Q4 2019 Earnings Call
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As a reminder, this call may be recorded I would now like to introduce your host for todays conference Mr. taught Sherman most senior director of Investor Relations you may begin Sir.
Thank you Catherine good morning, everyone and welcome to marry towards fourth quarter and full year 2019 earnings call.
On the call today, we have Jay Craig CEO , and President and Karli, Anderson, Senior Vice President and Chief Financial Officer.
The slides accompanying today's call are available at Meritor Dot com.
I refer to the slides in our discussion this morning.
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It is protected by U.S. any international copyright law and may not be rebroadcast without the expressed written consent meritor.
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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 to for a more complete disclosure of the risks that could affect our results.
To the extent, we referred to any non-GAAP measures in are called you'll find a reconciliation to GAAP in the slides on our website now I'll turn the call over to Jay.
Thanks, Todd and good morning, we appreciate you joining us today for look at our fourth quarter full year 2019 result.
Let's go to side trade.
Our performance. This year was excellent you can see we have consistently delivered meaningful improvement over the past three years since launching them 29 chain revenue was up 25% adjusted EBITDA margin has expanded by 25% or 240 basis.
On.
An adjusted diluted EPS from continuing operations is up 140%.
In a moment I want to highlight some of our achievements starting I'm 29 chain.
But first let me make a few comments about this past year.
We saw commercial vehicle volumes.
Peak levels closing out the year at 359000 units up 17% year over year.
Hi asked market and 13 years.
Production at that level requires nothing short of hardly orchestrated cross functional and regional coordination to ensure customer requirements are fulfilled.
I am proud to say that despite the stress this level production puts on the entire supply chain, our delivery performance was greater than 99% for the total company and our quality score was 108 parts per million.
If we excluded tennis shoes that arose from one facility this year.
Quality would have been an impressive 24 parts per million.
Hi, I'm pleased to tell you that we achieved and overall toward total recordable safety case right. <unk> 0.5 signed injuries per 200 out Collinson hours worked this safety buried required significant diligence by all of our employees during that timeframe.
In addition to the great effort required to manage the peak efficiently and convert on they increased revenue.
We also completed the acquisition of facts on top.
Great incredible progress in our electrified drivetrain offerings and launched several new products and core penetrate some markets.
We also recently announced that Steve bearing house CTO of Sensata technologies will join our board of directors.
Steve background and expertise hadn't the application of advanced technology for the transportation industry make him an excellent attrition.
We are pleased that he has agreed to join US as we began and 20 to 22.
Now, let's talk about the highlights stuff I'm 29 chain performance.
On slide four we score card our financial results against targets.
With more than $600 million send revenue outperformance or 16%.
Driven by new business around the world, including adjacent markets and revenue from our three most recent acquisitions.
As a result to fire high performance during the peak cycle. We were also able to gain rear axle share with customers said North America.
Not only Ted we beat our adjusted diluted D. P. S target, we almost has exceeded that by one dollar per share increasing it by $2.23 from 2015.
You will remember this was an aggressive goal for every announced at at the end of fiscal year 2015.
That time, we said, we believed and 80% improvement in adjusted EPS was the ultimate measure of success for EM 29 chain.
He actually delivered 140% purpose.
Our third financial target was true achieved 1.5 times net debt to adjusted EBITDA.
Excluding the financing associated with the actual tech acquisition, we achieved 1.3 times.
Or 1.6 times, if we include it.
We generated strong free cash flow over the term as a plan have reduced legacy liabilities.
Let's go to slide five for a summary of our capital allocation strategy.
I mentioned, we are now generating strong free cash flow and are returning a significant percentage to meritor shareholders.
During M. 29 chain, we returned $276 million a cash to shareholders through equity repurchase has which represents 56% if our free cash flow since fiscal year 2016.
That is more than doubled the target we establish tough returning 25% in that timeframe.
We intend to maintain an aggressive rate of share repurchases. During the M. 20 to 22 timeframe. We told you at analyst day last December that our cash generation and the ability to deploy that cash to drive shareholder value is a critical underpinning of our.
Next strategy.
This is where we expect to drive tremendous value for our shareholders. We will provide more detail later in the discussion.
Slide six provides a summary of strategic transactions, we completed three acquisitions to first of higher revenue streams.
Help us offsets the good cyclicality of the line haul markets.
These acquisitions expanded our portfolio and customer base with new technology and products in off highway severe service and defense.
Actual tech has the most recent acquisition that we completed in July .
We still expect annual run rate synergies from actual tax to be more than $15 million by 2022.
Our integration process is moving along well and our belief in the strategic value with this transaction has been reinforced in the past several months.
As you know we sold our interest in the farmer Meritor Wabco joint venture in 2017.
Have recently recently announced that we have exercised tower option to terminate the exclusive aftermarket distribution arrangement.
To the terms of this agreement Wabco will pay us between 225 million and $265 million, which provides further flexibility for capital allocation.
Finally, our investment in Trans power has served US an accelerant for many of the electric programs, we have with major Oems.
We look forward to our continued collaboration as customer show, increasing interest and electric drivetrain solutions for a range of applications.
Slide seven shows a few examples of the 21 products. We have launched during M. 29 gene for a variety of applications.
Our current launch cycle is one of the most aggressive and the company's history.
New products include front and rear axles for medium and heavy applications line haul construction buses and trailers. In addition to an optimized air disc brakes, and they transfer case for the medium duty all wheel drive market.
Moving to slide eight you see that new business accounted for 16% of our revenue outperformance largely driven by new product offerings.
We are designing and manufacturing for a wide range of applications and end markets and our efforts to grow our business in these areas is gaining traction and well continue.
Under EM 2020 too.
Slide nine reflects our efforts to position the company, that's a market leader and electrified drivetrain solutions.
Sorry, Mtwenty now chain, we introduce blue horizon, which consolidates meritorious advanced solutions under a single brand, reflecting more than 20 years of technology leadership.
In the past two years alone we have progressed to a third generation up to 14, NAXI and our to levering preproduction samples to major customers.
We have accumulated thousands of testing miles across a range of applications and duty cycles.
We have been awarded 22, Emobility programs and expected to play over 130 vehicles by the end of 2020.
In addition to the electric vehicles folks lacking in Brazil will launch over the next few years.
This program award, which we announced at the North American commercial vehicle show for 1600 trucks will begin with the Oems 11 ton E delivery truck.
Quipped with Meritor is 12 packs with E optimized scary.
Well be substituted with our 12 Akcea electric powertrain as it becomes commercially available.
We also announced at a nice CB the introduction of two new D. axles, one for medium at the other for heavy duty applications with the addition of these two new axles. We believe meritor now has the most comprehensive the axle portfolio.
For medium and heavy duty trucks have any wanted in the world.
With that I will turn it over to Carl for more detail on the financials, Thanks, Jane and good morning.
On today's call I'll review, our 2019 financial performance, along with our fourth quarter segment results.
Then provide you with an overview of our fiscal year 2020 guidance.
Overall, we had another outstanding year, a financial performance and we successfully completed our Mtwo thousand 19 plan that we committed to almost four years ago and the last year. The plan, we expanded adjusted EBITDA margin by 60 basis points increased adjusted diluted earnings per share from continuing operations to $3.82.
Generated $153 million of free cash flow and deployed over 60% of our free cash flow to repurchase $95 million of common stock.
Let's turn to slide 10, well, you'll see our full year financial results compared to the prior year.
Sales were up 210 million from last year, driven by higher in North America truck production increased aftermarket industrial and trailer volumes across North America and continued revenue outperformance.
From a segment perspective, we saw the largest increase in revenue from our aftermarket industrial and trailer segment, which was up $137 million from the prior year.
We benefited from a strong all wheel drive market. The launch of the first ever gear driven transfer case for Navistar and a 7% increase in trailer production.
The commercial truck segment was up $80 million in revenue in North America class eight truck production was up 17% from the prior year.
We also saw strong demand in medium duty, increasing almost 10% to 288000 units driven by demand for last mile deliveries.
In fact, our revenue since 2017 in North America truck has grown by over 50% compared to growth of 35% for the combined heavy and medium duty market.
We were however negatively impacted by lower sales in both India and China.
In India, the pending implementation of a new emission standards significantly impacted sales in the back half of the year.
And in China, we have seen a slowdown in the economy, which significantly impacted sales in our fourth quarter.
For the full year, China's revenue was $165 million down 18% from our expectations. When we started the year.
The overall increase in revenue was partially offset by an approximately 100 million dollar unfavorable foreign exchange translation impact as the U.S. dollar strengthened against most major currencies.
Moving to the right side of the side you can see on the line labeled volume performance mix. Another we had $51 million of higher adjusted EBITDA and $306 million of revenue increase.
That translates to net underlying conversion of approximately 17%, which we view as very good very good result in markets like these as we were faced with higher layer capacity and that steel costs as well as other inefficiencies primarily in the North America truck market.
Additionally.
As we compare 2019 results to the previous year, we had a one time 9 million environmental charge related to a legacy site, which occurred in 2018 and did not repeat.
And given the FX headwinds in the year adjusted EBITDA was negatively impacted by $14 million.
These items to provide the walk to our adjusted EBITDA of 520 million in adjusted EBITDA margin of 11.9%.
And the table on the left you can see that our operating performance drove an increase in adjusted income from continuing operations to $330 million or $3.82 of adjusted diluted earnings per share.
In addition to the higher overall adjusted EBITDA generated this year, we also had a lower tax expense.
Our effective tax rate was approximately 9%, which is lower than the 13% rate. We saw last year as we benefited from a higher percentage of earnings coming from jurisdictions, which have net operating losses or tax credits to offset taxable income.
And finally due to our continued focus on capital allocation, we had approximately 5 million less diluted average common shares outstanding.
Which drove about 20 cents of adjusted diluted EPS.
All of these items allowed us to exceed our Mtwo thousand 19 target of $2.84 of adjusted earnings per share by almost a full dollar.
Additionally, on a GAAP basis, we recognized approximately $8 million related to restructuring.
This was primarily driven by cost incurred as a result of the 20 million restructuring plan announced in September to reduce hourly and salary headcount globally in anticipation of market declines we expect the remainder of the restructuring costs to be incurred in fiscal year 2020.
We also recognized a $9 million charge to impair certain customer relationship intangible assets related to the eight gear business, we acquired last year.
And finally, we generated 153 million of free cash flow in 2019.
This is inclusive of the 50 million dollar cash contribution we made as part of the bankruptcy reorganization for the non operating entity Miramar that was completed in July .
Exclusive of this transaction, we generated $203 million of free cash flow, a 56 million increase from the prior year.
Slide 11 details our fourth quarter sales and adjusted EBITDA for our reporting segments.
And our commercial truck segment sales were $728 million down 11% from last year.
The decrease in sales was driven by lower production in India Europe in China.
While segment adjusted EBITDA was 69 million down 7% our segment adjusted EBITDA margin for commercial truck increased 40 basis points over the same period last year.
As we previously discussed higher costs associated with record markets in North America began to abate in the third quarter and this quarter's results continued this trend.
The increase in segment adjusted EBITDA margin was driven by lower net steel premium and freight costs immaterial performance, which more than offset the impact from lower revenue.
And our aftermarket trailer in industrial segment sales were $341 million up 11% from the same period last year.
This was driven by the inclusion of revenue from Axletech.
Segment, adjusted EBITDA was $44 million up 2 million compared to last year.
Segment, adjusted EBITDA margin decreased by 80 basis points compared to the same period last year, primarily due to the consolidation of Axletech.
We expect this acquisition to be accretive to margins through the end of the calendar year as certain targeted synergies primarily from the elimination of cost overlap have not yet been fully realized.
Next I'll review, our fiscal year 2020 market outlook on slide 12.
In the North America class eight market, we are projecting production levels between 240 250000 units.
Fundamentally this is due to continued lower order intake over the past several quarters combined with higher current dealer inventory, which is driving a step down we are seeing for production in 2020.
As we look to our other markets, we anticipate that Europe will be in the range of 450 to 460000 units down approximately 6% from last year.
Overall economic conditions are pointing to a modest slowdown in 2020 following several years of strong truck markets in Europe .
Moving to India. We are seeing the continued impact of the transition to the be ACICS emission standard along with continued liquidity constraints in the credit market.
Head of the April 1st 2020 deadline, when all new vehicles registered must comply and with that comply with the new regulations, we expect significant headwinds impacting the first half of our fiscal year compared to the prior year.
The impact of vs. Six should abate in the second half of our fiscal year as we passed the implementation deadline.
Overall for the full year, we believe the market will contract and be in the range of 330 to 350000 trucks down approximately 17% from last year.
Also while we have not included China, and our outlook slide I did want to break briefly discuss this market.
As I mentioned earlier, we have seen a significant economic slowdown in the region, which is impacting the off highway market, where we compete.
As a result, we expect their sales in China to be down approximately 35%, which is between 55 and $65 million from the previous fiscal year.
On Slide 13, I'll review, our financial outlook for fiscal year 2020.
Our forecast for sales is expected to be in the range of 3.7 to 3.8 billion.
We are projecting most of our markets to be lower in 2020.
The callout box to the right walks through this number from our 2019 actuals.
We expect lower global markets to reduce revenue between 625 million to 725 million.
We're also seeing continued headwinds from foreign exchange, which we estimate to be in the range of $50 million to $75 million.
Additionally, we anticipate terminating the way of go aftermarket distribution agreement in the second quarter of our fiscal year, resulting in an approximately 75 million dollar revenue headwind in the second half of the year.
Offsetting the impact of global markets and the Wepco distribution transaction will be a full year revenue from Axletech.
Moving back to the table on the left we forecast that our adjusted EBITDA margin will be in the range of 11% to 11.2%.
As you can see in the call out box, we expect our operating performance lower net steel prices and layer capacity costs to significantly offset declining markets.
Additionally, we expect an approximately 20 basis point impact from the termination of the Wabco aftermarket distribution agreement.
We're also planning to double our investment in electrification in 2020, given the significant opportunities. We are seeing in the market. This does result in a 30 basis point margin impact as compared to last year.
Overall, our downside conversion, even including the increase investments in electrification and termination of the distribution agreement is approximately 16%, which is well within our typical downside conversion rate of 15% to 20%.
Moving to adjusted diluted earnings per share, we expect 2020 to be in the range of $2 to 75 cents to $2.85, which does include the impact of our share repurchase plan that Jay will discuss coming up.
Additionally, we expect an adjusted effective tax rate of around 15% consistent with the I'm 2022 planning guidance. We previously provided.
Finally, we expect to generate $165 million to $175 million of free cash flow, an increase of $10 million to $20 million from last year.
This increase will be driven by the onetime funding of their my trust not repeating in 2020 and improvements in working capital due to market norm normalization.
Based on this we expect to achieve our I'm 2022 target of 75% free cash flow conversion in the first year of our new three year plan.
From a financial perspective, the bottom line is this we delivered and achieve the second consecutive three year strategy with them 2019, and even as global markets are softening, we expect to deliver solid results in 2020 continue our investments in electrification and aggressively deploy capital as we pivot I'm 2022.
Now I'll turn the call back over to Jay.
Thanks, Carl let's look at slide 14.
On the left side of the slide we highlight the competencies we've demonstrated during Mtwenty 19.
From strategic transactions product launches and new business awards to our exceptional operational management through the peak class eight cycle and global market upturn.
These competencies have positioned us well for EM 20 to 22.
We have shown that we up the ability to flex the organization up or down this needed to adjust for major fluctuations and production.
We have diversified outside of the class eight line haul market in North America by growing our business and adjacent markets.
We have improved our balance sheet and set in motion a capital allocation plan that is returning value directly to our shareholders. The transformation. We have undertaken since we launched 2016 has spent dramatic have will allow us to effectively manage even the most net.
It is economic environments profitably.
For example, our bottling indicates that even if could North America class eight market where declined to a level of 215000 units and Europe to 400000 units, we would expect to generate 3.5 billion in sales and maintain a 10.5%.
EBITDA margin.
We also would expect to generate $120 million of free cash flow and this type of environment, while maintaining our investments and increased productivity and new advanced product capabilities.
Therefore, we fully anticipate that our earnings and cash flow will ensure our ability to take advantage of future capital allocation opportunities that we have established under our 20 to 22 plan.
Let's go to slide 15, as Carl indicated our adjusted EBITDA margin guidance for fiscal year 2020 is in the range up 11% to 11.2%.
I am 20 to 22 target is 12.5%.
We have demonstrated our ability to improve adjusted EBITDA margin during each of the last two plants.
Through continued focus on material cost labor and burden a long list execution of synergies from the actual tech acquisition and additional new business wins, we expect to achieve the 12.5% adjusted EBITDA margin by 2022.
Let's take a minute sets us costs are 20 to 22 capital allocation strategy has shown on slide 16.
Our board of directors recently increased.
Our current 250 million dollar share repurchase authorization to $325 million, which we intend to fully utilize and 2020.
We have already repurchased $60 million of shares in October in addition to the $25 million executed in the fourth quarter 2019.
Were planning to repurchase another $240 million and the remainder of fiscal 2020.
The adjusted diluted EPS guidance that Carl reference for the year includes the impact of these anticipated free purchases.
Given our free cash flow expectations going forward. We also have an opportunity to utilize another $400 million for future repurchases in 2021 and 2022.
We strongly believe that we have a significant opportunity to aggressively to apply capital to take advantage of current market prices and our equity.
Therefore, we plan to continue and impact to accelerate our commitment to share repurchases. We will execute this plan through strategically timed open market purchases.
Were also committed to a strong credit profile and retaining flexibility to invest for the long term we.
We intend to whole leverage in a similar range through the three year period.
The company retains a significant liquidity buffer showed additional investment opportunities internal or external per cent themselves over the coming years.
Moving to the last slide we look forward to the future as we ramp up I'm 20 to 22.
And every area of the company, we are executing well to the tune as a talented dedication we have around the world I want to recognize our employees in every region of the world for their role <unk> Meritor has become each one of our 9000 employees. This responsible.
For our success.
We also have excellent relationships with our customers suppliers and investors.
Over the past month, our management team has worked with one of our largest long term shareholders Glenview capital.
Louis provided input on our capital allocation plans, which are fully aligned with our am 2022 strategy.
We appreciate the support feedback from them and all of our long term owners as we've tried performance for our customers opportunities for employees have value for shareholders now, let's take your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one key on you touched on telephone.
A question has been answered or you wish to move yourself from the Q press the pound key again, that's star one to ask a question.
One moment for questions.
And our first question comes from James Picariello with Keybanc capital markets. Your line is open.
Hey, good morning, guys.
James.
Just.
Digging in on a on commercial truck and near the expectations around you know decremental margins for the year.
This fourth quarter decremental Decrementals came in as promise solidly at 10%. It does sound like you know you plan to.
Almost double your your electrification spend so just wondering the cadence of the year and and maybe just the timing on the electrification spend if there's any lumpiness there.
Yeah, James its Carl Good morning, Yes, I think as it relates electrification I think as you look at the planned spending on that it's relatively ratable each quarter as we kind of go forward in 2020, and then in the commercial truck segment. If you look at kind of where the margin performance in some of the Tailwinds, we head into fourth quarter as it related to.
Lower steel costs.
As well as freight costs and they are capacity costs that will be offset by obviously just kind of the lower lower revenue volumes as well as we kind of go forward.
Got it and then.
Thinking about your other segment.
The Decrementals in this fourth quarter were pretty elevated.
Just wondering what might be one time related or or what do what's the favorable offset into next year related to the ex Tac synergy pull through and just your thoughts. So again on Decrementals for that segment as we think about next year, Yes, James If you look at the the performance and margin actually it's all.
Really attributable to actual tax. So if you were to strip out the actual type revenue margin performance would have been very similar on a year over year basis within the quarter. So as we said in the prepared remarks, we think axletech.
Right and the process of continue to execute on the various synergies that weve that we outlined previously and we fully expect as we kind of get out of the first quarter that that will be more in line with their expectations as we get into Q2 and beyond.
What was the actual check contribution revenue contribution in the quarter was right around $30 million.
All right. Thanks, guys.
James.
Thank you and our next question comes from Brian Johnson with Barclays. Your line is open.
Hi, This is Jason store Dreyer on for Brian going to that guidance quickly. If I you know if I look at the revenue guidance end markets are guided for a little more conservative potentially then.
Then third party estimates, which I think it's fine I guess I was looking at the any potential for revenue outperformance in 2020, and I know sort of a key tenants of the M. 22 plan.
Yes, some pretty significant at least 300 million or so of revenue outperformance driven by new wins, just wondering if we're seeing any of that and that global markets bucket.
Or if the cadence of that outperformance performance is maybe a little more.
Backend weighted.
Well I think thanks for the question Jason This Jay I'd pick up first of all we're seeing the full year benefit of actual type revenue, which candidly included in our demographic their targets, so you're seeing that benefit flow through.
I think the we are expecting some significant downturn surround the CLO.
And I know thats difficult.
Times for people analyzing us from outside the company because of how global we are.
We're also looking to hold the vast majority of our North American class eight penetration increase.
At or above seven out of 10 trucks now running our axles on the class eight market.
So we're continuing to see revenue outperformance, but the step downs and some of our markets, particularly in China off highway sum up our contractual return applications for declining steel prices and productivity.
Tamped down that a bit, but we're still continuing to bring on do business.
Thats, increasing penetration as well.
Okay. That's that's helpful.
Then just.
Secondly, as we think about steel costs next year, which I know was guided to be a tailwind and this sort of within that.
That first bucket, you mentioned offset by lower labor capacity costs steel costs I'm. Just wondering if you could help us if we assume the indices and the prices stay flat from here I was wondering if you could help us with maybe the cadence of.
The steel Tailwinds next year.
I know, it's a little complicated with any sort of escalation clauses and pass through clauses you have with customers. So I mean should we assume tailwinds there sort of.
Evenly spread throughout the quarters next year or is there any you know strange cadence, we should be aware of it I think on steel most of it will be in the first half as we as we expect.
Kind of the Tailwinds from that it's probably as Weve assessed it is probably high single digit millions of is what our expectations is for the tailwind in 2020 as you compare to 19.
Okay understood. Thanks, a lot.
Thank you again, if you would like to ask a question press Star one on you touched on telephone all my questions queue up.
And I'm showing no further questions at this time I'd like to turn the call back to Mr., Todd Shlomo for any closing remarks.
Great. Thank you. This concludes our fourth quarter call. Please reach out to me directly if you have any questions. Thank you very much for joining.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect everyone have a great day.
No.
Yes.