Q3 2021 Meritor Inc Earnings Call
Good day and thank you for standing by welcome to Meritor incorporated or third quarter 2021 earnings Conference call. Please be advised that today's conference is being recorded at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer.
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Thank you Carmen and good morning, everyone and welcome to Meritor, its third quarter fiscal year 2021 earnings call on the call today, we have Chris Bill of Orion, CEO, and President and Carl Anderson, Senior Vice President and Chief Financial Officer.
The slides accompanying today's call are available at Meritor dotcom will refer to the slides in our discussion this morning the cash.
Content of this conference call, which we're recording is the property of Meritor, Inc.
Is protected by U S and international copyright law and May not be rebroadcast without the express written consent of meritor.
We consider your continued participation to be your consent to our recording.
Our discussion may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995, let.
Let me now refer you to slide 2 for a more complete disclosure of the risks that could affect our results to.
To the extent, we refer to any non-GAAP measures in our call you'll find the reconciliation to GAAP in the slides on our website now I'll turn the call over to Chris Good morning, and thank you for joining the call today.
We had a very good quarter before we get into the results I want to recognize the dedication and commitment of our employees around the world and extend my appreciation to them.
The labor shortage in North America, as well as the global supply chain constrains have created a demanding environment, especially considering that revenue has increased over $500 million year over year on significantly higher volumes.
Despite these dynamics meritor safety quality and delivery have remained excellent and I'm very proud of the team. The strong performance has allowed us to gain market share in some of our major product lines in North America. Please.
Please turn to slide 3.
Revenue in our third fiscal quarter was just over $1 billion due to increased volumes in all global end markets.
Even with close to a $30 million of freight and steel headwind in the quarter, we converted at 20% adjusted EBITDA margin was 10, 5% and adjusted EPS was <unk> 62 cents on higher earnings.
Third quarter results are obviously, a difficult comparable on a year over year basis due to the COVID-19 impact in fiscal 2020, Carl will give you a sequential up that provides you a more relevant comparison overall.
Overall rapid cost increases in freight and steel have impacted our results throughout the year and a price correction does not seem imminent.
As a result, we're driving additional efficiencies in our operational performance and we're working with our customers to recover costs due to these high inflationary pressures.
We're also excited to announce important electrification programs and a strategic investment, which diversify our mix of vehicle class configuration, and energy source and demonstrate the flexibility of the products we provide.
We now have more than 1 million miles long down 180 battery electric vehicles.
These real world miles are validating our products in the marketplace and creating opportunities like the ones we will highlight today.
Go to slide for.
Given the strong truck market outlook, and our confidence in generating significant free cash flow, we opportunistically began to repurchase shares again fiscal.
Fiscal year to date, we repurchased a total of $59 million or nearly $2.5 million shares. This completes a prior authorization that we announced in 2019.
With that program complete Meritor its board of directors has authorized a new $250 million program.
As in the past, we will allocate capital to repurchase shares while maintaining sufficient liquidity and a strong double b credit metric.
This plan for capital allocation is consistent with our commitment to deploy cash to drive shareholder value.
Let's discuss electrification on slide 5 in the first quarter of this year, we announced we would supply meritorious electric powertrain to autocar for its refuse vehicle and to Bolton trucks for the voltage zero designed for inner city medium duty applications.
We also added line electric as a customer for our heavy duty tandem electric powertrains.
These wins demonstrate the adaptability web design into our electric powertrain portfolio.
Today, we're excited to announce a 5 year agreement with highly on Meritor will provide electric sub systems for its high for truck racks.
Hi, Leon's powertrain system will feature more towards 14, XC integrated drive axles as the standard position propulsion on its vehicle upsets that use natural gas net.
Next we're working with Hino Motors, who will be evaluating merit towards E powertrain for its development path to zero emission vehicles.
Meritor has been a long term key supplier to hino in our traditional business, where we provide a 100% of the axles for their medium duty business in North America.
In addition, we announced an equity investment in C Electric a global leader in commercial electric vehicles for urban delivery and logistics see electric partners with commercial vehicle Oems dealers operators and update ours to deliver a range of zero emission trucks with remote mountain <unk>.
<unk> for the medium duty commercial vehicle market.
We'll be working together on electric powered chassis opportunities for the Indian and North American markets in the near term.
This collaboration provides yet another path to apply our expertise and grow in the medium duty market.
On slide 6 we are highlighting the strategic relationships, we have established that provide paths to market across multiple medium and heavy duty segments. As you know adoption rates for electric vehicles are expected to occur in different time frames over the next decade.
We're actively engaging in medium duty electrification programs with our current limited market share. We see this as a significant opportunity to grow where they are with traditional axles or R. E. Powertrain, we're focused on expanding growth opportunities in electrification and remember.
Meritor breaks are an integral part of every E powertrain Carl.
Carl will now provide you more detail on the financial results and then we will take your questions.
Thanks, Chris and good morning.
On today's call I will review, our third quarter financial results and provide an update to our fiscal year 'twenty 'twenty..1 outlook overall, we delivered solid financial performance with an adjusted EBITDA margin of 10, 5% adjust.
Adjusted earnings per share of 62 cents, and we generated $18 million for free cash flow.
Now, let's review our financial results starting on slide 7.
As you will recall during the same period last year, our production was significantly impacted by the pandemic.
As a result, I will provide a more meaningful comparison, we are also presenting our quarterly sequential look in addition to our traditional year over year view.
Sales were up $502 million from last year due to strong global demand adjusted EBITDA was $107 million, which translated to a 20% earnings conversion on the higher revenue.
In total revenue for the company came in at just over $1 billion. This is an increase of $33 million from the second quarter of this year.
Global truck production remained strong in most of our markets, but the industry did experience intermittent production impacts due to constrained supply chain throughout the quarter.
GAAP net income was $42 million compared to $63 million last quarter keep in mind in our prior quarter, we recognized $15 million of value added tax credits net of tax in our wholly owned Brazilian subsidiary.
Our adjusted EBITDA margin was 10, 5% compared to 11, 3% last quarter.
The decrease in sequential adjusted EBITDA margin was primarily due to higher steel costs of approximately $14 million, which more than offset conversion on higher sales.
Adjusted diluted earnings per share was <unk> 62 cents down slightly from 68 since last quarter.
And free cash flow for the quarter was $18 million compared to $47 million in the second quarter of 2021.
The decrease was primarily due to higher inventory investments as we are preparing for another step up in production next year.
Additionally, we use cash on the balance sheet to complete the redemption of the remaining $175 million of 6 and a quarter notes due in 2024.
The completion of this debt repurchase returned our gross debt balances to near pre COVID-19 levels.
As a result, and May standards, and Poor's confirmed our double b credit rating and upgraded their outlook to stable.
With our balance sheet solidly intact, we were able to opportunistically repurchase shares to take advantage of the low trading multiple and our share price.
We also expect to continue aggressively repurchasing shares throughout 2022 with the new authorization.
Now, let's look at our segment results on slide 8.
Commercial truck sales increased almost 140% or $464 million compared to the same quarter in the prior year.
Segment, adjusted EBITDA was $69 million up $92 million from the same period last year.
Segment, adjusted EBITDA was 8.6% compared to negative 6.8% a year ago.
The increase in both adjusted EBITDA and margin was driven primarily by the conversion on higher revenue, partially offset by higher freight steel and electrification costs overall earnings conversion on the incremental revenue in commercial truck was approximately 20%.
Sales for the third fiscal quarter and commercial truck, we're $800 million, an increase of $23 million on a sequential basis.
Segment adjusted EBITDA for commercial truck was $69 million down slightly compared to the second quarter.
The decrease was primarily due to a higher steel and freight costs, which more than offset conversion on increased sales.
Aftermarket industrial sales for 258 million up 27% compared to the third quarter of last year the.
The increase in sales was primarily due to higher volumes across the segment.
Segment adjusted EBITDA was 36 million this quarter up 5 million from the same period last year.
The increase in segment adjusted EBITDA was driven by higher sales volumes, partially offset by higher freight costs.
Compared to the second quarter of this year aftermarket industrial sales were up $11 million and segment adjusted EBITDA was 14% up 20 basis points from the second quarter of 2021.
Now, let's review our global production outlook on slide 9.
Given the strong demand, we see across our global markets, we are raising our production guidance.
In North America, we now expect class 8 production to be approximately 285000 units near the upper end of our previous range of 270 to 290000 units.
Orders have been in line with our expectations as build slots are full for the remainder of 2021 and 'twenty 'twenty 2 order books are not fully open.
In Europe, we are raising our production outlook to approximately 415000 units an increase of 35 to 55000 units from our prior view.
We had expected European production to sequentially stepped out in the third quarter.
However production came in stronger at 101000 units, which was closer to what we experienced in the second quarter. As a result, this consistent production level is providing us confidence to increase our full year estimates.
In Brazil strong demand continues and we now expect production of approximately 145000 units, which would be the highest truck production in this region since 2014.
Now, let's turn to slide 10 for an update on our operating environment.
We continue to see higher manufacturing costs for steel freight and labor.
While earlier in the year, we would expect to both steel and freight cost to stabilize and our fourth quarter. This is no longer the case as prices have continued to rise.
Steel is our largest commodity cost and market indices for both hot roll and scrap at both more than doubled since the beginning of our fiscal year.
Freight costs also increased significantly in our third fiscal quarter with a cost of ocean containers up about 175% since October.
While we have contractual mechanisms in place to recover the majority of the increases in steel costs. They are on a 3 to 6 month lag.
As a result, we are taking additional steps to mitigate these costs for.
First we will continue to drive operational performance throughout the business. Our teams have done a good job in driving material performance and we expect this to continue into next year.
Second we are extremely focused on controlling SG&A expense throughout the organization.
And third we are in discussions with customers to recover the increased cost of freight and labor and accelerate the timing of our contractual still recovery mechanisms given the unprecedented run up in steel costs.
Let's turn to slide 11 for an update to our fiscal year 2021outlook.
With the increases in our production guidance, we are raising our full year forecasted sales to be approximately $3.9 billion, an increase of $100 million to $250 million from our prior outlook.
We also now expect our adjusted EBITDA margin to be approximately 10, 7% in line with our previous guidance.
Moving to adjusted diluted earnings per share our outlook for 2021 is now approximately $2.45 a.
A 10% increase from the midpoint of our prior range and finally, we now expect our free cash flow to be approximately $115 million consistent with our previous expectations.
Overall the team continues to navigate the short term challenges posed by the strong global markets and remain focused on executing on our 2022 goals.
As we announced last quarter, our Investor day will be in early December when we will present our M..2025 plan now we will take your questions.
Yeah.
Okay.
And thank you and as a reminder to ask a question simply press star 1 on your telephone to withdraw that question press the pound or husky.
And we have a question from the line of Joseph Spak with RBC capitals.
Good morning.
Hum.
Couple of questions.
I just wanted to.
To start with.
A bunch of the easy updates I think prior you said.
You know he starts about $400 million of a 5 target I know your business. It seems like there's more here today. So I was wondering if you could update us on that progress.
And then maybe even zooming out.
You know the new business wins.
The other original from 'twenty 2.
Plan, like where where are we tracking overall.
Good morning, Joe So I'll take that 1 so yes, we set a target of about 500 million dollar pipeline for E V wins.
And I'm happy to say, we're almost there. So these wins that we announced today gets us.
Very close to that target, we believe by the time, we hit let's call. It our analyst day that Carl mentioned by December we should have that closed out and we should.
Probably give you a perspective on what our next plan is.
Specific to where we are on the programs as you can see we announced for wins last time, we're announcing.
A couple of best time, so our pipeline is growing and it's all going through testing and so it depends on the validation timing with our customers and where that growth is going to drive through 2022, but all optimistic as we stand today.
Okay.
Maybe 1 more on concept for the system.
Okay, I'll get back in queue, but.
The electric cars.
Does that come with any commitments to us.
For a product that was split unclear that really sort of indicated.
Avenue.
So and then I guess there.
They're more from Gustavo.
Judy.
Yeah.
Perspective at least from from from being the ratio was able to garner it seems.
Maybe somewhat similar to what you got from cramps power. So I'm curious if you could sort of maybe talk about the differences there and if there is something different than like.
Why.
Powers for to focus on larger trucks for why it was that sort of caught scalable.
To be sure excellent question I'd love to answer it. So let me start with the first question, which was on fee electric and what's our commitments our commitments are to work together to essentially.
First of all you know.
The medium duty.
The immediate paths to market seems to be with the remote Mount and so what our initial pad this to work with them together to essentially work with our traditional axles now a traditional axle works differently under our electric environment, you've got to think about the fact of coast loading is different and when you think about region breaks.
Inc.
So with that in mind.
Have to come up with a product that's specific for the market and so we're going to work together on that as well as use that use that are using our existing 14 acts.
<unk> product, so long starting off it's to use our traditional products and.
What we are going to work on is to develop products together to make it work and then longer term transition to R.
Our electric E powertrain, because it provides them an opportunity to put more batteries as well as to drive more efficiency in cost now to the second question about what what's the difference between sea and transpired. That's a great question. So the best part about fee as they started out in the.
<unk>. This is a company that started in Australia, they had strong relationships in Australia and in group.
In the East and then moved into Malaysia.
Oh, I'm, sorry into North America, and so we see this as a great opportunity to pull them into India.
Because they're already in the region and also the difference between the 2 companies transpire was very focused on the heavy side and see gets us far more into the medium duty space. So we see that as an excellent opportunity and if you think about both companies they have about over 200 vehicles with them.
Million miles, we have about the same just under with a million miles.
Experience. So you bring the 2 companies together and you have enormous experience in Latvia.
In field experience as we drive this transition it also helps us cover more regions in the world.
If I could just quickly follow up I totally got the geographic and customer.
Diversity play, but Todd.
Exactly.
There's something that prevented ends.
Power from scaling down to other classes of vehicles like that that's what I was unclear to me from a from a technical perspective.
Transpire is let's call it more focused on class 8 and there is the size and scale difference. When you go into classified plastic. So yes. There is a difference okay. Thank you.
Welcome.
Yes.
Thank you and our next question comes from Brian Johnson with Barclays.
Yeah John.
Just want to follow up on that line of questioning.
Kind of when you and then I wanted to just ask about some of the basics of the business.
When you look at your electrified portfolio versus.
Obviously that the Toledo based rival.
Where would you say that you are particularly strong and then where would you say you still have some development work that will probably get an update on in December.
Good question, Brian So when we think I think it may be.
Akin to our announcements today. So if you kind of look at it we're very strong in the heavy side and if you think about it.
And we're also further I had in my perspective on the electric powertrain.
And we're launching our E axle first to market later this year right. So as we think about the fall we'll have our 14 X E in production and ready to go to customers. So I think that's as we.
We think about why our customers picking us on this side, it's primarily the availability of product the speed to market the way to an efficiency difference so by integrating an E powertrain youre saving somewhere between 400 to 800 pounds, you're you're creating the space. So those are the advantages and that's.
I think what is giving us the benefit obviously, where we have development. Ah is is as we think about this growth market that we have been pulled into which is a great opportunity is developing the <unk> sorry. The 12 back fee and then also focusing on the 17 X C, which we launched last quarter.
Okay. Thank you and then on the cost side.
Are there anything we should think about in terms of contractual or extra correct contractual.
Recoveries, just feeds will be the timing of your fiscal year versus.
Most of your customers you know oftentimes customers will true up in calendar fourth quarter, which of course would go into your fiscal first quarter.
That's a good question and I think as you know most of our some of our larger agreements are 3 to 6 months is what we have said I'll start this and maybe I'll hand, it over to Carl but the inflation and cost challenges that are that we're facing is no different as any as you know is being faced by everyone custom.
<unk> been suppliers alike, I believe it's well documented we're hearing it on all of the earnings call.
And this is being pushed into into.
Into the into the marketplace that said, we have already started having conversations with our customers. These conversations are usually never easy, but it is about our partnership and as I said in my prepared remarks. The 1 good thing is that.
There are many good things that the fact that we are responding and delivering through this.
Very well through this time of uncertainty and that partnership requires us to be healthy and so these conversations will progress and I believe that'll be a positive outcome and I'll turn it over to Carl.
Yes, I think Brian.
Brian just 1 other thing to add on that I think it just speaks to you know meritor is ability really just to execute during this time period. If we think about them you know our delivery.
And quality and what we've been able to do over the last.
Over the last years, but obviously over the last several quarters that has also resonated with our with our big customers. During this time period.
Okay. Thank you.
Well from King.
You bet, Inc.
And our next question comes from Sherif <unk> with Bank of America.
Hi, Good morning, guys. Good morning, good morning sure.
So to start off I, just wanted to ask a bit on the EV side as well with with highly on if I'm not mistaken they were using a day and a product for their original hybrids.
What's sort of driving the winner for you there on that new agreement and is that an exclusive agreement for the 5 years.
So we have a standard position with them for 5 years and what's driving that is is that I think is my belief that first were first to market. We have an E powertrain that that essentially fits with their product.
And again it is the fact that we are creating the space.
Moving away from a remote mount and creating the opportunity for them to put.
A different use more space for their fuel source. So I think that's the first thing.
Availability and first to market and that is also the fact that that comes with it the innovation and the capability that would have driven that we are essentially tested this for hundreds of thousands of miles to get here to put it into production.
With that in mind I think there is other opportunities. It's also akin to our space.
Our highly on as it is in the class 8 space other trucks. The hypo Truckee Rx is more aligned to what we're doing so I think it's the alignment with the customers in our space as well as the efficiency and the weight savings that I talked about earlier.
Thank you and then just on the.
For the semi shortage, we've seen a lot of the Oems have a significant buildup of red tagged or incomplete vehicles as they wait for certain parts or components are you seeing any pull forward from that for your products.
Well I think.
The semiconductor shortage has been pretty well documented I would say.
<unk> experienced that obviously you've heard from all of the.
Customers in the last 2 quarters and I do see that extending through the next 2 quarters and.
Obviously in our existing products when do you think about a traditional axle. There is no. There is no chips or no semiconductors and so as we think through this we do see disruptions on our customer side, but an axle is something that we have provided and what theyre doing is still building their truck out and.
And in some cases off lining them until they get the chips, but it hasn't driven a significant impact in that sense.
Understood and if you could just give us 1 last comment on that sure if as I do believe capacity on.
As we have heard on chips will come back in the back end of the year starting to 2022, so it'll help us all grow into the into the new year.
And then would you be able to give us a bit more color on your expectation for the industrial markets.
Yeah, Yeah. So I think that's what we're seeing there Sri for us the industrial markets for US continue to show pretty significant increases in what we've been seeing.
Think that whether it was through our actual tech acquisition, plus what we're seeing in kind of our traditional specialty business. I mean, both of those have been performing quite well this year and expectations are that we'll continue as we go for it.
Thank you I'll get back in queue. Thank you.
Thank you and I'm, sorry, Minder to ask a question simply press star 1 on your telephone.
We have a question from the line of Bruce Chan with Stifel.
Hey, Good morning, Gents morning result, here and thank you very much for taking the question.
Carl I may have missed it but you gave some good color around some of the cost headwinds, especially on the steel side and the freight side, but.
But in the release you also talked about electrification costs being higher I'm wondering if you can give us a little bit more color as to what that means are these related to the new product wins or something else that we should think about.
Thanks, Bruce Yeah, I think as we look at electrification, we do see it continuing to increase a little bit for the rest of this year. So originally we were.
Planning to be around $35 million to $40 million of expense this year and I think as we see it today, we're probably going to be running closer to about $45 million. So incrementally we'll be up so, especially as we think about our fourth fiscal quarter.
Do you expect a little bit of a headwind from that as we think about what we're going to end up and all of that does relate to all of the whether it's our new business wins and various investments that we're making in that business is to position the company for the next several years. So it's all connected.
Okay. So we should think about the sort of for the high class problem as opposed to maybe some other steel issues in the freight issues.
Agree with that yes, okay terrific and then sort of related question here, but you know when you think about.
These new agreements and new partnerships that you're citing.
What sort of investments do these require so when you think about these electrification costs.
Is this mostly to.
<unk> staff, what kind of goes in to.
The process and then how do we think about risks of maybe some of these contracts not materializing or getting pushed out and what that means for your business well a lot of what we've seen to date is <unk>.
Developing our 14 X E powertrain and as Chris talked earlier on the call that will be in production later this year so that expense.
And development work will begin to trend downward at the same time as we look at opportunities whether in medium duty or in Europe that will have a different actual configuration and so those if you would expense and development work against begins to increase I think specifically as it relates to production.
And various investments obviously that will be.
Be part and parcel to what what the market does and when the volumes really begin to kind of increase to more material from a size perspective.
And maybe I'll pick up there a bit Bruce if you think about our product.
Consistently message about 3 of them, so theres, a modularity to it or a flexibility we talk about a 12 X for the medium duty 14 acts and 17 acts and so if you think about the <unk> Z that.
Most of the announcements that we have today.
What we're talking about is a singular platform. So its product development for all that we're driving and then our strategy is to is to provide that to the market and just some software changes as we think through how we have to integrate to the power source, which is different for <unk>.
Hey.
Okay. That's terrific color and then 1 last follow up here Chris.
Give us some really good color around the semi shortage and when do you expect that to sort of normalize.
You also talked about in your opening remarks that you don't see a price correction in transport and freight costs.
It was imminent.
You have a timeline or an expectation as to when that starts to resolve and all are asking for you to look in your crystal ball a little bit here.
I don't I think that's a double edged sword.
It's in a sense, it's a good thing it's great that our.
Our our fleets and are are very healthy. So when you think about local transport I don't see that as a Chris.
Crystal ball call that.
Don't know how thats going to.
Work out.
Just a question of.
As we have seen cyclicality in different face different challenges. It's just a different challenge that we have to figure out how we're going to work through and it certainly worked out really well as I think about.
The last quarter and the strength, it's really a testament to the team and their ability to really work through that.
Okay fair enough. Thanks, a lot thank.
Thank you Bruce.
Thank you and this concludes our Q&A session for today I will turn it back to touch a little for his final remarks.
Thank you for joining our call today, if you have any questions. Please feel free to reach out to me directly thanks, again and have a great day.
And with that we thank you for your participation in today's program and you may now disconnect.
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