Good day, ladies and gentlemen, and welcome to the Q2 2019 Commercial Vehicle Group, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over Mr. Kirk Feiler, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Thank you, Brain, and welcome to our conference call. Joining me on the call today are Patrick Miller, President and Chief Executive Officer of Commercial Vehicle Group; and Tim Trenary, Chief Financial Officer. They will provide a brief Company update as well as commentary regarding our second quarter 2019 financial results. We will then open the call up for questions. This conference call is being webcast and a supplemental earnings presentation is available on our website. 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 economic conditions in the markets in which CVG operates; fluctuations in the 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.

Thank you, Kirk. Good morning, everyone. Ongoing momentum in the North American heavy and medium-duty truck markets drove year-over-year sales growth of 4% in the second quarter. The North America truck market continues to generate strong builds based on the backlog. Additionally, we are continuing to make strategic investments in the business, including our manufacturing capacity expansion in Electrical Systems, as well as corporate development activities associated with recent strategic reorganization of the business. These investments, coupled with cost challenges, resulted in a decrease in operating income as compared to the second quarter of 2018. Some of the challenges are short term. So the more systemic issues we've identified and implemented a number of cost control and recovery actions to potentially mitigate the impact going forward. Tim will provide additional detail in his prepared remarks. Turning to our segments. Revenue for the Electrical Systems segment was up $7.4 million or 5.5% versus the second quarter of 2018, due primarily to continued strength in the North American heavy and medium-duty truck markets. However, operating income declined $2.1 million year-over-year, due primarily to the capacity investments and previously mentioned headwinds. The cost challenges we experienced in the second quarter predominantly impacted the Electrical Systems segments. We have maintained our focus on positioning this segment for long-term growth. Our capacity expansion in our global wire harness business and North American trim business allowed us to more efficiently meet increasing demand levels and diversify into new end markets and applications. While these initial costs, including facilitation, training, and other expenses negatively impacted our operating income for the quarter, we expect these costs to moderate in the second half of the year. We have three new expansions underway, including wire harness capacity in Mexico, wire harness capacity in Ukraine and a new dedicated facility for…

Thank you, Pat, and good morning. Second quarter 2019 consolidated revenues were $243.2 million compared to $233.4 million in the prior year period, an increase of 4%. As Pat mentioned, this increase reflects the continued strength in the medium and heavy-duty truck markets we serve in North America. Foreign currency translation adversely impacted second quarter consolidated revenues by $3.5 million. Consolidated operating income for the second quarter 2019 was $17.2 million or 7.1% of sales compared to $20.9 million or 8.9% of sales in the prior year period. The new Border Minimum Wage in Mexico, costs associated with a troubled supplier, and costs associated with establishing additional manufacturing capacity are largely responsible for decrease in operating income, and more specifically, the operating performance of the Electrical segment, more on this in a moment. Cost control and cost recovery actions reduced the impact of these cost pressures on gross profit. Cost associated with the strategic reorganization of the Company to, among other things, develop a platform from which to pursue business and corporate development activities amounted to approximately $1 million in the quarter. We fully expect this investment of corporate resources to pay dividends in the future. Interest and other expense increased $4.3 million in the second quarter of 2019, compared to the second quarter of 2018. The increase reflects the impact of marking-to-market interest rate swap agreements, which resulted in a $1.1 million non-cash charge in the three months ended June 30, 2019, as compared to a $0.5 gain in the prior year period. In addition, the second quarter results include a $2.5 million non-cash charge associated with a voluntary lump sum settlement of $7.8 million in pension liabilities for a portion of our term vested participants, thereby reducing the future financial risk of our pension plan. Following the transaction,…

Thank you, sir. [Operator Instructions] And our first question will come from line of Mike Shlisky with Dougherty and Company. [Ph] Your line is now open.

Good morning, guys. Can we just maybe quickly touch first on some housekeeping? I didn’t really see it broken out in the release. Could you give maybe detail for us, what would the earnings have been without sort of that one time mark-to-market and without the pension?

Well, it was a total of almost $6 million pre-tax, Mike. I haven't tax effected that. So, I don't have that number. Maybe we can calculate -- I see Kirk here is kind of calculating around. So, we’ll calculate that for you.

Great. Just perhaps while doing that, just speaking in very broad numbers here. If you take those two and then sort of some of the one-time costs around kind of ramping up a BisDev unit at the company, you would have probably twice the operating income -- the earnings, have you not had those one-time items. Definitely, it sounds like to be headed towards, correct?

Well, to be clear, the investment we're making in business and corporate development isn't one time. It's on a run rate basis, annually, about $2.5 million to $3 million investment in our future. So, that was a little higher. It was $1 million in the second quarter. There were one or two sort of one-offs associated with the reorganization of the Company as it affected in the second quarter. But on a run rate basis, it’s on the order of $2.5 million to $3 million. We think it’s money very well spent.

And Mike coming back to -- if you assume adjustment of $6 million in the other income expense tax effected at roughly 25%, the EPS would have been about $0.38.

Okay, got it. All right. So, guys, also I want to ask you about some of these brand new platforms you've been stepped into here. Great work on obviously all of them. And it sounds like if you add up what you've kind of quantified, that's at least going to be a 10% to 15% tailwind from the current annualized run rate today, maybe in that ballpark. Can you tell me, if other platforms are going to be kind of ramping down during this period, or are you kind of being given here brand new platforms Autocar, the one in 2023, et cetera?

Yes. So, I'm sorry, we can't do specific names on all of them. You know how our business works.

Of course.

In general, there was a -- of their announced new business, there was really only one that was a replacement business, and that's the one I mentioned as replacement in the seating group, that $30 million. So, that's a current platform that will swap out for a new platform in 2023. All the rest of them are incremental to our current book.

Okay. And just on that same topic of brand new business, can you update us on your efforts in adjacent markets, like in power gen or the appliance market, trailers, et cetera?

Well, I think, we've continued to grow in what we consider to be power gen. That’s both, we lump -- industrial and vehicle power generation. And so that tends to be engines and harnesses. So, we're not prepared to announce anything new today. But we definitely have some things in the pipeline that we hope we’ll be able to announce in the near term, in that regard.

Okay.

You mentioned one other thing. We are ramping one power generation related item. Part of the expansion in the Ukraine is related to some new booked business along that regard. So, I don't have exact numbers off the top of my head. But, part of the justification for that expansion was new booked business in regards to power generation and also some off-highway business that we've booked with some existing customers in Europe.

Okay, got it. Just touching on Mexico briefly, there was a time way back when everyone said if you're not working in Mexico, you're missing out. Now, it seems like some of the costs have equalized between the two countries in certain parts of Mexico. Can you just -- are you changing any of your production outside of Mexico? In other words, is your plan to kind of move any other work from Mexico into the United States or other countries or is it all going to go from one state to a different state within Mexico?

Well, the two out of the three announcements we made today on capacity expansion are in Mexico. One of them, the interior trim, we have a campus with now five facilities. And so, we're able to add that capacity and still utilize mostly the same overhead management structure to manage that business. So, it's advantageous to us to be in that same region. The second expansion is not only capacity but also to mitigate some of the risk, as you're well aware, in 2017, there was some issues with a lack of availability of labor, in the area where most of our wire harness manufacturing is, and so this helps us mitigate that risk. You asked about, are we looking outside of there. It is something that we're constantly evaluating whether we can be cost competitive with our customer base. But, it's not equivalent to the U.S. So, it's still probably a 30% branded cost comparison improvement over being in the U.S., at least for the labor intensive activities. And so, most of our products are large and complex. And so, we trend to -- freight matters. And so, if that's a disadvantage, were to be offset by freight, then we would look to do what you suggest. But right now, it doesn't.

Okay. Just trying to combine a few different comments you made on your prepared remarks. On the one hand, you said there's a good chance that the U.S., so that maybe truck market might turn back to more normalized levels next year, which I think is a widely held view by ACT and others. But then, you're also expanding capacity in certain parts of the world and across North America. Could you just take us to like what [Technical Difficulty].

Could you repeat that question?

Yes. Hold one second. Sorry, guys. Is this little bit better?

Yes. Thank you.

Okay. I just wanted to tie together some comments you made earlier. You said that some of the big forecasters are saying that we could see a return to a more normalized truck market in 2020, which is something I guess pretty widely held view at this point, yet you're also bringing on new facilities in Mexico. Could just give us a little bit sense as to how you're going to be trying to manage your cost overhead during the time we might see a pretty big decline in the market when you're trying to expand or change your current footprint? So, I’d color around how you are going to manage your cost during that time.

It's a good question. So, I think with the order levels that we're seeing, we certainly are preparing and planning for a potential reduction in some of the truck volumes. The capacity that we've put in, in Mexico for the interior trim, first of all, part of that business is business we already have or business we've had outsourced and we're in sourcing into a purpose-built facility and moving some existing assets in, in addition to new assets. So, part of that capacity is already spoken for, if you will. The other part of the capacity is targeted at non-truck applications. And so, it gives us the opportunity to compete in those segments. Thirdly, I think, I would add this. The way that the truck OEMs tend to manage their capacity is when there's some downturn in the market, they don't take all their operations in North America down equally. So, the Mexico operations tend to stay at a much more fully capacitized production levels in comparison to the U.S. operations. So, we believe that capacity down there makes a lot of sense for us, not only for the existing business that we're moving into there, but also the future business, which we think helps us have a little bit more of a diverse customer mix. On the other hand, the other capacity we're adding is tied to non-truck. So, most of our -- with the exception of some of the engine harness business, most of the harness business is in off-highway and other segments. So, that's really what it’s targeted at.

Got it. So, it's fair to say that we see a big Class 8 reduction next year to give you some extra reading room to kind of build the business elsewhere or at the very least, there is a planned business, awarded business that's in line with this new capacity already? Is that fair to say?

Yes. It’s been around installation [ph] you're talking about. That's correct.

Thank you. And our next question will come from the line of Barry Haimes with Sage Asset Management. Your line is open.

Thanks so much. I had a couple of questions too. First, just following up on a couple of Mike’s and the comment you just made about the Mexico facilities generally holding up better in a down Class 8 volume environment. Is there any order of magnitude you could share? So, if Class 8 build is down X, would you expect the Mexican volumes to be down half of X, two-thirds of X? So, any sort of order of magnitude there? And then, what sort of decremental margins should we expect on that reduced Class 8 business? That's the first question.

Okay. I'll take the first part, and then I'll let Tim talk to the decremental piece. I can't give you an exact number. What I will just tell you is going from previous historical experience, the Mexico OEM operations tended to stay pretty consistently full. Today they're running at peak volumes. I would imagine, they will take them down a few percentage points, try to get out of overtime and some of the extraneous costs. This is speculation on my part, okay? But, when we look at what they've done in the past, they have different cost profiles in their different operations. And they've made efforts in the last three years to dual tool, almost all of their platforms in those facilities located south of the border. And so, they have a lot of flexibility. And I would imagine that their plans will be to leave those operations running relatively full. And they'll take -- they'll adjust the other operations to align with the sales orders drops, if there are some.

Barry, it’s Tim. With respect to your question on the variable contribution margin, the Company has a variable contribution margin that suggests that we convert sales, absent extraneous factors between 20% to 25%. Historically, again, add extraneous factors, the Company has a experience of doing that. If you look back, you would see that in 2016, we actually converted in a down market much better than in that range. It was in the single or low double digits. But that's because of some extra fixed costs that we were taking out. Having said that, looking forward, just to be very direct about your question, I look for a conversion of 20% to 25%. Probably early on in the decline, the conversion will be at the upper end of that range, just because it takes a little bit of time to get out some for the costs. But, as we move through any decline in the top line, I would expect that conversion to start to move down towards 20%.

Great. That's really helpful. Thanks. And then, one other question I had for you guys was, it sounded like the North American construction market still feels pretty good to you. But, I'm wondering if you could talk about any change in incoming order rates as you move through the quarter and maybe through July. There have been a couple other companies that have reported that, are kind of pointing to weakening CE markets. So just curious what you're seeing in North America?

Specific to North America, it's sometimes a little bit difficult for us to tell whether it's coming directly from construction or whether it's coming from mining, which has been up as well, and some of these other off-highways. So, we kind of lump them together because we can’t always separate them from where our customers are landing their equipment. But for us, North America has remained relatively strong. And the only softness we've seen have been in -- predominantly in Japan and Korea on the off-highway side. Europe's a little bit soft, but not the same as what we've seen in APAC. So, that's, about the best color I can offer you right now.

Great. Sounds good. Thanks so much.

Okay. Well, it appears we're done with the questions. Thank you very much for joining the call today. This is Pat Miller. And we appreciate your support as we work to drive better future for our Company. And we look forward to talking to you in the near term. Take care.