Q1 2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Q1 2020, Meritor Inc. earnings Conference call.

His time, all participants are gonna listen only mode.

We will conduct a question and answer session and instructions will follow at that time, saying one should require operator assistance. Please press Star then the zero key on your Touchtone telephone.

As a reminder, this call may be recorded.

I'd now like to introduce your host for todays conference Mr. torture, although senior director of Investor Relations you may begin.

Thank you Jamie good morning, everyone and welcome to Meritorious first quarter 2020 earnings call.

On the call today, we have Jay Craig CEO , and President Karli, Anderson, Senior Vice President and Chief Financial Officer, and Chris Spillover, Ryan Executive Vice President and Chief operating officer, all of whom will be available for questions. Following the call.

The slides accompanying today's call are available at Meritor Dot com, we'll refer to the slides in our discussion this morning.

The content up this conference call, which were recording is the property of Meritor Inc., it's protected by U.S. and international copyright law and May not be rebroadcast without the expressed written consent of meritor.

We consider your continued participation to new York consent to our recording.

Our discussion may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

Let me now refer you to slide to for a more complete disclosure of the risks that could affect our results.

To the extent, we refer to any non-GAAP measures in our call you'll find a reconciliation to GAAP in the slides on our website now I'll turn the call over to Jay.

Thanks, Todd good morning, everyone and thanks for joining us today.

Solid first quarter and a half a number of highlights we'd like to share with you today, let's look at slide three which provides an overview.

I'm, especially pleased that be continued to perform well despite production volumes being down year over year that most of our global end markets.

Adjusted EBITDA margin was 10.9% and we generated as a trusted diluted earnings per share of 64 cents.

As markets up weekend, we have taken steps to manage costs and maintain a downside conversion of 15%, which is at the lower end of our expected range of 15% to 20%.

We are effectively managing what we can control considering the cyclical nature of our business and the rapid declines in virtually all of our global end markets continuing our track record of operational excellence.

In the first several months of the fiscal year, we continue to execute our share repurchase program.

Finalized a meaningful new electrification agreement with Paccar.

Were added to the S&P 600, Smallcap index enhanced our technology and product portfolios and appointed Chris builder, Ryan Chief operating officer.

Sure you saw in the press release announcing Christmas appointment he is spend 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 an M 2016.

In an M 29 team.

Global operating responsibility for both of Meritorious business segments, what's the next appropriate steps for Chris and critical to leadership development for our team as we move forward.

Notably Meritorious 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 Awards, 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 has transitioned to chief operating officer.

We will be personally dedicating more time to electrification as we expand products development integrate trance power and grow our customer base.

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 four for capital allocation update on our last earnings call. It mid November we noted that we had repurchased $60 million. So shares as part of our plan 300 million dollar 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.

Actively completing two thirds of the 2020 program.

Late last fiscal year, we exercised our option to terminate the aftermarket distribution arrangement with propco.

We now expect to complete that transaction in this quarter with proceeds anticipated to be at a high end of the $225 million to $265 million range. We previously disclosed.

As a result, we accelerated 200 million dollar so pretty purchases in the first four months at this fiscal year.

As we have said, we believe that committing capital towards significant share repurchases as one of the primary ways, we intend to achieve our shareholder return objectives under 2022.

On slide five 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 ATM plans.

As part of them 2022, 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 brakes.

And our and our branch 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 trailer suspension in the industry.

Providing 23000 pound capacity for tankers, flatbeds and other demanding vocational applications.

Let's take a look at slide six first I am pleased to announce today that we were selected as paccar supplier of electric power trains 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 six blue Horizon electric power trains to Daimler trucks, North America for its E.M. true innovation fleet.

These are being manufactured in one of our facilities in North Carolina.

We continue to be they'll be a leader in electrification for the commercial vehicle that industry and our positioning the company for long term success by expanding our product portfolio and technology capabilities.

Last year, we announced in the in addition to the Fourteenx C., we will begin development of the medium duty 12 taxi and the Seventeenx see for heavy duty applications primarily in Europe .

And as you heard last week, we have acquired the remaining floating equity interest in trans power for $16 million expanding our offering to include full E. B integration capability that enables us to continue delivering complete battery electric systems.

Through our OEM customers.

As I have said the pace of investment in opportunities in this space. This accelerating more quickly than we originally for ourselves 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, Dollarss 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 and finalizing these opportunities we will be sure to update you.

Overall, I believe we have tremendous opportunities in front of us and Im very pleased with how we are positioned in electrification.

On slide seven I wanted to highlight our investments have built a new manufacturing facility in Brazil.

As we seeds of 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.

2022 that will help us achieve our margin objective.

As we mentioned last quarter, we are happy to be part of the E consortium with folks wagon 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 opportunities 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 it am 2022.

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

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 64 cents, reflecting our ability to manage the bid.

And this effectively across current end market conditions.

Additionally, we remain committed to our capital allocation strategy and in the first four months of the fiscal year, we have repurchased over 10% of outstanding shares.

This reflects our continued confidence in achieving in delivering on our end 2022 targets.

It's walk through the details by turning to slide eight where you'll 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 classic production in the first quarter compared to the same period last year production was down almost 17000 units or about 20%.

Additionally, in Europe production was down approximately 18000 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 onest.

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 has 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 overall material costs, including reduced layered.

Capacity costs.

You 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 were 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 Miramar, especially this liability which did not repeat.

Adjusted income from continuing operations was $52 million, resulting in 64 cents 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 used 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 nine which details our first quarter sales and adjusted EBITDA for our reporting segments.

And 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 immaterial 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.

And 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 actual tact 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 265000 285000 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 Onest may not fully compensate for the lower production levels. We are seeing now.

In Europe , we're lowering our production outlook by 5000 units, reflecting slightly lower truck demand.

And finally, we are revising our outlook for the Australian market to approximately 230 to 240000 units as we are now forecasting the trailer market to decrease more in line with class eight truck production.

On the next side, 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're also revised in 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 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 as we begin our end 2022 plan now we'll take your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound key.

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One moment for questions.

Our first question comes from Faheem Survey, how with Longbow Research. Your long line is now open.

Good morning, guys and thanks for taking my questions and Chris Congrats on the promotion Joe You mentioned, the 500 million dollar revenue opportunity.

The portfolio, but I was wondering what's baked into your guide this year and I guess, what the ramp look like over the next few years.

But as I mentioned in my comments to production on the Paccar Award Beacons next year. So we're ramping up our capabilities on the manufacturing side, particularly at trends power.

To deliver those vehicles beginning in 2021, and then we see them reach.

Call full production rate during 2022.

Okay and can you talk about the revenue content of these as systems on the Paccar trucks plus the other platforms. We expect to go live on versus you know your content on a diesel engine I just want to kind of get understanding what the profitability looks like on the we're not disclosing specifics on that right now, but the way you could think.

About.

Think about it as this is somewhere between prototype and low volume production. So that prices are quite a bit higher than we would expect when it reaches full production.

So even though the range. We gave US ahead last analyst day, five to 10 times the content when we got to full production mode.

This these particular of content levels are quite a bit higher than that because you're still somewhat at the prototype stage at these volumes, Okay and is there any white space left in the portfolio in the portfolio are there other services offerings at Meritor as maybe I bring that would increase the value proposition the customers at this point.

Absolutely I mean, it bedside mentioned in the comments really twofold, we're thrilled.

With our purchase of the remaining equity trance power.

We think that integration could build capabilities.

Significant growth opportunities for us.

In all different types of applications pre the medium duty refuse school bus as heavy duty.

So a lot of white space growth.

But just as importantly, I discussed the our intent to launch a 12, XC and Usseventeen ACSI electric capsule right now we're running with just the 14 vaccine.

Until those other two axle offerings will bring us into different markets segments.

Thanks, and I'll pass it on.

Thank you.

Thank you and our next question comes from James Pecoriello with Keybanc. Your line is now open.

Hey, good morning, guys running so just at a at a high level regarding the guidance I mean is the generalization here that we're seeing some additional weakening across.

You asked trailers Europe , India.

And you are still delivering mid teens decremental on just that.

That slate that modest weakening in the in the markets that you're seeing James It's Karl I think Thats 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 cannot come in relatively consistent with what we thought previously and it's really just the capabilities in ability for us too.