, David, we see some positive effects from it for us.

That's about as far out as we've got, I think, right now.

Okay.

It's a product that we have been able to increase our content on.

Okay, great.

And I guess one last thing, your structures business.

Is --that's focused primarily with MEC, is that correct?

MEC Autocar International is a big one, and Sterling, and niche vehicles like the Ford GT.

And we're seeing a lot of activity in the niche vehicle section.

Some of it's been canceled lately, like the hybrids or the true electric, but we're still seeing a lot of opportunity in the niche vehicles.

Okay, great.

Thank you.

Alan Weber.

Please proceed.

Oh, hi.

Chad, I misunderstood something.

For '09, or even the fourth quarter of '08, what were you talking about cash flow for the company, or free cash flow?

The question was for '09, if markets stayed relatively flat, would we see cash flow --or what would see on cash flow?

What I was saying is if markets stayed flat or we saw what we see in '08, I think we're at a level of where cash flow could go up or down $10 million from a break-even standpoint, is what I was saying, Alan.

I'll caveat that with that is a total shoot-from-the-hip guess, and we'll get into more of that when we get out there with everybody with '09 information, but just a rough guess.

And that would be for the company, that wouldn't be out of working capital, like that?

That's for the company, including working capital, correct.

Okay.

And I don't understand something on the raw material side.

Given the decline in raw materials that we're seeing now, how does that play through or work through for the company in terms of pass-throughs?

Does that mean lower revenues from that side in the fourth quarter, or how does actually work?

Well, nothing moves as quickly as it does on the commodity indexes.

If you think about steel, even in 2000, we were paying $22 a pound --or $0.22 a pound, and currently we're paying $0.57 a pound.

And to get there, it's taken forever to get these negotiated with customers and with ourselves to our suppliers.

So, you've got a lag time.

We've tried to lag on the other end of it as much as we get lagged on the front end.

So, what happens mechanically, Alan, on the face of the financials is we get a $5 increase.

We'll work with our customers to try to get a $5 increase on our either piece price or a separate charge or whatever to recover that.

So, the revenue line, top line goes up $5 or, in some cases, if you have agreements, it goes up $4 and you've got a negative $1 on your bottom line because your cost has gone up $5.

And that's kind of what we were talking about earlier.

I don't know if that answers your question, but that's sort of mechanically what happens.

Okay.

Except now, some of your --when you talked about the freight and logistics, I mean, some of those costs you do --you are seeing an immediate impact, correct?

Oh, of course, yes.

Okay.

Just to --I wanted to kind of make sure that everybody understands.

I talked about the baseline business remaining intact and things like that.

If you even go back to our first quarter, I mean, last quarter we went through our guidance, but our first quarter guidance --and I'll take the low end of what we walked through.

Sales we said was $7.74 million.

Operating income, $26.5 million.

And if you just take out the two or three things that we've just talked about, you actually can get to our recent range.

Take out a couple of million dollars for acquisitions that we know we need to fix, add $10 million to $12 million of sales, and back out $1 million on the bottom line.

And the currency, which we didn't talk much about, but it maybe adds $3 million on the top line and takes out $2 million on the bottom line because of just the way that we may buy or sell in certain currencies, and just the way that it's unfolded this year.

You actually get to roughly in the range of what our revised guidance is.

So, we've got a lot of impacts that have moved us, but hopefully everybody sees that those are probably the key drivers that are really impacting us, even from just two quarters ago when we put out estimates for the year.

And I guess my last question is when you look out, I don't know, over a five-year period, I mean --because, obviously, the results in '07 and '08, even from what you talk about in the fourth quarter in '08, if your operating income is kind of at the higher end, you kind of marginally cover your interest expense for the quarter, correct?

You're talking operating income versus interest?

Yes, it's--.

--Yes, yes.

And so, certainly--.

--Our operating --go ahead.

Right.

And so, certainly, the '08 results are nothing to write home about.

The '07 results are nothing to write home about, if you're looking at it in terms of operating income and your interest expense.

But, when you look at it over a five-year period, over the next five years, what do you think should be a level of operating margin--?

--Well--.

--Or has something really so changed that what you did --that what you've done historically just has no meaning anymore?

No, I think the things that have to change, Alan, are what's starting to happen in our economy now.

Steel prices are starting to go down.

Crude oil has gone from, in the five-year period, $30 a barrel to $147, and now it's back down to $65.

And as long as things like that keep continuing, I think you will see where the operating levels and things have gotten much more in line with --when you have to swallow some of those increases because of contracts that you had out or that it's not happening at the same level in other businesses, which are competitors, then you end up eating a little of it.

And I think that that's not an issue for us going forward.

It's a little hard to pinpoint, Alan, or specifically say we can get to this margin, but obviously our objective is to get back up to those historical levels.

As Merv mentioned, when we've had such dramatic changes in our cost of sales (i.e., freight and materials) and you don't achieve the mark --a tender of 15%, or whatever percent your using, margin on your top line to recover those, it can make it a little bit more difficult.

But, our objective will be, as always --this last couple of years have been a little bit harder but, as always, our objective will be to have cost savings that overcome any price-downs or increases that we see.

And if we do that and we continue to grow our top line with that mentality, we believe we'll continue to increase our profit margins.

But, maybe--.

--But, it's a little harder--.

--Okay.

Maybe I misunderstood something.

One of the earlier questions talked about if the --as I understood the question to be, if your end markets duplicated in '09 what they did in '08, which is not going to happen, but if arbitrarily kind of happened, what would be the incremental earnings you'd have in '09 compared to '08 due to these factors, the raw material now more stabilizing?

And it really didn't sound like you were adding much to the bottom line.

Did I --as you ran through that calculation.

We didn't run through the calculation because we haven't put our '09 numbers out.

What we said was our objective will be to have cost savings exceed any price-downs or --well, if we're keeping all markets the same, to exceed any price-downs and have our efficiencies add to our bottom line.

So, that's really all we did say, Alan, and really all we can say until we put some '09 figures, but--.

--We do have a lot of initiatives internal for cost reduction that look very promising, and we'll continue to push on those.

Okay, all right.

Thank you.

Ann Duignan.

Please proceed.

Hey, Ann.

Yes, just one real quick one.

You mentioned there that part of structures business goes to Sterling.

Could you talk a little bit about what's going on with them, in fact that that brand name won't exist anymore and how that might impact your business with them, and whether --if that business disappeared, whether it will be material or not?

I think that the impact it has, obviously, it's the biggest in the structures, but it doesn't go away until March of '09, or April, and that's if things go right.

They have got a major push on advertising for the Sterling, and then there's a lot of service parts that have to be run up for the Sterling.

So, to give an exact input on what it's going to have today is just not possible, but when you look at it, structures is about $26 million, $28 million, something like that, and we grow our business organically 4% to 6% a year.

That's pretty well covered with the organic growth.

And I am quite confident that with the freight liner being one of our big customers and have been a partner for a very long time, that we will see this business, a lot of opportunities become available to us.

Now, whether there'll be in structures or not, who knows?

But, we will see the business become available to us and maybe in seats, maybe in interior trim.

So, how much does Sterling represent from a total company perspective, then, in terms of revenues?

I was going to say $20 million, something in that range, Ann.

Okay, I'm being told wrong.

It's $30 million--.

--$30 million, okay--.

--$25 million to $30 million, yes.

And if Sterling just disappeared March 31st next year, would that $30 million be at risk, or is some of that aftermarket in parts?

I think we'll have aftermarket in parts, plus the business is not going to go away in the US to every customer we supply.

And one of them, including Daimler itself, has intentions on picking up a big portion of the Sterling business with their M2 class or the other customers with their competing class.

So, we don't think the volume is going to go away.

We just think it's going to be redistributed.

Right.

So, if X number of units are going to be built next year, then X number of units are going to be built.

And how that's distributed is really the question in who picks up that Sterling business.

And as you guys know, we have business with all of the major OEs, so the question really becomes not only will the service continue, but how it's redistributed among what other OEs and what business we have on that.

Okay, that's very helpful.

Thank you.

I'll follow-up off-line with you.

And at this time, there are more further questions in the queue.

Well, we'd like to thank all of you for joining us.

And as always, if you have any other questions, you can get a hold of John Hyre, and he will get a hold of Chad or myself and we'll talk to you about anything.

Thanks, everybody.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.