Good day, ladies and gentlemen, and welcome to the Q2 2020 Meritor 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. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Todd Chirillo, Senior Director of Investor Relations. You may begin.

Thank you, Jash. Good morning, everyone, and welcome to Meritor's second quarter 2020 earnings call. On the call today, we have Jay Craig, CEO and President, Carl Anderson, Senior Vice President and Chief Financial Officer, and Chris Villavarayan, Executive Vice President & Chief Operating Officer, all of whom will be available for questions following the call. The slides accompanying today's call are available at meritor.com. We'll refer to the slides in our discussion this morning. The content of this conference call, which we're recording, is the property of Meritor Inc. and is protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to Slide 2 for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call, you'll find the reconciliation to GAAP in the slides on our website. Now I'll turn the call over to Jay.

Thanks Todd and good morning. I'd like to begin by expressing my thanks to all our Meritor employees for their dedication and hard work as we take on the challenges we face today. As part of an essential business, Meritor employees remain committed to supporting the delivery of medical, food, and other critical products for our communities around the world. I also want to express my thanks to the frontline workers that Meritor had the privilege to support in the fight against COVID-19. I'll now spend just a couple of minutes talking about the second quarter before providing an update on the status of the business today in light of COVID-19. Let's turn to Slide 3. The company was performing extremely well before the pandemic began to impact production, first in China beginning in mid-January, then throughout the rest of the world, beginning late in the second quarter and continuing into the third. Carl will share more detail, but here you can see the highlights from the quarter. Sales were down $285 million from last year due to lower volumes. We finished the quarter, however, with a 12.3% adjusted EBITDA margin, up from 12% in the same quarter of last year. That income was $240 million, up $167 million from the same period last year. This was driven by $203 million of after-tax income associated with the termination of the distribution arrangement with WABCO. Our liquidity position at the end of the second quarter was $829 million. This represents approximately 20% of our trailing 12-month sales. Cash on the balance sheet was $508 million. We have access to the remaining $321 million of availability under our revolving credit facility and expect to be in compliance with our covenants under this facility for the remainder of the year. Although it is still early to accurately forecast the extent of the pandemic's impact on the industry, the strong foundation we built over the past several years will provide advantages as we work through this crisis. Let's go to Slide 4. As we bring operations up around the world, the safety of our employees is our highest priority. Over time, we have improved our safety record to be comparable with the best companies in the world, and it is my intent to maintain that level of excellence as we face the challenge of protecting our employees during this global health crisis. We have developed a comprehensive set of procedures that make up safe start. This plan outlines protocols for operating in this new reality. It includes procedures and policies that will be audited at each of our global locations whether it's a manufacturing plant, office, distribution center, or a test environment. These practices include preventative measures in entryways and common locations, heat mapping to identify areas that require special attention, personal protective equipment, wellness checks, more frequent and in-depth cleanings, visual indicators, and the attrition of social distance coaches, to ensure that we are following and sharing best practices across the company. I have asked Meritor's General Auditor to assume the additional role of Chief Safety Compliance Officer. He will consult with outside experts as needed to ensure that best practices are being implemented and followed. On Slide 5, we provide a current update on our global operations. Meritor's aftermarket distribution business ran without interruption over the past two months to maintain the supply of critical replacement parts for trucks and trailers. Our industrial business operated at lower volumes to support the production of vehicles considered critical for defense, bus and coach, terminal tractor, fire and rescue, and other off-highway applications. We also maintained delivery of battery electric kits from our TransPower facility in California, primarily for Kalmar terminal tractors for delivery to companies like Amazon and Walmart. And we continue to work on critical electric vehicle integration projects for our customers. Currently, the majority of our operations in North America and Europe have resumed limited production. Over the coming weeks, we also expect to restart operations in South America and India. China resumed full operations last month. We acted swiftly to implement a series of actions that took effect in early April. This allowed us time to look at the business longer-term and evaluate next steps. These actions included a reduction in pay for salaried employees in addition to reducing discretionary spending and capital expenditures. Since that time, we have lessened the salary reduction for most employees beginning May 1. The current reduction in pay from 40% to 50% of base salaries will be reduced to 20% to 25%. Salary reductions for the executive committee, including me, will remain at previously set levels of 50% to 60%. Other actions announced in March are in effect indefinitely.

Thanks, Jay, and good morning. On today's call, I'll review our second quarter financial results, liquidity position, debt maturity profile, and retirement-related liabilities. Before I begin, I wanted to take an opportunity to express how proud I am of our team's ability to quickly mobilize and rise to the challenges that have been placed before us. Now, let's walk through our second quarter financial results compared to the prior year on Slide 6. Overall, sales were $871 million, down 25% from the same period last year. Sales in our commercial truck segment decreased by 33% year-over-year to $588 million. The decrease in revenue was in line with global truck market conditions as all regions saw lower production levels. The suspension of production due to COVID-19 first in China in mid-January and then late March in Europe also contributed to lower sales. In our Aftermarket, Industrial and Trailer segment, sales were $319 million, down $10 million or 3% from last year. Lower sales were primarily driven by decreased volumes across the segment, including the beginning impacts of COVID-19 and overall market demand, partially offset by $43 million in revenue generated from our AxleTech business. Net income from continuing operations attributable to the company was $240 million compared to $73 million in the same period last year. As Jay mentioned, higher net income year-over-year was driven by $203 million of after-tax income associated with the termination of the aftermarket distribution arrangement with WABCO. Adjusted EBITDA was $107 million in the second quarter of fiscal 2020 compared to $139 million in the same period last year. Adjusted EBITDA margin was 12.3% compared to 12% a year ago. The improvement in margin was largely driven by a $10 million adjustment of lower incentive compensation expenses to align with the revised performance expectations due to COVID-19. We also recognized a $4 million benefit resulting from a tax law change in India. Segment adjusted EBITDA for commercial truck was $55 million, down $33 million from last year. Segment adjusted EBITDA margin for commercial truck came in at 9.4%, down from 10% in the prior year. The decrease in segment adjusted EBITDA and EBITDA margin were driven primarily by lower volumes, partially offset by lower incentive compensation costs, lower net steel costs, and other material costs. Segment adjusted EBITDA in our Aftermarket, Industrial and Trailer segment was $49 million, a decrease of $3 million compared to the second quarter of last year. Segment adjusted EBITDA margin decreased 40 basis points to 15.4%. Free cash flow for the quarter was $292 million compared to $19 million in the same period last year. The increase in free cash flow was driven primarily by the $265 million of cash received from WABCO. Next, I'll review the debt governs of revolving credit facility on Slide 7. The credit facility has the sole financial covenant based on priority debt, which is a subset of our total outstanding debt. The calculation states priority debt cannot exceed trailing 12-month compliance EBITDA by more than 2.25x. It is important to note that the $265 million pretax income we recorded associated with the WABCO termination is included in trailing 12-month compliance EBITDA. Now let me walk you through the calculation in detail. First, priority debt is comprised of any outstanding borrowings under the revolver, inclusive of any term loan funding, any outstanding US factoring and US securitization balances, plus any secured liens for us consisting of our capital leases. In total, priority debt as of the second quarter was $633 million. Secondly, priority debt, as compared to trailing 12 months compliance EBITDA, which starts with consolidated net income and then adds back our depreciation, amortization, interest, and taxes. Including other minor adjustments, the total 12 months trailing compliance EBITDA at the end of the second quarter was $701 million. The results in ratio are 0.9x priority debt compared to compliance EBITDA, significantly under the limit of 2.25x. Furthermore, the covenant is only measured on the last day of each quarter. If compliance is achieved, the covenant is being met for the entire following quarter. As the income from the WABCO termination will be included in our priority debt calculation for four fiscal quarters going forward, at this time, we expect to be in compliance with our covenant throughout the year and maintain access to the full credit facility. Let's move to Slide 8, which details our extended debt maturity profile and retirement liabilities. As you can see on the chart on the left, we have no significant debt maturities until 2024. In fact, we only have $4 million of debt coming due for the remainder of this year and $32 million in total debt maturities in fiscal year 2021. You will note in fiscal year 2023, we saw the maturity for our US securitization facility. We typically extend this facility annually for an additional year, which we would expect to do again later this year. The bottom line is that we have a clear runway with our debt maturities with no significant cash costs through 2024. At the end of 2019, our net pension liability was $122 million, which translated to a 93% overall funded status. Based on this, we expect very manageable required contributions over the next couple of years. And while we have obviously seen challenging financial markets as we ended the second quarter, our estimated funding status has actually improved from the end of 2019. This has been driven by a combination of strong US asset returns in the plan, which are up over 10% through March, and higher discount rates as corporate spreads have widened. While our plans will continue to be susceptible to changes in asset returns and discount rates as we move through the remainder of the year, our asset allocation is skewed more towards fixed income given our liability hedging strategy. Overall, we are pleased with the performance to date. Turning to our OPEB liability, as we have previously discussed, we have taken steps in recent years to significantly reduce this obligation. At the end of 2019, this liability was only $67 million. Overall, with an extended debt maturity profile and a well-funded pension plan, we don't have any significant cash costs from these liabilities in the near term. In summary, the balance sheet actions we have executed over the last several years, along with our current liquidity position, puts us well-positioned to navigate the current environment. Now, I'll turn the call back over to Jay.

Thanks, Carl. Please turn to Slide 9 for our third-quarter outlook. Let me highlight our assumptions. As I said earlier, segments of our operations have continued to run. We expect these businesses to contribute between 50% to 60% of our revenue during the third quarter. The restart and ramp-up of our commercial truck business is not as clear. While we expect most of our plants around the world will be running in early May, there is uncertainty on timing and volume, which is driving a large range of our revenue outlook of $400 million to $500 million. Negative cash flow from operations is expected to be in the range of $150 million to $225 million. This includes the one-time impact of the unwind of our factoring programs. These programs allow us to monetize our receivables quickly after they are generated. Removing the impact of factoring, we expect negative cash flow from operations of $25 million to $50 million during the third quarter. Turning to margins, we expect to hold sequential detrimentals in the third quarter in the range of 20% to 30%. This includes additional investment required to implement new safety protocols. We were able to achieve this due to the quick and aggressive cost containment measures we have already taken. I want to emphasize that we are running the business to focus on operational cash flow in the near term. Let's move to Slide 10. As we enter the second half of the fiscal year and restart production, we are making sure that every safety protocol is in place, including providing the necessary PPE. With the existing challenges in obtaining large quantities of masks, gloves, cleaning supplies, and disinfectants, we will first ensure that each of our plants, distribution centers, and testing labs has the necessary quantities on hand before we start allocating these supplies to global administrative offices. I have been pleased with the adjustments that our salaried employees have made to working remotely. With that in mind, our salaried employees will work from home until further notice. We have begun to see the favorable impact of our aggressive cost reduction initiatives. As I mentioned, we believe these initiatives will provide the stability necessary to minimize negative operating cash outflow in the near term. We are working closely with our customers to run production as needed to meet their schedules. Our assumptions include a significant decrease in production for the remainder of 2020, and we will evaluate and implement additional cost actions with a focus on minimizing operating cash flow in the near term. As we now turn our attention to the longer-term outlook for the company, we are evaluating the appropriate strategies for a global environment where demand for our products may be weak for many quarters. We plan to provide you with a longer-term outlook for fiscal 2021 and our M2022 planned performance on our third-quarter earnings call if there is a set of market forecasts that we are comfortable with for modeling purposes. This outlook will include a summation of the benefits we expect to see from the longer-term actions we're in the planning phase of executing. While the pandemic created a situation unlike any we have faced in the past with the full repercussions as yet unknown, we are taking the actions we believe will put the company in the best position for the long term. I want to thank Meritor employees for their focus during this unprecedented crisis. Our employees' dedication and responsiveness to customers and to each other has been overwhelming. Now, we'll take your questions.

[Operator Instructions] Our first question comes from Joseph Spak with RBC Capital Markets. You may proceed with your question.

Thanks. Good morning, everyone, and good to hear all your voices. I hope everyone is okay. I guess the first question is even if we sort of look at the decrementals in this quarter ex some of the incentive benefit, it still seems like there's a step down on the decrementals into the next quarter. Is that just all sort of, you know, volume-driven as you know, sort of feeling the bigger clients or is there anything else that could sort of help bridge that gap between the performance?

Yes. Good morning, Joe. Good to talk to you as well. Yes, as I think we look at the next quarter, one, what we provided was a sequential look relative to the second quarter. I think when you cut through the math on a year-over-year basis, it gets - it's kind of running a little bit in the low 20% range. And as far as we look specifically for the second quarter, as you pointed out, we did benefit from lower incentive compensation in our actuals, as well as the one-time kind of tax impact that ran through EBITDA.

Okay and yes just, while I guess actually somewhat related. Obviously, sort of taking out a bunch of cost in the short term and I guess some of that can be viewed as temporary. But as you mentioned, sort of maybe a new world, new era. Is there an opportunity to sort of maybe as you reevaluate to make some of those temporary savings more permanent in the mid to long term as you reevaluate the cost structure?

Joe, this is Jay. Thanks, very good question. Obviously, that was what I was referring to in my comments. We think the aggressive actions we took including 40% to 50% to 60% salary reductions in a very short order allowed us the time to sit back and say what is the longer-term impact of this crisis look like to Meritor. And what additional actions should we take that can allow us to be successful throughout what potentially could be a longer-term downturn. So we are looking at strategies as I mentioned in my comments and beginning to execute them that. We think will set our cost structure on the right basis for what we would expect to see for fiscal year 2021 and beyond.

Yes. Jay, the tough one, you know, sort of, I guess, plan for otherwise hope, hope for the best mentality, but as a veterinary industry, I wanted to I guess pick your brain on what you thought could be the potential snapback ability of the market and maybe what you're sort of hearing maybe from some of the, even your customers because even - if you look at sort of typical peak to trough timing probably would have normally come to the end of sort of cycle sometime around the end of the calendar year maybe a little later. And COVID obviously made it much steeper, but even if you sort of don't return to the replacement levels next year, it seems like there could be some pretty healthy growth versus obviously a very depressed 2020. So what are – do you have any high-level thoughts on that?

Well, I think it's difficult for us to say in the near-term. And you heard the comments from our customers who have their calls, so far, they’ve been very reticent to project what the outlook looks like in the future. And I think that goes for us as well. What I believe and what our team is working on is, as you mentioned is setting up to plan for the worst and hope for the best and make sure we retain the capabilities in the company to respond to the aggressive snapback that ultimately will occur most likely in long quarters' time as it always does, and we're going to make certain we retain that expertise to be as successful as we have been in capturing the value on that snapback and those volumes.

Your next question comes from Alex Potter with Piper Sandler. You may proceed with your question.

Yes. Thanks very much. Hope everybody is doing well. You mentioned that cutting back on CapEx on discretionary spending. Can you just give maybe a few examples of things that you are and are not reducing spending on just trying to get a better idea of the sorts of initiatives that you think are sufficiently important to continue investing in even in this macro?

Sure. Good morning, Alex. I think you know me, this is Chris Villavarayan. If you look at it, for example, last quarter we talked about launching our or building a new facility in Brazil where we were looking at making a significant investment. As we see the current market, we might look at, for example, slowing down on that investment and just really modeling out where we see the market snapback and then making decisions like that. We are very definitely proceeding with the long-term prospects for Brazil, but in the short term, we might look at slowing down our investment. Also, when you think about sustaining investments through our facilities, imagine for markets that we're running almost 60% to 70% from where we forecast, you could look and make decisions in the short-term on what we do. However, I think one thing that, Jay is driving that as we think of the long-term strategy in terms of investment in electrification, we are not slowing down on that process and as he also mentioned in how we are running the facilities and delivering the proportion or the systems, we are continuing our investments into TransPower as well as electrification for the next quarter.

Okay. Very good. That's helpful. I was wondering if you could comment also on the supply chain risk, you know, not all companies end up having this sort of balance sheet that you guys have. I'm thinking particularly of risks that you see upstream potentially for smaller suppliers. You know, is this going to be an issue, you have solvency risk concerns for any of the suppliers that you rely on?

Good question, Alex. And we're using the same playbook that we put in place during the 2008-2009 recession, where we immediately put up a multi-discipline team together including finance, purchasing, supply chain, manufacturing expertise to do much more active monitoring of suppliers, particularly those who we think do not have the balance sheets that may provide them enough liquidity through this time period. So far, we have not seen any disruptions, but we're monitoring it extremely closely and that playbook that we did execute in 2008-2009 was very successful for us. Included in that is engagement of outside experts that we can send in to the suppliers to assist them with operational and financial challenges that we've already locked those same experts into agreements if they are necessary.

Interesting. Okay. That's good to hear. I – one thing, obviously, this WABCO infusion was well-timed. Can you update us on the ongoing relationship with WABCO, if there is any? I think – what is the relationship between the two companies going forward? Have you essentially severed all historical relationships now going forward or not?

Yes. We have a much smaller relationship here through our aftermarket business as a distributor for certain products. But I don't want to misrepresent it; it's a fraction of what the business was previously. And those expected revenues are embedded in our outlook for the third quarter.

Okay. Very good. Last question. I know that you had historically looked at some of these smaller sorts of mom-and-pop machine shop-type operations to support aftermarket gearing and off-highway. That always struck me as sort of an interesting business. I don't know, I guess maybe two questions. First, do you want to continue building that part of the business through the acquisition of these little companies? And question number two is, do you think COVID-19 will potentially present you with the opportunities to do that?

That's a very good question, Alex. I think it gets around the broader question as obviously there will be M&A opportunities that present themselves through this crisis for people who maybe don't operate as well or have the financial wherewithal to withstand the downturn. At this point in time, we are focused on making certain that our company operates successfully as it's currently configured. And we like the growth prospects of the company in areas like electrification, like our recent off-highway acquisition of AxleTech, so we didn't see a burning need to add bolt-on acquisitions at this time. Now as we come out of the crisis, if there is just some incredible opportunity on the landscape and we see our revenues growing during that time period, we may revisit at that time.

Thank you. Our next question comes from Brian Johnson with Barclays. You may proceed with your question.

Hi, Jay, and good morning. This is Jason Stuhldreher on for Brian. And just first question on margins, maybe first in the Commercial Truck space. In the past we've talked about sort of layered capacity giving you the ability to sort of flex that debt, the footprint, and the direct labor footprint given the variations in Commercial Truck. Just curious, I mean in the margins that we saw this quarter, which I frankly thought were pretty good. Did any of those benefits come from offloading that layered capacity, or did that layered capacity pretty much already hit bottom by last quarter? And then similarly on Aftermarket, Industrial and Trailer. I was also impressed by the margins this quarter; I was thinking the AxleTech acquisition would be a little bit dilutive. Is that not the case sort of now?

Good questions. This is Carl Anderson. Just on your first question regarding Commercial Truck, as we look at those layered capacity costs, for the most part those have pretty much been eliminated in the second quarter. We did have some that carried a little bit in the first quarter. And as we go forward as we're kind of back in ramp-up mode depending on the supply chains, you could see a little bit maybe some incremental cost kind of coming in over the next couple of quarters, but nowhere near where we were running last year with a high truck market kind of at that point. And regarding your aftermarket question, I think the AxleTech business, we're very pleased with the amount of synergies we've been able to achieve as it relates to that. One thing that's running a little bit softer than initially planned is just overall revenue for that business. And so I think the margins aren't exactly where we want them to be currently, but as you know over time, as revenue begins hopefully at some point to pick up, I think we're going to be in good position with an acquisition in that business.

And just adding to Carl's comment, I think one of the benefits we got from also the layered capacity costs coming down is also a benefit from not seeing the premium freight costs associated with all of that. So we have seen some benefits from both the layered capacity as well as from the premium freight. And I think in terms of the overall cost of purchase components versus our own internal costs, there is also the benefit that we're seeing from that as well.

All right. Got it. Okay, very helpful color. And then just I guess more broadly, as we think about the electrification opportunity, Jay, I think you've mentioned, the team has mentioned how pivotal of a year 2020 is shaping out to be in terms of the awards activity pipeline that was going to be coming here in the next few quarters. Just curious if that pipeline is still full or if that is – if the industry is basically pushing that out 8 to 12 months as we deal with the current situation?

Yes. It's a very good question, Jason. Obviously, I think it's a question on the industry spend where this will be viewed as something that can be deferred to preserve capital. But so far, all of the programs we're associated with, particularly the largest program, the PACCAR program, it remains on schedule. I've had technical updates with the PACCAR team recently. Our products are performing extremely well, and so we see no sign that our customers, not too dissimilar from us, are not continuing to prioritize that spend. And as Chris mentioned in one of his comments, this is one area with all the cost reductions we've made both on the CapEx and expense side. We are retaining our investments in electrification and we continuously continue to respond to active code opportunities and still look at this year to be a very big year for us.

Thank you. Our next question comes from Ryan Brinkman with JPMorgan. You may proceed with your question.

Hi, good morning. Thanks for taking my question. Is there anything that you can relate about customer order books in the back half of the calendar year after lockdowns are presumably lifted? I'm sure their visibility is also low, but when you look across your various customers and your various end markets, you know commercial and highway, off-highway, specialty trailer, etc., are there notable differences and how you expect these end markets to bounce back or hold up?

And maybe I'll take this one, Ryan. Just, you know as you can see, we're not giving much guidance beyond the next quarter. Again, it's from the perspective that we are seeing from our customers as well. But at a very high level, let's just break it down into maybe the three areas. And if you think about aftermarket and we've looked through last quarter as well as, you know, what we're seeing at least in the short-term window, aftermarket is obviously holding well. You know, when you think about 75% of the products that we use travel by truck. The aftermarket seems to be holding strong. We see a slight weakening but nothing that's dramatic in the near future. Moving to the specialty defense of hype space, as I think Carl pointed out, we have noticed, you know, we did notice the back end of that order board was getting weaker, we could say maybe about 20%, 30% but nothing of significance obviously consistent demand on that side and we got to see how that plays out. The truck market is obviously the big one as we see the customers coming up in April or late April and early May, that's where we're going to probably see what the real order boards come in. So we – all the customers will be up, you know, as we see most will be up by May 4. So that would be probably a good time to see a perspective. But then breaking it up by region maybe I'll just address it in that way. China, you know, as all of you know, I think we've seen a quick V and the markets are back now whether that will hold up is all based on stimulus. And then India and South America are still under a pretty hard shutdown and so time will tell how those two markets will come up. But in those two markets, inventories were low as you know with the FX. And the other two markets have addressed previously, I think we just have to see where our customers come back at.

Okay. Thanks. You know those are helpful rundowns. Just lastly from me, why are you it looks like unwinding some of your factoring facilities. Can you remind us, was that something that was previously planned prior to your mention in that March 25 release? And does it relate to the various Volvo facilities mentioned in the K or the US one with P&C that I think has a covenant attached? I'm just asking because it would seem maintaining the facilities might help bolster liquidity in the current environment or am I missing something? Thanks.

Yes. Good morning, Ryan. It's Carl. Good question. You know, I think that the factoring unwind is really – it's really that's a function of having a lot lower sales, especially really in Europe where we are utilizers of the supply chain financing program. So if the unwind is just more, it's more natural because we're not able to sell receivables in normal course because the sales are a lot lower. The real impact is just because you have a timing mismatch as far as obviously the payables need to kind of run off in the working capital perspective. And you are unable to sell new receivables. So yes, it is consistent with what we kind of provided back in the March 25th 8-K that we put out as well.

Our next question comes from James Picariello with KeyBanc. You may proceed with your questions.

Hey. Good morning, guys. Just regarding your covenant, the total priority debt over trailing EBITDA, I mean it seems very encouraging how the EBITDA is calculated; you just to clarify this includes the gain on the WABCO aftermarket sale now. Is that right? And then, has there been any change on that point? And then just based on your third-quarter outlook that outlook clearly the most challenged environment, is it safe to assume that the Meritor can now avoid any covenant breach over the next 12 months? Thanks, Jay and Carl.

Yes. Thanks, James. Yes. I mean I think what you're seeing from the WABCO income, yes, it is included in the trailing 12-month calculation. And so as I was highlighting that we're going to carry through for the next really four quarters as we look to calculate the overall compliance to EBITDA. So as we look at what's in front of us not only third quarter but for the rest of this year, our expectation is we will not have any issues with our debt covenant and we feel that coupled with the overall liquidity of the company. So with the amount of cash on hand I think we're in a pretty good spot to be able to manage the current environment.

Okay. Yes. That's great to hear. And then just on that factor receivable, the previous question, can that reverse partially by as early as the fourth quarter?

Yes. That's exactly right. And so that's how we're characterizing it. There is, we'll call it a one-time impact at a sales levels dropped significantly based on the lower production volume. But as the fourth quarter, if there is some pick up and production kind of comes back, you will see the cash benefits at that point in time.

Got it. And then it sounds as though you guys were not stepping off the accelerator in terms of future EV investment for this year. But just in terms of CapEx is a good starting point and assumption of maybe a similar level of your CapEx as a percentage of sales for this year.

I think that's early.

Or early to be?

That's a good way to think about it. I think the last quarter that we had guided about $115 million of CapEx. So it's probably closer in the $80 million, $85 million range at this point as we think for the remainder – for the full year. So that kind of around 3% is probably the right way to think about it.

Got it. And then my apologies if I missed this, did you mention the AxleTech contribution in the quarter, so just wondering on that point and then how the synergies are trending, does the current environment accelerate or maybe delay the synergy pull through.

No. I would say on the synergy side in AxleTech, we're coming in right on plan, and actually we're looking and we feel very good with all the actions that we have been able to take since we acquired the company last year. You know there is a reference, obviously, we are seeing some softness in overall just revenue levels, specifically in the off-highway market, as well as in aftermarket. So overall, the margin performance is still probably not where we want it to be, but a lot of that now is driven more on the revenue side as opposed to any of the cost actions that we've taken to date.

And what about the revenue contribution in the quarter?

Yes, it was about $43 million, so very consistent with what we saw in the first quarter as well.

Thank you. Our next question comes from Faheem Sabeiha with Longbow Research. You may proceed with your question.

Hi, good morning. Thanks for taking my question. I appreciate the guidance you are able to provide for FY 3Q and the additional color regarding the revenue breakdown, but can you provide a little more color around Aftermarket, Industrial, and Trailer? I mean, then imply the sizable hit, and I know first talked about aftermarket coming down a little, just wondering if most of that's in Trailer or equally across all three parts of that business.

Good morning, Faheem. You know, I think one of the things that's in there is the impact from the WABCO agreement being, our distribution agreement being terminated. Prior to the crisis, that was probably a book of business about $115 million. So you are seeing a headwind now in this quarter that we're in as well, and that will continue on as we kind of go forward. So a significant piece of that really relates to that particular business.

Okay. And how much are you baking in from AxleTech acquisition in 3Q?

Well, again I would say we've not kind of given line-by-line guidance on the revenue, but I would just say the first two quarters that we've seen this year in AxleTech has been running a little bit north of $40 million of revenue. And I would expect we don't expect probably some little bit further softness for a period of time for that business.

I think it's really almost entirely based on the lack of visibility on the OE manufacturing side. So if you take the business that your questions, Carl, you were just discussing the aftermarket business and Industrial that represents roughly 50% of our expected revenue in that guidance. So if you took the remaining revenue, we have almost a 50% range of aftermath on the truck OE business. And I think that's very consistent with what we're hearing from our customers both in our private discussions and what you've heard them discuss publicly as they've released their earnings. It's just - it's a very opaque visibility window right now and after this quarter. And so that's why we put as wide a range on revenue as we did. But understand this revenue estimate was important for us internally as well because it gave us the markers on which we have to manage the business to achieve our objectives of having the operating cash outflow be a very limited amount.

Yes. Okay. And as far as the 20% to 30% sequential downside earnings convergence, I mean, is that going to be balanced between commercial truck in aftermarket, industrial, and trailer, or will one of those segments look a little weaker?

I don't think where we're providing that level of guidance just given the volatility, I mentioned on the revenue outlook. But what I would make note of is included in that downside sequential guidance is the incremental cost of providing the safety materials that we need to ramp up our production such as masks, face shields, sanitary products, and positional cleaning. So there are some incremental costs that are being incurred right now that are outside our norms in running the business.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Todd Chirillo for any further remarks.

Thank you for joining our second quarter 2020 conference call. Please reach out to me directly with any questions. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.