Carl D. Anderson - Vice President and Treasurer Jeffrey A. Craig - President & Chief Executive Officer Kevin Nowlan - Chief Financial Officer & Senior Vice President.

Colin Michael Langan - UBS Securities LLC Brian A. Johnson - Barclays Capital, Inc. Patrick Archambault - Goldman Sachs & Co. Neil A. Frohnapple - Longbow Research LLC Ryan Brinkman - JPMorgan Securities LLC.

Good day, ladies and gentlemen, and welcome to the Meritor Incorporated Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's call, Carl Anderson, Vice President and Treasurer. Sir, you may begin..

Thank you, Eric. Good morning, everyone, and welcome to Meritor's second quarter 2016 earnings call. On the call today, we have Jay Craig, CEO and President; and Kevin Nowlan, Chief Financial Officer. 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 are recording, is a property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We do 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 two 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, Carl, and good morning, everyone, and thanks for joining us today. Let me start by saying that I continue to be proud of our team's performance this quarter and over the past three years since we launched M2016. We use the word transformational to describe the change that has occurred at Meritor.

We've created a new way of working that is now characterized by a dedicated focus on our most critical priorities and disciplined execution toward achievements of our long-term objectives.

Simply put, M2016 defined for us the areas we knew we needed to dramatically approve upon if we were to become a company positioned for growth and greater shareholder return. Those areas included safety, quality, and delivery, product development, improved customer relationships and better cost management.

Driven by the discipline we've demonstrated during the execution of M2016, we've proven our ability to successfully manage the cyclicality inherent in our industry without impeding the investments required to fund our future growth objectives.

Through excellent management of materials, labor and burden, in addition to growing our business with important customers and developing new products, we are on track to meet the financial objectives we set three years ago. And we accomplished this even as some of our largest markets have declined more significantly than anticipated.

Before I go on, I want to take a moment to touch on our recent announcement. As most of you know, Ike Evans has stepped down from his position as Executive Chairman, but will continue to serve as a Director on our board. Bill Newlin has been elected to serve as non-Executive Chairman.

Ike's decision to step down reflects the planned leadership transition that commenced last year with the separation of the Chairman and CEO roles. Ike played an integral role in our transformation and steered us through the launch and execution of our M2016 plan, which has greatly improved Meritor's operations and financial position.

We are grateful that we will continue to work with Ike as a member of our board and benefit from his insight and experience. Now, let's turn to slide three and talk about the highlights from our second fiscal quarter of 2016.

In the phase of rapidly changing end markets, we're continuing to execute well both in markets where we are experiencing increasing and decreasing production volumes.

The softening market in North America, combined with the severe recession that continues in South America, is obviously putting pressure on our results this year, and is only being partially offset by strengthening markets in Europe and India.

The new business wins and penetration increases that we've driven in M2016, particularly in North America, have further mitigated the effects of some of our weaker markets.

Even in this environment, we reported an adjusted EBITDA margin of 9.9%, and adjusted diluted earnings per share of $0.41 and revenue that is down 5% or $43 million from the same period last year. As I said earlier, strong value-added customer relationships continue to differentiate us in the market.

In March, we were pleased to announce a contract extension with Navistar that I'll talk about on the next slide. In the second quarter, we also repurchased $55 million of our 4.625% convertible notes that were outstanding.

Since the start of our $210 million equity and equity-linked repurchase program, we bought back 8.1 million common shares and are on track to complete the entire program by September this year, another commitment achieved in the phase of volatile markets. Let's move to slide four for a closer look at the Navistar agreement.

As we announced, under the terms of this contract, we retained standard position for brakes and rear axles, as well as standard position for front axles in severe service, medium-duty and bus applications.

Not only are we excited about the opportunity to extend our relationship and retain standard position for another five years, we also look forward to collaborating with Navistar on its Open Integration initiative.

Open Integration will utilize future technologies and designs to provide improvements in the total cost of ownership for end users while also offering supplier expertise and the availability of a broader service network like we have at Meritor.

If you turn to slide five, you'll see that we are also offering our customers integrated products and bundlings that will provide many benefits including lower costs, weight savings, ease of assembly and serviceability. Let me give you a few examples.

In March, we introduced the MFS+ Front Steer Axle for 12,000 pound and 13,000 pound applications in North America. This is the next evolution in Meritor's front steer axle offering, with new advanced beam material and integrated torque plates and tie-rod arms that offers up to 85 pounds of weight savings and allows for easier installation.

We'll take this as a step further over the next few years when we launch a fully integrated front axle system that optimizes form, fit and function. This system will include Meritor EX+ disc brakes and additional wheel-end options. In China, we're launching Meritor's DUALite Series of integrated systems for the bus and coach market.

With more than 50% of our business in the region now being on highway, we're offering fully dressed axle options that are manufactured locally. Customers will benefit from lower life cycle costs and increased reliability. And for the Humvee recap program that could start in 2019, we will offer an integrated rolling chassis.

It will be complete with front and rear high-mobility independent suspensions and fully dressed with wheel-ends and disc brakes, a transfer case and frame rails reinforced to handle the higher load requirements for the upgrade. We're going to do all the assembly in our plants and deliver the integrated chassis to our customers just like you see here.

Again, the primary benefit is that like the others, it has been engineered as a system. Specific benefits include better ride and handling, improved driveline angles, reduced weight, and easier packaging into a Humvee capsule. We are also currently pursuing opportunities for this solution outside the U.S. market.

We'll share more about this new integrated solutions in the future. Now, let's go to slide six, for a look at our end markets. Overall, we've reduced our outlook for North and South America. We're lowering our expectations for Class 8 volumes in North America by 8% to approximately 245,000 units, down from the 265,000 units we projected in February.

We believe that excess Class 8 inventory and declining used truck prices are causing the fleets to adjust their orders for new trucks. This is leading OEs to reduce production levels.

One data point we watch is the inventory to retail sales ratio, which is currently at 3.3 months, significantly higher than more healthy level of 1.5 months to 2.5 months. Based on various data points including truck ton miles, we believe we may be in the midst of an inventory correction in Class 8.

And once excess inventory is used, we expect to see the market stabilize at a relatively normal production level. Also, we have been seeing lower than anticipated order activity in our North American aftermarket business. As we started the year, we expected the overall market in North America to be up modestly in 2016.

However, during the first six months of the fiscal year, we have actually seen the market soften. We have been able to mitigate the effect on revenue through increased share in certain product lines like air systems (10:53), which is why our overall revenue for that business is roughly flat year-over-year.

But the market softening that we're seeing this year is a headwind relative to our prior expectations. The medium-duty market continues to be robust, and as a result, we have increased our forecast for Class 5-7 to the top end of the range we gave you on our first quarter call at 220,000 units.

This also makes us more excited about the introduction of the 13X axle that we've previously discussed which is specifically targeted at this market. Moving over to Europe, the market remains stable and is trending positive as we look at medium and heavy truck registrations and the road freight index, two market indicators in the region.

We expect the European market to be up 4% to 6% year-over-year, consistent with our previous forecast. In South America, I'm sure you know the political and economic situation remains extremely challenged. GDP continues to decline.

The political environment is uncertain, and we do not have any indication at this time that a recovery is likely in the near future. We are revising our outlook for the year to the low-end of our previous range at 70,000 units. On slide seven, we have provided an update of our M2016 scorecard.

The main takeaway from this chart is that we are on track to achieve all three financial objectives this year. As we told you, we felt margin improvement was the most important target. When we launched this program three years ago, we had just posted an adjusted EBITDA margin of slightly under 6% for the first half of 2013.

Our target was to increase our margin by around 400 basis points. And as you can see, we've been extremely successful in moving along that trajectory. We ended last year at 9.5%. This quarter, we're at 9.9% and we remain confident we're going to hit the 10% for the full fiscal year.

The second financial target was to reduce net debt by more than $400 million. We achieved that target at the end of fiscal 2015, and we're confident we'll stay at or below that level through fiscal 2016. At the same time, we are returning value to our shareholders and are on track to complete the $210 million stock repurchase program.

Our third target was to achieve $500 million of incremental book revenue. As of March 31 of this year, we are at $450 million. Building relationships with our customers and introducing new products to the market have provided us the opportunity to grow our share, particularly in our largest market, North America.

We now have long-term contracts with the four largest OEs in North America and our partnerships with each of them have never been stronger. With the foundation established by our M2016 plan, we are now well-positioned to grow in the future. With that, I'll turn it over to Kevin for more detail on the quarter and our outlook for the 2016 fiscal year..

Good morning. As you heard from Jay, we had another quarter of strong performance as we continue to execute our M2016 strategy. The consistency in our results over many quarters has established a solid foundation to build upon, as we begin our M2019 growth strategy.

Let's walk through the details of our second quarter financial results by turning to slide eight. Sales were $821 million in the quarter, down 5% compared to last year. The revenue decline was primarily driven by lower commercial truck production in North and South America and weaker foreign currencies, especially in Brazil, relative to the U.S.

dollar. Although revenue was down, we expanded our gross margin by 140 basis points, reflecting our continuing ability to drive lower material, labor and burden costs. In fact, our 14.7% gross margin is one of the highest we've achieved since the launch of M2016.

SG&A was $3 million higher in the second quarter of 2016 compared to the same period a year ago. The increase was primarily due to a favorable adjustment to our incentive compensation accruals last year.

Income tax expense was $7 million in the second quarter of 2016, which translates to an effective tax rate of approximately 18%, up slightly from last year.

The increased tax rate was driven by the fact that we now recognized tax expense in countries like Italy and Sweden, following the reversal of our valuation allowances in those countries at the end of last year.

As we discussed last fall, we are now adding back non-cash tax expense in countries with net operating losses when reporting adjusted income and adjusted EPS. This accounted for $3 million in the quarter of the total adjustments you see on the slide.

The bottom line is that we generated $33 million of income from continuing operations attributable to Meritor and after adjustments for non-cash tax expense from restructuring costs, we generated adjusted income from continuing operations of $38 million or $0.41 per share, down just $0.01 from last year.

Let's move to slide nine, which compares our sales and EBITDA for the second quarter of fiscal 2016 to 2015. Foreign exchange continued to be a headwind in the quarter on both revenue and EBITDA. Revenue was down $24 million due to foreign exchange translation driven by the strong U.S. dollar relative to the Brazilian real and other currencies.

As highlighted on the chart, we also had $6 million of lower EBITDA year-over-year caused by the one-time gain from foreign exchange hedges that we reported in 2015.

Beyond foreign exchange, we saw revenue reduction relative to last year of $19 million due to lower production in the North America Class 8 truck market and in South America partially offset by increasing penetration in North America from our new business wins announced over the last couple of years.

Despite this overall lower production, we continue to drive strong material, labor and burden performance. This, combined with lower steel indices, overcame lower production and drove $5 million in positive EBITDA from volume mix, performance and other. As a result, our adjusted EBITDA margin was 9.9%, down only 20 basis points from last year.

And if you were to exclude the one-time FX gains from a year ago, then we really saw better cost management completely offset the impact of lower revenue on our reported EBITDA. Slide 10 details second quarter sales and EBITDA for each of our reporting segments.

In our Commercial Truck and Industrial segment, sales were $631 million, down $50 million or 7% from the same period last year. Lower Class 8 truck production in North America, combined with lower production and a weaker currency in South America, drove the revenue decline in the segment.

Again though, this was partially mitigated by our increased market share on axles in the Class 8 truck market. Segment EBITDA was $56 million, down only $1 million from last year, which drove an increase in EBITDA margin to 8.9%, up 50 basis points from last year.

This increased margin was primarily driven by strong cost management that continues to favorably impact our earnings. In the Aftermarket and Trailer segment, sales were $218 million, up 3% from last year, driven by stronger sales in our North American trailer business. Segment EBITDA was $28 million, down $2 million compared to last year.

The decrease was driven primarily by unfavorable mix in our aftermarket business, which brought our margin down 140 basis points to 12.8%. Now, let's turn to slide 11. For the second quarter, total free cash flow was $19 million compared to $27 million in the prior year.

The biggest driver of the decline year-over-year was the increase in capital expenditures, as we remain committed to investing in new product development to support our M2016 and M2019 revenue growth initiatives.

You can see this by looking at the bottom of the slide where our cash flow from operations, which excludes CapEx, was actually up by $6 million from the second quarter of last year. Now, let's turn to slide 12 which provides an update on our equity and equity-linked repurchase program.

As expected, investors exercised their put option on $55 million of 4.625% convertible notes. As a result, we repurchased these notes at par during the quarter.

Consistent with what we previously communicated, this equity-linked repurchase is part of our $210 million buyback program, which means that our cumulative repurchases now stand at $171 million.

With approximately $100 million of free cash flow generation expected during the second half of this fiscal year, we remain confident that we will complete the buyback program by September as planned.

Given where market prices are for our common equity, our current expectation is that substantially all of the remaining $39 million will be used to repurchase common equity. Next, I'll review our updated fiscal year 2016 outlook on slide 13.

Based on the demand assumptions Jay highlighted earlier, we've lowered our 2016 sales guidance to approximately $3.275 billion. Our current expectations of lower production levels in the North America Class 8 market and flat aftermarket sales are the primary drivers of this downward revision.

Despite the decreased revenue outlook, we remain on track to achieve our adjusted EBITDA margin target of 10%. We continue to drive margin performance just like we have consistently done throughout M2016. Although we're maintaining our 10% margin outlook with revenue lower by $125 million, we now expect to generate lower bottom line earnings.

That's why we're reducing our adjusted earnings per share from continuing operations guidance to a new range of $1.55 to $1.65 for fiscal year 2016, down $0.10 from our previous outlook.

We continue to expect another strong year for free cash flow generation, although slightly lower than previous guidance as a result of the lower bottom line earnings.

In addition, as we head into the second half of the fiscal year, we anticipate that we will not be able to reduce inventory to previously targeted levels, because production had declined more rapidly than we anticipated when the year began. As a result, we're expecting modestly elevated inventory levels until the early part of next fiscal year.

Nonetheless, we still expect to generate $90 million of free cash flow for the full fiscal year. Our execution of M2016 has fundamentally strengthened our earnings profile and cash-generating ability, and that has put us firmly on the path of achieving our third consecutive year reporting more than $100 million of adjusted net income.

We successfully managed the North American truck upturn profitably and with strong cash flow generation, and we're doing the same as our largest market now returns to more normalized production levels. Now, I'll turn the call back over to Jay to provide closing remarks..

Thanks, Kevin. Let's turn to slide 14. The message I want to leave you with today is that our continued focus on those parts of the business that we can control has allowed us to stay on track to achieve our M2016 financial objectives.

Over the past three years, we have developed the core competencies needed to help mitigate the effects of the cyclicality inherent in our business. In other words, downturns are not as dramatic (23:29) to our bottom line as they once were. Cost management, customer relationships and new product development have led to an improved financial profile.

This is demonstrated by the fact that despite taking our sales outlook down by $125 million for fiscal 2016, we are still tracking to the 10% adjusted EBITDA margin, and we continue to win in the marketplace.

With these competencies in place, we are well-positioned to execute on our M2019 growth focus plan which could be further fueled if our global markets strengthen over the next few years. Now, let's take your questions..

Our first question comes from the line of Colin Langan from UBS. Your line is now open..

Great. Thanks for taking my question.

Any color on what drove the negative aftermarket trailer mix? Is that just reflecting the trailer growing and aftermarket start being flat (24:45) or can you give any color on how aftermarket within that is performing?.

Hey, Colin, this is Kevin. I'll take that.

Fundamentally, it's a change in the mix of our aftermarket North America portfolio that we've seen year-over-year where we really saw the increase in brake and wheel-end components which tends to be lower margin business for us, offset by a decrease in product mix of our higher margin business which tends to be our drivetrain components.

So fundamentally, we saw that mix shift on a year-over-year basis..

Okay. So it's within aftermarket. And how is the aftermarket trending? Your guidance for the year now is flat.

How has it been? Within the results, is the aftermarket flat for the year-to-date or is that just a continuation (25:26) or does that imply getting better or worse for the rest of the year within Aftermarket and Trailer?.

Sorry. We were having a tough time hearing you, but I think, Colin, your question was is aftermarket down for the full year.

Did I hear you correctly?.

Yeah.

Just what is the outlook for aftermarket, just broadly? I mean, because within – I'm trying to understand embedded in the Aftermarket and Trailer, how is the aftermarket actually doing standalone?.

Yeah. So far this year, aftermarket is slightly down in North America. But overall, we were expecting actually the markets to be up in aftermarket. But we haven't seen that as we were anticipating.

On a full year basis, we're expecting the aftermarket to be relatively flat year-over-year, but what that means is that we're going to see our typical seasonal increase in revenue in the second half of the year relative to the first half of the year, particularly as we go into this third fiscal quarter..

Got it.

And can you give a – just remind us where you stand with market share in terms of the PACCAR win last year? Are you – when do you – have you been increasing shares sequentially? And when do you start to anniversary the gains that you got with that customer?.

Well, we jumped off as (26:39) we talked about head count on – this is Jay. We jumped off as (26:42) we talked about at the Analyst Day about 50% penetration. And so, I think that we're starting to – we certainly expect year-over-year increases, because that penetration level certainly wasn't at that same level at these quarters last year..

Okay. All right. Thank you very much for taking my questions..

And the next question comes from the line of Brian Johnson from Barclays. Your line is now open..

Yeah. A couple of things. First, can you just help us think about when we think about the mix and performance? On our calculations, it's probably worth at least $9 million or $10 million in the quarter, within that volume, which is obviously a headwind I'm talking about Commercial.

How do you – could you divide that between you're doing better gross margins and the products either through and then to the extent you're doing that is to what extent it's kind of moving to more differentiated products with our margins or is it materials? And then in terms of the major kind of cost takeouts or cost improvement outside of SG&A, the cost permits are going to COGS, how that played out?.

Brian, this is Kevin. You're right. Your math is roughly in the right range as you think about that $5 million line item we call volume mix performance and other, and there is volume and mix is a negative in that number. So you're in the right area.

In terms of what that $10 million or something in that range looks like, what's driving the positive numbers there, a piece of it is lower steel indices. That's worth about $4 million year-over-year. The difference between the good news we get from lower steel prices from our suppliers and passing that back through to our customers on a lagged basis.

And the balance of that is really material, labor and burden performance, driving cost performance not really, in this case, to the SG&A line, it's really been through the material, labor and performance lines, which goes through the gross margin..

Okay. And second question. What's your expectations for the revenue tailwind from new business? You started out assuming $175 million, but obviously, the end market in North American Class 8 has moved downward.

And so, where are you on that, or was it maybe not tied to the Class 8 market?.

It was tied to the Class 8 market. When we originally announced that, it was based effectively on about a $260 million market when we're announcing new business wins. So effectively, in our guidance, we are seeing the effects of what we had hoped to achieve in terms of the new business year-over-year..

Okay, good. And just final question, given the softness of the Class 8 market, how is that playing through in terms of the couple of factors? First, OEMs' desire to use the in-sourced solutions when available, and second, just in terms of the pricing environment in the marketplace..

Okay. Hey, Brian. This is Jay. Yeah, I think in answer to your first question, obviously, the one customer that has that alternative would be Daimler and we're seeing our penetrations remain stable there, consistent with the agreement that we have with them over the long-term.

And then, secondly, on pricing, as you're well aware, we have long-term contracts with all our customers where the pricing remains relatively fixed other than the pass-through mechanisms for materials, which we do see. As market slowdowns occur, obviously that commodity price can decline and we can be passing a lot of those benefits to customers..

Okay.

But no major attempt either from the OEMs or the fleets to push the pressures on their businesses upstream to you?.

No, I think everybody in the industry appreciates that this is a highly cyclical industry, and they expect us to perform on the up-cycles when they can generate significant revenue and profitability, but that also requires that we have some fixed level of expectations of what pricing will be on the down-cycles, so we can manage our business to it.

So we are not seeing them..

Okay. Thank you..

Thank you. Our next question comes from the line of Patrick Archambault from Goldman Sachs. Your line is now open..

Yeah. Thanks. Yeah, my main question is just on the margin trajectory. You're sticking with the 10%. You're running kind of in the 9.6%, 9.7% range in the first half, and it does imply – it's a little bit of an acceleration in the second half, I think, like year-on-year, like, up 80 basis points.

I think we've talked about some of the factors that would help like the non-recurrence of that $6 million comp issue.

But what are some of the other factors that we need to think about to get to that acceleration?.

Yeah. Patrick, it's Kevin. I think your math is roughly right. I mean we're expecting to effectively average something around 10.4% for the back half of the year. Now, keep in mind, we're coming off a 9.9% quarter. But nonetheless, we're expecting the full back half of the year to be around 10.4%.

To put that in perspective, what that means is we have to outperform 10% in the back half by about $6 million of EBITDA if you just do the math, so $3 million or so a quarter. And there's really two fundamental drivers of that. One is that revenue in the back half of the year is slightly stronger than the front half of the year.

And so, we'd expect to contribute on that. And then second, we continue to reap the benefits from our performance initiatives, the material, labor and burden performance initiatives as they achieve full run rate for the full year..

Okay. I mean for me, it's a little easier to think of it year-on-year rather than sequentially, but it sounds like aside from the comp issue, the burden initiatives will continue to produce pretty significant improvements year-on-year as well..

Absolutely. As they have even in the second quarter, and you can see that just in response to Brian's question, volume mix performance and other were showing a plus $5 million, but that has a negative headwind from the mix we talked about in the aftermarket..

Right..

Plus just volume being down $19 million, yet, we're still throwing off a plus $5 million in that line item. So our performance has been pretty significant year-over-year..

Got it. Yeah. I mean it sounded like you're pointing to something. And maybe my math is wrong, but it sounded like $8 million or $9 million of year-on-year just, I guess, performance is what I would've gotten based on that conversation.

Is that right?.

I mean there's a number of things going on in there. You have again the steel indices, which is a tailwind, about $4 million year-over-year. We have quite a bit of material, labor and burden performance. And there's even some negative from FX on transaction.

We have some transaction purchases which is part of our material cost overall that's been negatively impacted. But the net of all of that plus the volume and mix is the plus $5 million..

Yeah, I know. Maybe I'll follow up with you online, because when I was just kind of disaggregating that plus $5 million, it sounded like performance was a pretty big number like plus $8 million or $9 million within that equation, but maybe we can follow up after..

Yeah. It's probably even a little bit north of that but that's right. It's a pretty big number..

Got it. Okay. Thanks a lot, guys..

And our next question comes from the line of Neil Frohnapple. Your line is now open..

Hey. Good morning, guys. Congrats on a great quarter..

Thank you..

Kevin, you mentioned lower steel cost, I think, was the $4 million tailwind in the quarter.

Should we expect these benefits to begin to moderate or even become a headwind later this year? Can you just remind us what a typical lag is, the changes in steel indices?.

I think the answer is yes to that. I mean we got some benefit in the first quarter on a year-over-year basis and some more benefit in the second quarter.

But as we look at the full year, we're not expecting to see much incremental benefit from it, because in some cases, steel prices have flatted or even in North America here in the last quarter, they've ticked up a little bit.

So as we look at the full year on a year-over-year basis, we think we'll see a tailwind in total, but most of that tailwind is already in the P&L that we reported for the first half.

The risk we have as we look out is if steel prices were to increase, because the cost coming through from our suppliers happens more quickly than the pass-through back to our customers.

And so, our outlook right now is based on an expectation that steel prices roughly moderate at where they are, which is slightly up this past quarter in North America, although slightly down still in Europe overall..

Got it. Thanks. And maybe a question for Jay.

I mean just not looking for 2017 guidance by any means, but just given North America truck continues to deteriorate, again, with orders being weaker than expected out last night, just curious if you think this is more just temporary like mid-cycle slowdown, as the industry tries to work through this excess inventory, and you think we can kind of return to growth in 2017 for the North American Class 8 market.

I mean just any more color you can provide on just conversations you're having with fleets and your customers..

I think at this point we do still believe it is an inventory correction from the aggressive buy last year. I mean if you look at a lot of the underlying factors that stabilized and are starting to improve, I think the manufacturing index has been positive the last two months. We're seeing the outlook for ton miles to be slowly increasing over time.

What we look at is over the long term, trucking moves almost exactly on a flat line (36:44) with GDP growth. So if the overall economy holds up, this inventory should clear the system and we should go back to more normalized levels. Now, will we get back to the peak demand we saw a year ago? Probably not.

But can we get back to normal replacement demand orders and production? We believe so..

All right. Got it.

So I mean assuming that inventory correction works its way through and we get positive GDP growth, you're saying there's no reason why we shouldn't see some North American Class 8 growth next year?.

Well, that's what we believe at this point, that's correct..

Thanks, Jay..

Thank you. And our next question comes from the line of Ryan Brinkman, JPMorgan. Your line is now open..

Okay, great. Thanks. Can you just update us on any progress made during the quarter relative to your pursuit of the revenue opportunity you talked about at your last Investor Day, the components area or North America off-highway don't expect that they (37:43) contributed during the quarter, but discussions you're having with customers, et cetera..

Sure. Great question. On the components piece, we are working with several potential customers responding to quotes that we had developed the business stream for. And so, we're very optimistic on that. As far as the off-highway, it's a little different approach. We are developing the products necessary to address that market.

We're having discussions with potential customers and getting a very clear understanding of what they would expect from us in terms of product attributes and offerings, and we're aggressively investing in those applications. And so, we're still very optimistic about that.

We think we have a lot of competitive strengths to bring to both of those marketplaces, not the least of which is just a reliability of delivery, the cost of our products and also the quality that we have. So we still feel very, very optimistic about those markets..

Okay, great. Then – and just last question, it seems like Western Europe registrations have been coming in better.

I'm curious if you're also seeing it with regard to your big customer over there, Volvo and is this offset already sort of included in your lower guide today?.

Well, I'll start with the end of (39:11) your question first. It is included in our guide, but I think it's more than Volvo.

We are seeing that with Volvo, but I think what is really heartening to us is that our customer (39:25) and Renault were starting to see strengthening in that Southern European market as well which we haven't seen for several years. So I think it's across our customer portfolio base there in Europe. We're seeing a pretty broad-based recovery..

Great. Thank you..

And I'm showing no further questions at this time. I would like to turn the call back to Carl Anderson for any closing remarks..

Thank you, Eric. We do appreciate your participation in today's call. If you have follow-up questions, please feel free to contact me directly. And this does conclude Meritor's second quarter 2016 earnings call. Thank you..

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