Good day, ladies and gentlemen and welcome to the Q2 2017 Commercial Vehicle Group, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Terry Hammett, Vice President of Investor Relations. You may begin.

Thank you, Glenda, and welcome to the conference call. Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group will provide a brief company update; and, Tim Trenary, our Chief Financial Officer, will provide commentary regarding our second quarter 2017 financial results. We will then open the call up for questions. This conference call is being webcast. It may contain forward-looking statements including, but not limited to, expectations for future periods regarding market trends, cost saving initiatives, and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, the economic conditions in the markets in which CVG operates, fluctuations in production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies, and other risks as detailed in our SEC filings. And now Pat Miller with a brief company update.

Good morning, everybody, and welcome. Our results for the second quarter of 2017 reflect that consolidated revenues have increased about 10% for the quarter as compared to the same period last year and up about 13% quarter over quarter. We discussed in the first quarter the strengthening in OEM orders that we were seeing in our largest segments, North American heavy-duty truck and also global construction. Those orders have been translated into sales increases for our operations. We have made many cost and infrastructure improvements in the past 18 months and we expect that these changes should translate into higher margins than historical performance. However, our earnings have been burdened by our refinancing actions in the second quarter and also by the prolonged headwinds in our North American wire harness business, which I will discuss shortly. Net income for the second quarter of 2017 was $0.1 million as compared to $2.7 million in the prior year period. Historically for CVG we expect higher sales to result in a profit pull-through of about 20% to 25%. In the second quarter we experienced some challenges in converting the higher sales into operating profit at our normal historical rates. When the production spikes this quickly, it can cause some short-term inefficiencies and capacity constraints. We have stated previously that our company has traditionally been adept in managing the cycles up and down and I believe that has not changed. We are continuing to manage this up cycle in many parts of the company that are going, especially in truck. We have a challenge in our North American wire harness business that has been lingering. We continue to experience labor shortage issues in our Agua Prieta facility which has been exacerbated by the increases in OEM orders. We have an operating presence in Agua…

Good morning. Our two largest end markets continue to improve and sales are up but conversion of the improving sales and operating income or pull-through is well below CVG's historical experience. For the consolidated second quarter 2017, revenues were $195.1 million compared to $178.3 million in the prior year period, up approximately 10%. This improvement in sales is primarily attributable to our heavy-duty truck market in North America and the construction end markets we serve. Truck orders continue to be encouraging in the second quarter and are now being reflected in the bill. Our second-largest end market, construction equipment, is also improving. The strength of the U.S. dollar remains a burden on the top line but less so than in the recent past. Foreign currency translation negatively impacted second quarter revenues by $2.1 million or 1.2% as compared to the second quarter of 2016. Selling, general and administrative expense in the second quarter were $14.8 million compared to $15.6 million in the prior year period, 5% less than the prior year period. This 5% reduction in SG&A reflects the cost containment initiatives action over the past two years, not all of which were in place this time last year. Before giving effect to the special items arising from the facility restructuring, adjusted operating income in the second quarter was $8.4 million compared to $8.9 million in the prior year period. This roughly flat operating income period over period on a 10% sales improvement does not reflect the pull-through we have historically achieved due primarily to our wire harness business in North America. Adjusted operating income margin was 4.3% for the quarter compared to 5% in the prior year period. The company's net income in the second quarter reflects the cost, primarily transaction costs associated with the refinancing of the company's…

[Operator Instructions] Our first question comes from Michael Shlisky from Seaport Global. Your line is now open.

So, I guess I wanted to start off with asking about the labor cost issue as you may have guessed. We are in mid-August now, almost half way through the quarter. Can you give us any update as to how things have trended most recently? Are you looking at maybe $4 million in the third quarter and a very [indiscernible] on the fourth quarter or could it be more spread out there, cost issues for the rest of the year.

Yes. So we have given the range. $3 million to $6 million. I don’t know that we are going to break that down by quarter. What I will tell you is that we are seeing some stabilization in the operation from a consistency standpoint. The labor issues there have not receded and we know that the best way for us to deal with the issue is to grow our capacity outside of that are, which we are in the midst of doing. We are having pretty good success on a performance basis. The ramp is starting to get traction and we have seen some minor reductions in some of those costs where we are at today. But I think it will be a trend down through the year as we have projected.

Are there any cost levers elsewhere in this segment that you could pull to perhaps offset the dollar impact at least for the rest of the year? Or is that not being considered at this point.

Yes. So it's a good question and we are certainly looking at that to try and offset some of the impact. And discretionary spending, those levers are being evaluated now as well as hiring where it's not critical to some of the growth activity that’s going on. So it's good comment. It's certainly something that we do as a regular discipline. We are having underperformance in area, we are trying to make up for it in other areas.

And as you see things today, do you think this issue is going to persist into 2018 or you are fairly confident that it will be all said and done by the end of this year.

Our current plans, and I am confident in those plans, show us getting out of this issue, transitioning out of the issue over the second half of this year 2017. You know I think, Mike, it would be helpful to understand the business, the wire harness business in general for us has historically and traditionally has been a very sound and profitable business. It has been a growth business of late with the strategies that we have discussed in previous calls and it continues to be a growth business for us. We are seeing growth in Europe, as I mentioned in the script. But also new customers even here in North America. So we have been hit with an extraordinary cost related to protecting the business. The business is worth protecting and we are doing that, we are working very closely with the customers that are being impacted, which are some of our core customers, and as a result of that I think that we will come out of this in better shape and the company will be better for it once we get through mitigating the labor capacity issue.

That’s great, Pat. Maybe I will just ask one more on this issue. Looking at your 2018 cost structure and the outlook for your margins next year and the operating pull-through situation. Is the right way for investors to kind of think about this is you will still get the 20% to 25% that you usually get after you sort of take out the $8 million you saw in the first half and 3.06 in the second half on the cost issues. So in other words, you think that operating pull through above the usual range just because you won't have these issue again and is it simply as simple as the $8 million in the first half and $3 million in the second half that lead to kind of disregard to put it for 2018.

Mike, it's Tim. Let me take that question if I may. As we sit here today and think about what you just ask, we do not have any reason to believe that there will be any material impact going forward on the company's operating leverage. That is the 20% to 25% pull through that we have historically achieved. There will be some step change impact in the restructuring savings that we had in intended to receive from the wireless, the North American wireless part of the restructuring efforts. That step change change we again do not expect it to be material at this point an as Pat said, we fully expect that the overall savings from the restructuring efforts that we initiated a year and half ago, that range you might remember is $8 million to $12 million annually. We still expect to be at the upper end of that range. So just to sort of summarize, I believe at this point a small change in step change expectations with respect to savings, but no significant change on the pull through.

I think I would add just a little bit to that as well. These are not normal operating expenses that we are incurring. Premium freight we have got. When you get into these kinds of situations where you create a backlog with the customers, we have to make extraordinary efforts in order to get out of them. And that includes production inefficiencies, more frequent changeovers in orders to deal with the shorter lead time to keep the customers in product. And those things will go away once we have resolved the issue.

I appreciate that color. Perhaps, maybe I should ask the question in a different way. To get that kind of pull through next year is very easy now given what happened in the first half of the year. At least for the first half of next year. So what I am asking is, do we need to assume 20% or more incremental margins on operating profit that would actually be $8 million higher. Maybe I am not asking this question the right way. I am trying to [indiscernible] you will have a much higher operating pull through next year than this due to easy comps. Maybe that’s the best way to put it.

No, I see what you are saying, Mike. No, the 20% to 25% pull through that we expect to continue to be able to achieve in the future. That’s does not include, if you will, any benefit from the savings that Pat just mentioned for managing down this freight. Said another way, once the excess freight and the inefficiencies are gone and that operating income comes back, it's been burned by that, then the 20% to 25% is on top of that.

Okay. Okay. I might have to follow up on that one offline. Last one from me, I want to get some more color on your construction market outlook. It sounds like you have some good orders in the quarter. Can you just confirm that, from what we heard from your last quarter, that the outlook for the rest of the year has improved there? And I don’t want to ask for guidance directly but some of the main customers in your portfolios, some of the multinationals are looking at a 15%, 20% growth in the back half of the year on a pretty good recovering market here. I don’t want to ask you if you would agree with that but can you give me a sense as to, in the first half you saw double digit growth, could that sort of range 10% plus, continuing on the back half of the year as far as the growth rate goes.

Yes. I don’t know if I have the exact numbers comparable to what you discussed there, Mike. But I would tell you that our orders, I mean part of the reason we have a backlog is our orders are much higher and we are not achieving all of that order output today and our orders tend to precede, obviously our customers shipments right. So we are seeing a strong pull from the customer base in the construction site and it's coming from multiple regions especially in North America, Europe and Asia where we are participating and we are seeing good demand and it's not softening fur it's a little hard for us to put it into an exact quarter basis as to where they are seeing it. Obviously we don’t really understand that part of it.

Thank you. [Operator Instructions] And I am not showing any further questions over the phone lines at this time. I would like to turn the call back over to Patrick Miller, Chief Executive Officer, for closing remarks.

Okay. Well, I want to thank everybody for joining. Obviously, we had some difficulties this quarter with some of the pull through but I would like to just reemphasize, we are seeing strong fundamentals in many parts of our business from a market perspective and also from an operating performance. And we will manage these as we go through the rest of this year and you will see the performance transition the way that we hope to see it. So thanks everybody for joining and I look forward to talking to you in the future.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.