Edited Transcript of MTOR earnings conference call or presentation 30-Jan-20 2:00pm GMT

In the first several months of the fiscal year, we continued to execute our share repurchase program, finalized a meaningful new electrification agreement with PACCAR, were added to the S&P’s 600 small cap index, enhanced our technology and product portfolios and appointed Chris Villavarayan, Chief Operating Officer. As you saw in the press release announcing Chris’ appointment, he has been with Meritor for 20 years in various leadership roles. In each of those positions, he has excelled and has made significant contributions toward achieving the targets we set forth both in M2016 and M2019. Global operating responsibility for both of Meritor’s business segments was the next appropriate step for Chris and critical to leadership development for our team as we move forward. Notably, Meritor’s electrification business is transitioning to low volume production more quickly than we anticipated as adoption of battery electric commercial vehicles increases globally. This is demonstrated by the new business award we announced today with PACCAR. Meritor is providing customers with a range of electric powertrain technology including fully integrated system solutions. We are confident that our differentiated offerings are establishing Meritor as a leader in the industry. With Chris’ transition to Chief Operating Officer, I will be personally dedicating more time to electrification as we expand product development, integrate TransPower and grow our customer base.

I look forward to having more direct involvement in refining and executing our strategic plan as we go to market with our Blue Horizon portfolio that serves global customers in many different applications.

Let’s turn to Slide 4 for a capital allocation update. On our last earnings call, mid-November, we noted that we had repurchased $60 million of shares as part of our planned $300 million share repurchase program for fiscal year 2020. Since that time, we have repurchased an additional $140 million of shares for a total of 8.8 million shares purchased, effectively completing 2/3 of the 2020 program. Late last fiscal year, we exercised our option to terminate the aftermarket distribution arrangement with WABCO. We now expect to complete that transaction in this quarter with proceeds anticipated to be at the high end of the $225 million to $265 million range we previously disclosed. As a result, we accelerated $200 million of repurchases in the first 4 months of this fiscal year. As we have said, we believe that committing capital towards significant share repurchases is one of the primary ways we intend to achieve our shareholder return objectives under M2022.

On Slide 5, we highlight a variety of products introduced in the quarter. These new offerings further demonstrate that we continue to expand our portfolio maintaining the aggressive new product launch cadence initiated under our M plans. As part of M2022, we have a clear view toward maintaining our leading market share positions with best-in-class products and services. We are introducing new products, including our single-piston air disc brake and our range of high-efficiency axles. This includes a new vocational axle that is the first of its type in decades. We are also bringing to market the lightest weight trailers suspension in the industry, providing 23,000-pound capacity for tankers, flatbeds and other demanding vocational applications.

Let’s take a look at Slide 6. First, I am pleased to announce today that we were selected as PACCAR’s supplier of electric powertrains for Kenworth and Peterbilt refuse and heavy-duty battery electric vehicles. Production is targeted to begin in 2021. We are very excited about this opportunity with such an important customer. As you know, we have had a long-standing relationship with PACCAR and look forward to expanding the scope of that collaboration. Additionally, Meritor has also delivered 6 Blue Horizon electric powertrains to Daimler Trucks North America for its eM2 innovation fleet. These are being manufactured in one of our facilities in North Carolina. We continue to be a leader in electrification for the commercial vehicle industry, and are positioning the company for long-term success by expanding our product portfolio and technology capabilities.

Last year, we announced, in addition to the 14Xe, we will begin development of the medium-duty 12Xe and the 17Xe for heavy-duty applications, primarily in Europe. And as you heard last week, we have acquired the remaining voting equity interest in TransPower for $16 million, expanding our offering to include full EV integration capability that enables us to continue delivering complete battery electric systems to our OEM customers.

As I have said, the pace of investment and opportunities in this space is accelerating more quickly than we originally foresaw, and we believe this will result in additional production awards for us over the next 12 months. Today, our book of expected business is greater than $200 million and growing. We also have line of sight to other potential production awards that could drive our revenue pipeline north of $500 million, which we expect to be profitable as production ramps up in fiscal 2021. As we are successful in finalizing these opportunities, we will be sure to update you. Overall, I believe we have tremendous opportunities in front of us. And I’m very pleased with how we are positioned in electrification.

On Slide 7, I wanted to highlight our investment to build a new manufacturing facility in Brazil. As we see the region continue to recover and grow, this is the right time for us to optimize our footprint. This project is one of the largest manufacturing cost reduction programs in M2022 and will help us achieve our margin objective. As we mentioned last quarter, we are happy to be part of the e-Consortium with Volkswagen in Brazil, which provides us with the opportunity to supply axles for e-Delivery vehicles. As we look at the quarter, I am pleased with our performance as we navigate end market volumes that are significantly lower on a year-over-year basis. We have a strong balance sheet that provides us with significant financial flexibility. Our increased free cash flow generation provides us with the opportunity to continue returning value to our shareholders through our share repurchase plan, while we also invest in our core product portfolio and electrification business. The company is well positioned to deliver strong growth, margin improvement and robust free cash flow generation under M2022.

With that, I’ll turn the call over to Carl for more detail on the financials.

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

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Thanks, Jay, and good morning. On today’s call, I’ll review our first quarter financial results and updated full year guidance. Overall, as you heard from Jay, we delivered a solid start to 2020. We achieved an adjusted EBITDA margin of 10.9% and adjusted diluted earnings per share of $0.64, reflecting our ability to manage the business effectively across current end market conditions. Additionally, we remain committed to our capital allocation strategy and in the first 4 months of the fiscal year, we have repurchased over 10% of our outstanding shares. This reflects our continued confidence in achieving and delivering on our M2022 targets.

Let’s walk through the details by turning to Slide 8, where we will see our first quarter financial results compared to the prior year. Sales were $901 million in the quarter, down $137 million from a year ago driven primarily by lower global truck production and lower volumes across our other businesses. This was partially offset by revenue from AxleTech, which we acquired in the fourth quarter of 2019. As anticipated, we saw a significant decrease in North America Class 8 production in the first quarter. Compared to the same period last year, production was down almost 17,000 units or about 20%. Additionally, in Europe, production was down approximately 18,000 units or 14% compared to the first quarter of 2019. And in India, production volumes, which were down almost 40%, continued to be impacted by the emission standard changeover that will occur on April 1, which requires all vehicles sold after this date to comply with the new standards. This is resulting in an industry-wide focus of reducing inventory levels prior to the changeover. Additionally, we are seeing tighter credit conditions, which is also contributing to the market challenges. And finally, revenue from AxleTech helped to offset slowing market conditions in our North America aftermarket specialty and trailer businesses.

Looking at the right side of the page, we did a good job of managing costs to limit total downside earnings conversion to 15% on the lower revenue. Lower volumes decreased sales by $127 million or 12% from last year. On this revenue decline, adjusted EBITDA decreased $17 million or 14%. Our ability to manage costs on lower revenue was highlighted this quarter as we were able to drive lower material, labor and burden expense, which resulted in very solid downside revenue conversion performance. In addition, foreign exchange was a slight headwind on sales as the U.S. dollar had strengthened year-over-year. Adjusted EBITDA was unfavorably impacted by $4 million compared to the prior year. Overall, we generated adjusted EBITDA of $98 million with an adjusted EBITDA margin of 10.9%.

Looking at the left-hand side of the chart, gross margin came in at 14.1% this quarter, an increase of 50 basis points from a year ago. This improvement was mainly driven by lower overall material costs, including reduced layered capacity costs. You will also recall, we announced a restructuring plan at the end of our fiscal year last September. The plan was implemented in anticipation of the slowing market conditions we are now experiencing. As a result, we did recognize $5 million related to the restructuring in the first quarter.

As you move down to the table on the left, you’ll see that we’re reporting $39 million of GAAP net income from continuing operations. In addition to lower sales compared to last year, in fiscal 2019, we recognized a $31 million gain from the remeasurement of the Maremont asbestos liability, which did not repeat. Adjusted income from continuing operations was $52 million, resulting in $0.64 per adjusted diluted share. And finally, free cash flow was negative $35 million this quarter compared to negative $12 million in the same period last year. As you may recall, we typically use cash in the first quarter due to fewer selling days as a result of the holiday season, which generally drives lower revenues and incentive compensation payments for achieved performance in 2019.

Let’s move to Slide 9, which details our first quarter sales and adjusted EBITDA for our reporting segments. In our Commercial Truck segment, sales decreased by 20% to $622 million. The decrease in revenue was primarily driven by lower truck production across most regions in the segment. Segment adjusted EBITDA was $56 million, down $21 million from last year. Segment adjusted EBITDA margin for Commercial Truck came in at 9%, down from 9.9% in the prior year. The decrease in adjusted EBITDA and adjusted EBITDA margin was driven primarily by lower volumes, partially offset by lower freight and material costs, including reduced net steel and layer capacity costs. Lower labor and burden costs also contributed to managing to 13% downside conversion on the lower revenue in this segment.

In our Aftermarket, Industrial and Trailer segment, sales were $317 million, up $14 million or 5% from last year. The increase in sales was primarily driven by revenue from AxleTech partially offset by decreased volumes across the segment. Segment adjusted EBITDA was $40 million, which was flat compared to last year. Segment adjusted EBITDA margin decreased 60 basis points to 12.6%. The decrease was driven primarily by the impact from AxleTech as the expected benefit from synergies continues to ramp up to full run rate.

Next, I’ll review our updated fiscal year 2020 global market outlook on Slide 10. We are revising production levels for India to between 265,000 to 285,000 units, down over 15% from our prior outlook. Based on the market uncertainty we are seeing in this region, it is likely that the production levels after April 1 may not fully compensate for the lower production levels we are seeing now. In Europe, we are lowering our production outlook by 5,000 units reflecting slightly lower truck demand. And finally, we are revising our outlook for the U.S. trailer market to approximately 230,000 to 240,000 units, as we are now forecasting the trailer market to decrease more in line with Class 8 truck production.

On the next slide, we provide a summary of our 2020 guidance based on these updated market assumptions. We now expect revenue to be approximately $3.7 billion, which is at the lower end of our previously provided guidance. We are also revising our outlook for adjusted EBITDA margin to approximately 11%. We expect to manage our downside revenue conversion at the low end of our expected range through our laser focus on managing costs.

As a result of the slightly lower earnings expectations, we now expect adjusted diluted earnings per share to be approximately $2.75, which is consistent with the low end of our previous guidance. And finally, we now expect to generate free cash flow of $165 million this year. While we cannot control the global markets, we are pleased with our team’s ability to quickly adjust to market changes and delivered solid financial results as we begin our M2022 plan. Now we’ll take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Faheem Sabeiha with Longbow Research.

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Faheem Farid Sabeiha, Longbow Research LLC – Research Analyst [2]

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Chris, congrats on the promotion. Jay, you mentioned the $500 million revenue opportunity for the EV portfolio, but I was wondering what’s baked into your guide this year? And I guess, what does the ramp look like over the next few years?

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

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Well, as I mentioned in my comments, the production on the PACCAR award begins next year. So we’re ramping up our capabilities on the manufacturing side, particularly at TransPower to deliver those vehicles beginning in 2021. And then we see them reach what you would call full production rate during 2022.

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Faheem Farid Sabeiha, Longbow Research LLC – Research Analyst [4]

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Okay. And can you talk about the revenue content of these EV systems on the PACCAR trucks plus the other platforms you expect to go live on versus your contents on a diesel engine? I just want to kind of get an understanding of what the profitability looks like on this?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [5]

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We’re not disclosing specifics on that right now, but the way you could think about it is, this is somewhere between prototype and low-volume production. So the prices are quite a bit higher than we would expect when it reaches full production. So even though the range we gave at our last Analyst Day of 5 to 10x the content when we got to full production mode, this — these particular content levels are quite a bit higher than that because you’re still somewhat at the prototype stage at these volumes.

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Faheem Farid Sabeiha, Longbow Research LLC – Research Analyst [6]

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Okay. And is there any white space left in the portfolio and the EV portfolio? Or are there other services or offerings that Meritor is maybe eyeing that would increase the EV value proposition of customers at this point?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [7]

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Absolutely. I mean, as I mentioned in the comments, really twofold. We’re thrilled with our purchase of the remaining equity at TransPower. We think that integration capabilities has significant growth opportunities for us in all different types of applications, be they medium-duty, refuse, school buses, heavy-duty. So a lot of white space growth. But just as importantly, I discussed the — our intent to launch a 12Xe and a 17Xe electric axle. Right now, we’re running with just the 14Xe. And those other 2 axle offerings will bring us into different market segments.

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Operator [8]

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And our next question comes from James Picariello with KeyBanc.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [9]

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So just at a high level regarding the guidance, I mean, is the generalization here that we’re seeing some additional weakening across U.S. trailers, Europe, India, and you’re still delivering a mid-teens decremental on just that? That’s like — that modest weakening in the markets that you’re seeing?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [10]

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Yes, James, it’s Carl. Yes, I think that’s right. I think as you look at the guidance, the markets we did take down or what you referenced, we’re still seeing North America kind of come in relatively consistent with what we thought previously. And it’s really just the capabilities and ability for us to manage the kind of the cost structure to be at that lower end of our downside conversion levels that — around that 15%. And that’s what we’re really managing the company to.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [11]

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Got it. And then can you just talk about what the status of your internal actions are with respect to — is the restructuring plan completely finalized now? And then maybe just some other cost-out initiatives that help support the margin resilience for the year? And also, how are commodities trending?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [12]

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As you would expect, James, a company operating in deeply cyclical environments that we do. We’re constantly looking at our cost structure really, with the target to try and convert, if we can, at the lower end of that conversion guidance that we provided of 15% to 20%. Obviously, we’re successful in doing that this first quarter, in spite of this being a quarter where we saw rapid ramp-downs in production. But we’re continuously looking at actions that we could potentially take to manage that very volatile volume environment.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [13]

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Okay. And is the status of the restructuring plan — is that completely finalized? Or you still have some more work to do?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [14]

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Again, we are still — there are — the previous restructuring plan we announced, that is virtually complete. But again, we continue to monitor our cost structure, and if we see further declines in our market expectations, we will have to take additional cost actions, but I believe we have established a track record over the last half a dozen years of being very good at reacting to that very, very quickly.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [15]

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Got it. I appreciate it. And then just on AxleTech, and maybe I missed this, my apologies. But what was the contribution in the quarter for AxleTech? And how are you thinking about the full year in terms of the revenue and the synergies that should be realized for AxleTech this year?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [16]

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James, it’s Carl. As you look at the AxleTech revenue, we had about $43 million of revenue from AxleTech. I think what we’re seeing — as it relates to the synergies expectations, we’re actually kind of above our internal planning from an expectation or what we — that we’re delivering on. I think the business itself, we’re seeing some general softness, just like you’re seeing, whether it’s in the off-highway, defense and aftermarket kind of areas of the business, which is similar to what we’re seeing with the rest of Meritor’s business. But I would say, overall, we continue to be very pleased with the strategy and with the acquisition of the company. I think revenue is a little bit softer than what we’re originally planning, if we had the discussion 6 months ago. But overall, what we’re very pleased with is really just the team’s ability to execute on the synergy plan and where we stand at this point.

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Operator [17]

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Our next question comes from Alex Potter with Piper Sandler.

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Alexander Eugene Potter, Piper Sandler & Co., Research Division – Director & Senior Research Analyst [18]

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I’m interested in digging in, I guess, maybe a little bit more on the EV opportunity with PACCAR. I guess, what I’m trying to understand is, once this is in run rate production, are you primarily going to be providing them with eAxles, drivetrain components? Or is it going to be something that flows through TransPower, these fully electrified chassis type products?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [19]

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Okay, good question, Alex. The short answer is both. So that’s — the beauty of the investment in TransPower is we truly felt that 2 plus 2 equal 3 or 4. And the Meritor products and the customer relationships we brought could be added with TransPower’s capabilites on — that they are able to provide on the full integration for an electric vehicle. So we will be working now with our wholly owned subsidiary TransPower on providing fully integrated electric vehicles for PACCAR, and they will be composed, also where we can, of Meritor components, including eAxles on some of the vehicles.

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Alexander Eugene Potter, Piper Sandler & Co., Research Division – Director & Senior Research Analyst [20]

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Okay. I guess, I mean, the reason I asked the question is, I think you may agree or may be not with this, but eventually, presumably once electric vehicle penetration reaches a certain threshold, the truck manufacturers themselves are going to have to decide what they view as core and what they’re going to rely on the supply chain for. And I got to believe that at some point, they’ll take some of that content and do it internally, maybe that’s not the case in the sort of quasi prototype stage, but I don’t know what’s your view on when you think the OEMs (inaudible) on that line differently?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [21]

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No, I think as we’ve spoken before, we couldn’t agree with you more. That’s why we’ve taken what we’ve labeled an open architecture model towards our work primarily out of TransPower, where we work very closely with or OE’s development teams and work with them on what capabilities they will eventually want to insource. And as we’ve mentioned specifically, as an example, we’re looking forward to them insourcing the battery sourcing and battery management systems. We’re doing that right now, but we expect that they will integrate that over time. Because they have naturally greater scale for purchasing of those. But offsetting that decline in revenue on that end will be 2 different items on the other side coming up, which is, one, our eAxles, which we’re developing and getting to full run rate production will begin to be placed on more vehicles with significantly more content than a traditional axle. And then secondarily, there will be a segment of the market that won’t have the scale that will be able to execute all the integration services. So we will be providing those as our technology is proven.

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Alexander Eugene Potter, Piper Sandler & Co., Research Division – Director & Senior Research Analyst [22]

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Interesting. Okay, very good. That all makes good sense. I was wondering then outside of electrification, some of the other maybe more — slightly more near-term growth initiatives that you’ve spoken about recently, thinking about things like off-highway precision gearing, maybe medium-duty trucks share, disc brakes, I’m pretty sure I’m omitting a couple more here as well, but if you could maybe just rank order those opportunities based on your recent experience, which ones are doing better than plan, in line with plan or maybe some that are performing below expectation?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [23]

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What I’m going to do is let Chris, I want him to speak about the disc braking opportunities because we think they are significant. But the — obviously, the biggest opportunity we have during this planning period through 2022 is the successful integration of AxleTech and making sure we garner all of those cost and revenue synergies, particularly as we focus on the off-highway and military opportunities there. But I’d ask Chris to also speak about the disc braking side.

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [24]

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Sure. Thanks, Jay. I think when you think about M22, and our target is $300 million of revenue, and as you look at our presentation, we talked about 7 new products. And the 1 right in the middle is the disc brake, our single-piston disc brake that we’re launching. As we announced over a year ago, we have a standard agreement on air disc brakes with Daimler. And we’re looking as one customer. And as we are growing here in the future, we plan to take this globally and grow the disc brake. So the disc brake business is a considerable part of our growth strategy going forward.

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Operator [25]

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Our next question comes from Brian Johnson with Barclays.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [26]

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Great. I both have kind of outlook, kind of housekeeping question and then a more strategic question. In terms of just — and I know you’ve hit on this before, but the commercial truck downside conversion was very strong at 15%. I was particularly struck by the — how gross margins held in, which would seem to imply that perhaps you’re managing decrementals on SG&A OpEx side. Could you maybe talk about that or, in particular, with the gross margin holding in better, was there a commodity tailwind there?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [27]

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Yes, Brian, it’s Carl. I think you’re right. On the gross margin, what we did see is we did see some benefit from steel in the quarter. Kind of similar in line what we talked about back in November as far as our outlook for the full year. So I would say steel is probably a mid- single-digit million tailwind for us in the quarter. We also had a pretty significant improvement in cost as it relates to labor and burden in the quarter as well as really managing kind of our freight expenses well. So it’s really — it was a combination of all of those items, which were all around kind of the same type of magnitude for the quarter in which we saw — which helped really drive the improvement in gross margin for us.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [28]

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Okay. Second question around what are you seeing in kind of the mid-truck market in North America that gives you some greater confidence about how it’s held up and then how it’s going to look over the coming year.

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [29]

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Well, right now, in terms of the market, I think we’re in line with where we see, let’s call it, the external rating agencies coming in ACT, FTR between 240,000 to 250,000. And then on top of that, as I look at the line rates that we’re seeing from our customers. I believe all those 3 are actually boxing in very closely. So we’re quite comfortable with what we see going forward. Maybe your question on — with respect to new trucks and where we see that going in the future. I think trucks are becoming far more efficient as we see, and as, obviously, we have seen over the last 2 years. And with the path of electrification, diesel’s got to get even more efficient. So I think that’s one place where we really play strongly. And so I think it’s equally important because if you think about our high-efficiency axles that we have launched recently as well as the axles that we have coming, jay talked about the new vocational axle, we really believe that the efficiency gain will drive it. And I just want to clarify one point also on the forecast, it’s 245,000 to 255,000.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [30]

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Okay. And then finally, the PACCAR, obviously, it’s prototype to low production, it’s early days. But then you talked about some things like battery management. How are you thinking about the software that would span across managing the flow from the battery, the flow-through the power electronics and then the actual control of the motors itself? Is that something where you’re — whether it’s some of the acquisitions you made, you’re writing the software? Or are you basically providing the hardware and the OEM partner is doing the software?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [31]

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Very good question, Brian. I mean, that’s why the TransPower investment and now the acquisition of the remaining equity was so critical. TransPower provides the supervisory controls to software in that area that makes the whole system run, including instrumentation on the vehicle, braking, all the other supervisory controls. They also provide the battery management controls that determine the energy — rate of energy flow and the utilization of energy. So we do have software and software engineers at TransPower. In addition, we’ve ramped up, within Meritor, our software engineering capability, just to manage the features in the eAxle because that eAxle, obviously, containing motor components, cooling components, requires a lot of software system intellectual properties. So we have an entire software team here in our Troy research center that’s focused on the software of the eAxle as well.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [32]

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And as part of that, are you getting closed-loop data out of vehicles on the road that would allow you to refine the algorithms, control algorithms would you be able to (inaudible)

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [33]

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Absolutely. We’ve — yes, we welcome any of our investors or analysts to come visit TransPower in San Diego and you can ride on the test vehicles with me and see how they operate. We have thousands and thousands of test miles on these vehicles right now.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [34]

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And any plan once those get on the road to continue to harvest the data? I’m thinking here of last night and…

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [35]

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Oh, absolutely. Yes, continuously. Sorry for misunderstanding your question. But yes, it’s to…

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [36]

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Yes, I know, I’m thinking of the advantage the Tesla has in terms of getting for its BMS and control systems.

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [37]

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You’re correct. Although I think as we heard in a previous question, it is our expectation with the large OEs that they will start to take control of management and some of that data as well. And we’re very open in working with them to enable them to do that.

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Operator [38]

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And our next question comes from Ryan Brinkman with JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [39]

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Clearly, you’ve accelerated the share repurchases here, which, as you’ve mentioned before, provides flexibility toward meeting those longer-term targets and a wider variety of macro scenarios. I’m curious, though, just given that only 100 million remains, whether you intend to pursue another authorization? Or what your plans might be after the current authorization is completed?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [40]

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Ryan, it’s Carl. I think you’re absolutely right. We have 100 million left to go, which the board has authorized us. We’ve been, in the first 4 months, pretty aggressive in the share repurchases. We did signal last quarter that we have an opportunity in front of us over the next couple of years as it relates to what we’re generating in free cash flow to repurchase up to potentially another 400 million of shares. And so I think our approach will be, we’d like to fully execute and complete the existing program. But I would believe that once we do that, we’ll be in a position to seek further authorization, especially where the stock is currently trading.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [41]

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Okay, great. And then just on Slide 8 regarding that catch all volume mix performance, other category driver of EBITDA. I know you’d called out your decremental track toward the lower end of your targeted range, which indicates solid performance within that category. But are you just able to maybe disaggregate that bucket a little bit. What is electrification investment running within this category? And how are you thinking about the impact of performance or electrification investment for the full fiscal year?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [42]

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Yes. I think, Ryan, as we look at the quarter specifically, electrification really was roughly flat on a year-over-year basis, at least in the first quarter. We do expect that to continue to ramp up for the rest of this fiscal year. And the — I think what we’re talking about probably up about $10 million or so from a year ago. So overall, as it relates to about that line item itself when you kind of do the math, is about 13% downside conversion with all the components. But as we go forward, we do see this pickup and ramp up in electrification spend, especially as — with the success we’ve had with the new PACCAR win as well as with the TransPower acquisition.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [43]

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Okay, great. And just lastly for me. Regarding that new facility in Brazil, there’s been some reticence to invest more capital in light vehicle capacity in that region on the part of suppliers. Can you just maybe talk a little bit why you’re excited about this? Is it a case of increased localization, which helps to offset currency risk? Or — also I heard you say that it was a significant cost savings move. So maybe it’s replacing some older, more expensive capacity. Anymore how to think about that would be helpful.

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Chrishan Anthon Sebastian Villavarayan, Meritor, Inc. – Executive VP & COO [44]

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Yes, excellent, Ryan. This is Chris Villavarayan. I’ll take that one. So I think you hit on 2 points. We’ve been in Brazil for several years, actually, over 50 years. And our current location is landlocked and we’re unable to grow from that site. And the Brazilian market, as you could imagine, and you have seen through many of our quarters, is a very important market for Meritor. And so we’ve made — we made a decision many years ago to make a long-term commitment here, and we’ve been working on deciding a new facility here for over 10 years. And so with the market continuing to strengthen, and we’ve seen it strengthen over the last 4 to 5 years, our thoughts are, we need a new facility that will add more capacity, drive local content, to your point, also bring us closer to our customers and also drive the best-in-class cost. It provides us yet another path to build a new facility that’s more modernized and then continues to drive our cost position. So it is one of the largest, as Jay pointed out, cost reduction opportunities in our M2022 plan.

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Operator [45]

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Our next question comes from Joseph Spak with RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [46]

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I guess, first, just on the Aftermarket, Industrial, Trailer segment. So margins were down. You called out some of the integration. You lowered your trailer outlook, but then the synergies ramped through the year. Like what do we expect margins for the year — for the whole year in that segment to be now? Like, can they be flat? Or should we sort of start modeling them down now given some of the incremental headwinds there?

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [47]

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I think, Joe, what we are seeing — we definitely see it margins increasing kind of from the current run rate that we finished the first quarter end. The one thing to take into account is just that overall, just general softness we’re seeing across the segment. Obviously, we talked trailers, but also just with the industrial and off-highway parts of the business. And aftermarket itself that we’re seeing here in North America, we’re just seeing some general softness. But our expectations, as you know, we don’t give a number specifically for the year by this segment, but we definitely see that margin increasing, progressing throughout the year.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [48]

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Driven by the synergies ramping up.

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Carl D. Anderson, Meritor, Inc. – Senior VP & CFO [49]

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Right. That’s right.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [50]

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Yes. Okay. Okay. Jay, the TransPower full acquisition, not a surprise. I think you’ve sort of hinted or indicated this could be possible. But you’ve also been working very closely with them to date. So like just what specifically does sort of the full ownership allow you to do now that you weren’t able to do before?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [51]

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Well, I think it’s just overall the statement to the employee base there of how important they are to Meritor. I think we’re the perfect home for them. And what we’ve found in the period that we had an investment in TransPower, is those benefits are even greater than we originally estimated. And we each bring different skill sets. Obviously, Meritor has over a 100-year history of production for the commercial vehicle industry, and we can assist TransPower as they’re moving from this low volume prototype stage to production stage, and we actually have a head of production that resides in San Diego and has for many months now. That’s an executive of Meritor that’s running the production floor. And TransPower brings to us the development expertise in this particular area, and jump-starts us as the full vehicle integrator. So I think overall, it’s been a perfect marriage. The employees at TransPower that I meet are just thrilled to be part of Meritor. So I think it’s just a natural progression.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Analyst [52]

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Okay. And then lastly for me. With the appointment of Chris to COO, very exciting and I appreciate Chris — all Chris’, sort of, comments and look forward to talking more with him. But you’ve also, like, been an operating story and operating at a very high level for some time. So what specifically did you see that led you to believe that now is the right time to have that role? And I guess, I mean this in the most respectful way possible, but is there any element of succession planning in this decision as well?

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Jeffrey A. Craig, Meritor, Inc. – President, CEO & Director [53]

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Well, to be honest, there’s always elements of succession planning whenever anybody gets promoted. But I’m not saying that in any time in the foreseeable future, I see stepping away from the company. It’s really twofold. Chris has really been my partner in crime on the operating side. As I was reading through my prepared remarks, almost everything related to the operating side of the product side, I would say Chris has either led or we’ve jointly led. So I think a lot of it is recognition of Chris’ importance to the business. But secondarily, also, as I’ve mentioned, the rate of the ramp-up of the electrification business has been much — happened much more quickly than any of us anticipated. And those capital allocation decisions and other critical decisions around that business have really ended up flowing to my desk as you would expect. And I think it’s the right time just for me to get more directly involved in that and make sure we’re all aligned on those — the different decision points we encounter.

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Operator [54]

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And I’m showing no further questions in the queue at this time. I’d like to turn the call back to Todd Chirillo for any closing remarks.

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Todd Chirillo, Meritor, Inc. – Senior Director of IR [55]

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Thank you for joining our call today. Please reach out to me directly if you have any questions. Thank you, and have a good day.

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Operator [56]

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