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Edited Transcript of MTOR earnings conference call or presentation 31-Jul-19 2:00pm GMT

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Q3 2019 Meritor Inc revenue Call
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TROY Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Meritor Inc revenue parliament summon or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT translation of Transcript

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Corporate Participants

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* Carl D. Anderson

Meritor, Inc. - Senior VP & CFO

* Jeffrey A. Craig

Meritor, Inc. - President, CEO & Director

* Todd Chirillo

Meritor, Inc. - Senior Director of IR

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Conference summon Participants

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* Alexander Eugene Potter

Piper Jaffray Companies, inquiry segment - leading & Senior inquiry Analyst

* Brian Arthur Johnson

Barclays beach PLC, inquiry segment - MD & Senior Equity Analyst

* Colin Langan

UBS Investment Bank, inquiry segment - Director at the commonplace Industrials people and Analyst

* James Albert Picariello

KeyBanc leading Markets Inc., inquiry segment - Analyst

* Joseph Robert Spak

RBC leading Markets, LLC, inquiry segment - Analyst

* Neil Andrew Frohnapple

The Buckingham inquiry people Incorporated - Analyst

* Ryan J. Brinkman

JP Morgan pursue & Co, inquiry segment - Senior Equity inquiry Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and address ought the Q3 2019 Meritor, Inc. revenue parliament Call. (Operator Instructions) during a reminder, this summon can be recorded.

I used to now comparable ought introduce your host although today's conference, Mr. Todd Chirillo, Senior Director, Investor Relations. You can begin.

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Todd Chirillo, Meritor, Inc. - Senior Director of IR [2]

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Thank you, Brian. Good morning, everyone, and address ought Meritor's Third area 2019 revenue Call. above the summon today, we eat Jay Craig, CEO and President; and Carl Anderson, Senior Vice principal and head financial Officer.

The slides accompanying today's summon are available at meritor.com. We'll refer ought the slides at our discussion this morning. The content of this parliament call, which we're recording, is the estate of Meritor, Inc. It's protected by U.S. and international copyright regulation and can no be rebroadcast without the explicit written consent of Meritor. We deliberate your continued participation ought be your consent ought our recording.

Our discussion can hold forward-looking statements during defined at the personal Securities Litigation reform deed of 1995. depart me now refer you ought glide 2 although a more end disclosure of the risks that could affect our results. ought the extent we refer ought any non-GAAP measures at our call, you'll find the reconciliation ought GAAP at the slides above our website.

Now I'll fetch the summon above ought Jay.

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Jeffrey A. Craig, Meritor, Inc. - President, CEO & Director [3]

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Thanks, Todd, and good morning, everyone. We comprehend you joining our summon today. above glide 3, you'll look our especial results although the quarter. Year-over-year revenue was up slightly, chiefly owing ought classification 8 volumes at North America, partially offset by negative foreign exchange. Adjusted EBITDA edge was 12.5%. Our EBITDA conversion year-over-year was near ought 30% and adjusted diluted revenue per segment were $1.20.

On the strengths of higher operating revenue and working leading management, we generated $124 million of liberate money flow at the quarter. afterward at the presentation, Carl will supply additional details, besides this area is another large example of our team's competence ought kill robust at changing global markets.

With 3 flae after us although the year, we are raising our full year hope although adjusted EBITDA edge and adjusted diluted EPS, during you'll look afterward at this discussion.

Our results hence distant this year and the full year hope supply us with an select basis heading into our M2022 design that we trust will perform ought a important shareholder impose creation.

On glide 4, we hope ought harmony you an update of our segment repurchase program. final November, we announced a $200 million segment repurchase program based above the vigorous revenue and money flow we anticipated. Year-to-date, we eat opportunistically repurchased 4 million shares, including 1 million at the third area alone, allowing us ought retort $70 million of impose direct ought shareholders.

Today, based above our continued vigorous hope although the generation of important unencumbered future liberate money flow, we are announcing a new Board authorized $250 million segment repurchase program that supersedes the previous program.

As we appear ahead at the even of money flow we trust we will generate, this new program provides us with additional flexibility although execution of our leading allocation strategies. during we eat shown above the past little years, with the important improvement at profitability coupled with the question strengthening of our remainder sheet, we are taking the happen ought consistently retort impose ought shareholders. This has been demonstrated by the repurchases we eat made this fiscal year and the new $250 million program we are announcing today. We trust this manner ought leading allocation is creating vast impose although Meritor shareholders.

On glide 5, we are excited ought talk you about a new anxiety endow with the leading trailer guest at Europe. Schmitz Cargobull is a manufacturer of trailers and lorry bodies although temperature-controlled freight, commonplace burden and bulk goods. With this award, we will supply one of the industry's lightest, maiden piston stand disc brakes ought this OEM beginning at 2021. This solution is designed ought face trailer fleet expectations although efficiency, safety and cost. And we look additional opportunities at this just during we launch this advanced brake offering.

On the lorry side, we announced final year at the IAA appear at Germany that we used to be launching a new maiden piston air-disc brake at 2019. We will show that brake at the North American Commercial Vehicle appear coming up at October. With this launch, Meritor will eat the most end brake portfolio at the industry offering drum, dual and maiden piston disc brake alternatives although our customers. This full new offering features a maiden piston invent and utilizes Meritor's proven air-disc brake architecture. It too provides important price ought weight savings, nevertheless maintaining the deed our customers expect. The trailer recess although Schmitz Cargobull is alike ought our new lorry brake besides modified ought face the concrete demands of the global trailer market.

On glide 6, we hope ought segment with you a new electrification program at Europe although the Alstom Aptis, an electrical urban bus. product although this manufacturer's first orders of the all-electric Aptis lorry begins this autumn although cities including Paris and Strasbourg, between many others at France. We developed a only pursue teach solution although this program at less than 1 year. Meritor front and rear motivate steer axles, air-disc brakes and a sharp gearbox will integrate direct into the differential ought send might ought the wheel ends from Alstom's electrical engine. This is a tightly coordinated effort between 4 Meritor mechanism at Europe. The axles eat left fling Housings from our foundry at France, brakes from our plants at the U.K., gearboxes from Austria and meeting at Italy. Deliveries are expected ought quit at the aim of the year. This program is an select example of the impose that is transpiring from this strategic transactions we eat completed above the final little years.

In 2017, we acquired the manufacture portfolio at technologies of Fabco. We said at the time that this acquisition used to harmony us access ought markets that will complement our strategic growth initiatives. Our facility at Austria, which was isolate of that acquisition, engineers that manufacturers highly customized gearboxes that we are integrating into electrical motivate systems, allowing us ought capitalize above opportunities comparable this one. This is compatible with the news we delivered at our Analyst appointment regarding the breadth of opportunities although Meritor during adoption of electrified vehicles increases.

We trust the acquisition of AxleTech, that we shared earlier -- that we closed earlier this week, will supply alike opportunities during you look above glide 7. This acquisition, comparable the one I impartial mentioned, furthers our strategic initiatives ought enlarge into adjacent markets, specifically at defense and off-highway about the globe. get at mind, that more than half of AxleTech's 2018 revenues came from defense programs and another 33% was from off-highway. This diversification will offset some of the cyclicality we look with the linehaul markets. It too brings us a complementary global manufacture portfolio that allows us ought offer our customers an even more sturdy drivetrain portfolio although their only requirements.

We remain highly confident at the more than $15 million of annual price synergies we identified when we announced the bargain at May. We trust this was an select supplement ought us and we hope ought lengthen a hot address ought our AxleTech employees that are hind ought the Meritor building and appear deliver ought optimizing the combined benefits although our shareholders, customers and employees.

On glide 8, we are arrogant ought segment contemporary accolades from our global customers although excellence at quality, delivery, innovation and anxiety alignment. Being the preferred associate ought our customers is identical important ought us. We acknowledge large brag at the relationships we eat established with OEMs about the globe.

As the industry evolves indeed of our customers that their customers' change, near collaboration is the amount one priority although us at supplement ought maintaining the highest levels of feature and delivery at the industry. We eat said ago that our purpose is ought supply preferred manufacture solutions that eat the precise formula of technique and functionality combined with the identical best service and support. This is the leading constituent of our M2019 design and will remain equally important during we initiate M2022.

At this time, I'll fetch the summon above ought Carl although a more detailed progposal of the quarter's financials and then we will acknowledge your questions.

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Carl D. Anderson, Meritor, Inc. - Senior VP & CFO [4]

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Thanks, Jay, and good morning. above today's call, I will magazine our third area financial results and updated 2019 guidance. Overall, we had another select area of financial performance. Adjusted EBITDA edge improved by 50 base points ought 12.5%. Adjusted diluted revenue per segment increased 35% ought $1.20, and we generated $124 million of liberate money flow.

Let's stroll along the details by turning ought glide 9, where you'll look our third area financial results compared ought the preceding year. Sales were $1.166 billion at the quarter, up 3% from a year ago, driven greatly by higher lorry product at North America. during you can look from the rgeister at the right, higher revenue was partially offset by foreign exchange headwinds during the U.S. dollar continues ought strengthen against most leading currencies. This impacted sales by $25 million and adjusted EBITDA by $6 million compared ought the preceding year. Overall, revenue was up $37 million, which helped ought generate adjusted EBITDA of $146 million, an amplify of $11 million compared ought final year.

On the left-hand phase of the chart, you'll look that we're reporting $85 million of GAAP net pay from continuing operations, an amplify of $19 million from final year. Adjusted pay from continuing operations was $103 million, resulting at $1.20 per adjusted diluted share.

In supplement ought the higher overall adjusted EBITDA generated at the quarter, we too benefited from lower impose expense. This was greatly driven by higher percent of revenue coming from jurisdictions, which eat net operating losses or impose credits ought offset taxable income. at our adjusted income, we bear ought hind out the noncash impose expend associated with the utilization of these deferred impose assets.

For the first 9 months of the year, we generated $3 per adjusted diluted segment and eat already exceeded our full year M2019 purpose of $2.84. And finally, liberate money flow is $124 million compared ought $102 million at the third area of final year, an amplify of $22 million. at supplement ought higher operating earnings, we too benefited from improved working leading driven greatly by lower inventory levels.

Let's face ought glide 10, which details our third area sales and adjusted EBITDA although both of our reporting segments.

In our Commercial lorry segment, sales increased by 2% ought $869 million. The amplify at revenue was greatly driven by higher lorry product at North America, partially offset by unfavorable foreign exchange.

Segment adjusted EBITDA was $93 million, down $7 million from final year. portion adjusted EBITDA edge although Commercial lorry came at on 10.7%, down 100 base points compared ought final year. The diminish at adjusted EBITDA and EBITDA edge was driven greatly by higher question costs. These costs were partially offset by conversion above higher revenue and continued operating performance.

Last quarter, we stated that higher costs associated with record markets at North America used to initiate ought abate afterward at the fiscal year, and this quarter's results are showing this trend.

Segment adjusted EBITDA margins improved sequentially at the Commercial lorry portion by 70 base points from the preceding quarter. during we face into the fourth quarter, we hope continued improvement at North America price performance.

During the fourth quarter, we typically look a sequential step down at margins although our Commercial lorry portion given the seasonal European shutdowns. And even although we hope this conventional edge step down at the fourth quarter, we do hope ought look farther benefits during our price initiatives bear ought materialize.

In our Aftermarket, Industrial and Trailer segment, sales were $340 million, up 7% from final year. The higher revenue was driven by increased industrial volumes and pricing actions we enacted earlier this year at our aftermarket business. portion adjusted EBITDA was $54 million, an amplify of above 40% compared ought final year. portion adjusted EBITDA edge grew 400 base points ought 15.9%. This growth was driven greatly by the definite impacts of pricing actions I impartial referenced and continuing operational performance.

Next, I'll magazine our fiscal year 2019 global just hope above glide 11. nevertheless we are closely monitoring the classification 8 North America market, we eat a transparent row of view although the surplus of our fiscal year although continued vigorous product levels. We are, therefore, maintaining our product estimate of nearly 350,000 units.

We are revising our revenue forecast although China ought nearly $160 million, down $30 million ought $40 million from our preceding review. during you know, we greatly hind the off-highway just at China, we are seeing a deceleration of bid activity, inventory reductions during robust during continued supicion surrounding global trading conditions, which is impacting our hope although the ruin of our fiscal year.

In India, we are beginning ought look an shock of the transition ought BS6, a new emission measure based above Euro 6. Starting at April 2020, full vehicles registered get ought consent with this new principle and just participants hope ought pledge that recent inventory can be sold preceding ought the adoption of this standard. This is causing us ought adapt our just hope ought nearly 435,000 units, down from our previous hope of 450,000, which, however, overall is nevertheless a identical vigorous just although India. Overall, we bear ought look firm ought vigorous global aim markets supporting our definite hope although the surplus of our fiscal year.

Now let's fetch ought glide 12 and magazine our updated guidance although fiscal year 2019. during we eat impartial announced our acquisition of AxleTech, guidance assumptions now include the consolidation of results although 2 months at our financial statements. We hope revenue from AxleTech ought be nearly $30 million ought $40 million. Additionally, we eat impartial initiated a restructuring design although AxleTech ought quit driving the synergies we hope from this transaction.

Overall, we are maintaining our revenue hope at nearly $4.4 billion during the expected step down at both China and India will be chiefly offset by the incremental revenue from AxleTech.

Building above the results at the third quarter, combined with continued vigorous deed expectations, we are raising our hope although adjusted EBITDA edge ought nearly 11.8%, up 10 base points from our preceding guidance. during a result, we hope ought generate higher adjusted pay from continuing operations. Adjusted diluted revenue per segment is expected ought be nearly $3.70, an amplify of $0.20 from our preceding guidance.

Our liberate money flow guidance of $130 million ought $140 million has been updated ought muse the approximate $48 million money contribution we made at July although the newly formed asbestos credit during isolate of the bankruptcy reorganization although the nonoperating entity, Maremont. This transaction permanently derisk a division of our remainder slice by eliminating nearly 70% of our net asbestos liabilities during measured at the aim of our preceding fiscal year. This transaction is impartial one manner we eat deployed the sturdy money flow we are generating. during Jay discussed earlier at the call, year-to-date, we repurchased 4 million shares and eat impartial announced a new $250 million segment repurchase program during we prepared ought pivot ought our M2022 plan. These transactions certify our manner ought leading allocation, which we trust is creating vast impose although our shareholders. We are identical pleased with our deed hence distant this year during M2019 finishes vigorous and we transfer our concentrate ought delivering above M2022.

Now we'll acknowledge your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will grow from the row of Colin Langan with UBS.

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Colin Langan, UBS Investment Bank, inquiry segment - Director at the commonplace Industrials people and Analyst [2]

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Any color above the aftermarket margin? It seems fairly high. I intend is this sustainable? Or is this more of a peak-type edge that we to be thinking about?

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Carl D. Anderson, Meritor, Inc. - Senior VP & CFO [3]

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Thanks, Colin, it's Carl. Yes, impartial ought retort that, during distant during we did muse at what we saw was additional pricing that we enacted indeed above the final 9 months within that business. get at worry that third area is one of our stronger performing flae during we deliberate about that business. And hence if you appear at on past years, aftermarket tends ought -- revenue begins ought friendly of step down a small bit at our fourth fiscal area during robust during at our first fiscal area during well. hence overall, obviously, we're identical pleased with the results at the portion at entire although the first 9 months of the year, which is running about 15%. And I deliberate during we friendly of appear deliver that's plus or minus friendly of the precise district ought deliberate about although that segment.

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Colin Langan, UBS Investment Bank, inquiry segment - Director at the commonplace Industrials people and Analyst [4]

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Got it. And can you impartial deliberate this during a follow-up, recall us of your ware exposure. I deliberate it was noted during the headwind at commercial vehicles. Is that -- given the important fall off at Q2, I intend is that starting ought grow a tailwind? Or that...

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Carl D. Anderson, Meritor, Inc. - Senior VP & CFO [5]

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Yes. I used to speak if -- yes, if we deliberate about steel at the quarter, there's a slender headwind that we saw that although the third quarter. besides you're exactly right, during we appear at the steel industries at North America during robust during at Europe, prices eat declined, and we do hope that ought be a tailwind during we acquire into the fourth quarter.

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Operator [6]

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And our next question will grow from the row of Neil Frohnapple with Buckingham Research.

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Neil Andrew Frohnapple, The Buckingham inquiry people Incorporated - Analyst [7]

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Congrats above a large quarter. impartial a hasty follow-up above that final question. hence assuming that steel costs remain relatively successive between now and fiscal year-end, are you capable ought speak what the steel price tailwind could potentially be although FY '20 during you recover, again, I deliberate high single-digit million headwind from this past year?

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Carl D. Anderson, Meritor, Inc. - Senior VP & CFO [8]

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Yes. I deliberate during distant during 2020, it's possibly a small premature ought friendly of argue what we hope although what we're seeing with steel. besides overall, during we discussed, we are expecting that steel ought be a tailwind during we deliberate about the fourth quarter. And especially, the one anxiety that you're seeing from us during distant during above how we're managing our inventory and working leading during that begins ought grow more at line, we do hope steel to, again, be a tailwind at the fourth area at 2020. I deliberate at this point, we used to hope ought possibly harmony you a better update above that here at November.

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Neil Andrew Frohnapple, The Buckingham inquiry people Incorporated - Analyst [9]

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Okay. And just, I trust the implied Q4 revenue and EBITDA guidance implies the decremental edge of only about 7% although the quarter, which is considerably better than the 15% ought 20% flow-through mount during you've historically experienced above revenue changes. And again, I realized you won't supply FY '20 guidance until November, besides again, is it is rational ought end that the decremental edge at FY '20 could be potentially lower than the historic range, again, excluding AxleTech during you to eat less inefficiencies stemming from the peak-end market, steel recovery, et cetera, impartial any thoughts there even directionally at this point? And again, I learn if you hope ought wait until November, besides impartial wanted ought experiment there.

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