Q1 2022 Meritor Inc Earnings Call
Yeah.
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience. Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good day and thank you for standing by welcome to the Q1 2020 to Meritor, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, Tom Carrillo Senior director of Investor Relations. Please go ahead.
Thank you Gigi good morning, everyone and welcome to Meritorious first quarter 2022 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.
Slides accompanying today's call are available at Meritor Dot com will refer to the slides in our discussion this morning.
The content of this conference call, which we're recording is the property of Meritor, Inc.
It's 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 $19 95.
We refer you to slide two 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 the reconciliation to GAAP in the slides on our website now I'll turn the call over to Chris Good morning Collyn.
Collyn I look forward to walking you through an excellent first quarter.
Before I begin I want to thank the exceptional <unk> team for their hard work and dedication to our customers.
Now, let's turn to slide three overall, we're pleased with our financial performance and are off to a good start for the year.
We demonstrated our ability to manage the business well to a challenging set of factors on higher sales driven by stronger demand in most of our end global markets. Adjusted EBITDA margin in the quarter was 11, 5% and adjusted earnings per share was <unk> 80, an increase of more than.
35% year over year.
We're working closely with our customers and suppliers to offset historically high freight and material costs, while managing supply chain constrained and a prolonged labor shortage.
We're navigating these headwinds and are confident in our full year outlook that we are reaffirming today.
In December we introduced aggressive F 2025 targets that include growing $500 million in revenue above market with one half coming from electrification and expanding margins to 13%, while generating $600 million in free cash flow.
And 2025 represents <unk> fourth and plan our execution of these plans have transformed the company since the introduction of <unk> 2016, we have increased adjusted earnings per share by more than $2 through fiscal 2021 and expect to further increase EPS.
By almost an additional dollar this fiscal year. We have also expanded adjusted EBITDA margin by 350 basis points.
We had a very successful first quarter in terms of finalizing new business awards, some of which we announced at Investor Day, Let me briefly recap the significance of these.
We have an exclusive agreement with Thomas built buses format towards electric powertrain with SLP plan for 2024.
With the electric school bus market expected to be one of the fastest adopting segments in large part due to the infrastructure Bill. This agreement represents a meaningful near term opportunity to accelerate our electrification journey and expand our long term relationship with Daimler trucks North America.
We extended our multi year agreement with <unk> to supply electric powertrains and fully electric solutions for Kenworth, and peterbilt tractors and refuse trucks and we added three new prototype collaboration in the quarter with two different customers to hydrogen fuel cell applications.
For hexagon and a road sweeper platform for electro this makes the fifth quarter in a row that we have announced new lateral vacation wins.
In our core business, we are excited to significantly increase our on highway presence in China.
With this five year agreement, we will supply Daimler with rear axles for the Amtrust. We also have a new business win with one of our largest trailer customers.
This is our first five year agreement with Wombat and is valued at more than $150 million.
You can see on slide four that meritor is differentiating itself in the industry. We believe our growing number of electrification awards.
True measure of the value our customers place on our integration capabilities and electric powertrain.
In fact, our electrification revenue forecast for fiscal 2022 has increased by more than 30% since December .
Slide five brings into focus all our electrification programs announced to date.
Want to make three important points with this slide.
First half of our production programs are in the medium duty with accelerated adoption rate expected in this segment, we anticipate that volumes on these programs will grow faster than on the heavy side, which is all growth for us.
Second we're either exclusive or standard position on all of these programs and finally, we have eight production contracts three with large Oems and the remainder with promising startups, we look forward to helping more customers drive to a cleaner world.
On slide six I want to emphasize the importance of the work we're doing at our innovation complex in Escondido, California.
With the technical expertise inherent in this operation we can offer complete turnkey vehicle electric vehicle solutions.
In addition to the electric powertrain Metro can provide the picasa or power controls and accessory sub system.
Our acquisition of Transpire gave us a wealth of experience in vehicle controls that we have strengthened since taking ownership in 2020, we're proud to be production ready for our electric powertrain and the full electric system.
We're confident in our capabilities and in the important role <unk> will play as commercial vehicles transform over the next decade.
This is an incredibly exciting time for US now I will turn it over to Carl.
Thanks, Chris and good morning.
On today's call I'll review, our first quarter financial results and outlook for fiscal year 2022.
Overall, we delivered excellent financial performance to begin the final year.
<unk> 2022 plan.
Adjusted EBIT margin was 11, 5% and adjusted earnings per share was <unk> 80.
Now, let's review the details of our financial results on slide seven.
Overall revenue came in at $984 million up 11% from the prior year.
The increase was driven by higher truck production in most markets as orders remain elevated around the globe.
Net income from continuing operations was $54 million compared to $32 million last year.
Higher net income was driven by increased sales volumes and lower interest expense, partially offset by net steel costs.
We also benefited from a $6 million settlement with an insurance carrier related to our specify ability this quarter.
On a comparative basis, you will recall last year, we recognized a 6 million one time gain from our joint venture in Brazil relating to a value added tax credits.
Adjusted EBITDA was $113 million, an increase of $11 million from last year.
The growth in adjusted EBITDA was driven primarily by higher sales volumes, partially offset by net steel costs.
Adjusted diluted earnings per share was <unk> 80 up 'twenty, one from last year, and finally free cash flow for the quarter was a use of $39 million compared to $34 million of cash generated last year.
The decrease was in line with our expectations as we built higher inventory levels to support an anticipated strong production environment throughout the year. Additionally.
Additionally, incentive compensation payments were higher this year.
Now I will discuss our segment results for the first quarter compared to the same period last year.
Sales in commercial truck were $785 million.
Up nearly 14% year over year.
The increase was driven by higher truck production in most global markets.
Segment adjusted EBITDA for commercial truck was $69 million up $6 million from last year.
Segment adjusted EBIT margin was eight 8% a slight decrease of 30 basis points from a year ago.
Higher sales, partially offset by net steel costs drove an increase to adjusted EBITDA.
However, adjusted EBITDA margin was lower as net steel costs impacted sales conversion.
Aftermarket industrial sales were $241 million in the first quarter of fiscal year 2022, an increase of $7 million compared to the prior year.
Pricing actions executed over the last year in this segment was the primary driver of the improvement in revenue.
Segment, adjusted EBITDA increased 3 million to $38 million and EBITDA margin was up 80 basis points to 15, 8%.
The expansion in segment adjusted EBIT margin was driven primarily from the footprint optimization initiatives implemented after the first quarter last year.
Now, let's review our global production outlook on slide eight.
As we saw last quarter demand remains strong across our markets.
In the North American class eight market and the backlog is estimated at approximately 260000 trucks, representing nearly a full year of industry production.
While we are closely monitoring constraints in the global supply chain, we are beginning to see some signs of stabilization.
We are expecting supply chain to continue to improve as we progress throughout the year.
As a result, we have not seen a significant change from our November view. Therefore, we are maintaining our global production forecast for all markets.
Let's turn to slide nine for an update to our fiscal year 2022 outlook.
Based on first quarter results and our expectations for the rest of the year, we are reaffirming our fiscal year 2022 guidance across all of our metrics.
We expect revenue to be a range of $4 one to $4 3 billion based on our unchanged global market assumptions.
Additionally, our expectations for adjusted EBIT margin remains between 11 five to 12, 5%.
We continue to plan for pricing actions to help mitigate steel freight and labor cost pressures. We expect these recoveries to be more fully realized as we progressed through the year.
Adjusted diluted earnings per share from continuing operations remain in a range of $3 25 to $3 75.
And finally, our free cash flow guidance is also unchanged with a projected range of $175 million to $200 million.
Our first quarter results provide a great foundation for a successful final year of 2022.
We remain focused on executing this plan, while simultaneously gearing up for 2025.
As we approach the start of this new plan, we are forging a path with the coming electrification of the commercial vehicle industry.
The road ahead is blue.
Now we will take your questions.
As a reminder, task a question you will need to press star one on your telephone.
With your question press the pound key.
And by while we compile the Q&A roster.
Our first question comes from the line of <unk> <unk> from Bank of America. Your line is now open.
Hi, Good morning, guys. Good morning, good morning Sherri.
So first off congratulations great quarter.
On the commercial truck margins, the first quarter saw some headwinds from steel.
Looking at similar Incrementals would suggest steel is around the $10 million to $11 million headwind to EBITDA is that correct.
And then how would you see the cadence of those headwinds playing out quarter to quarter throughout the year.
Yeah. Thanks, <unk>, yes for the entire quarter steel was actually about a $24 million net headwind for us.
The vast majority of that close to $20 million really affecting the commercial truck segment.
As we look forward, we think steel will continue to be.
A headwind for the rest of this year, but the next big step in that probably will be in the second quarter and then as we look forward for the second half we do believe based off the trend line, we are seeing in steel prices that.
We'll start seeing the impact really started to decline as we get into the second half.
Makes sense and then last quarter you mentioned it was a very difficult quarter with the sporadic shutdowns from semis and limited visibility and you expected that to normalize in the first quarter. So have you seen sort of a normalization of those lingering shortages and do you have better visibility based on Oems.
Letting their line rates.
Yes, sure if I'll take that one for sure I mean based on I think where we're seeing demand the supply chain has improved from Q4 to Q1.
To your point, it's not resolved and I would say certainly as we see from Q1 to Q2, we do see more stabilization.
It's probably too early to declare a victory and you do see over time this continuing to improve but at this point, we certainly do see an improvement both from a supply chain standpoint, and let's call. It more from our customers customers getting far more comfortable with their ability to get chips or understand there.
Supply and also forecast better as you can also see with Patkars announcements and taking the number of offline trucks. They are obviously starting to get more chips and the systems. So we do see that improving but again, probably too early to declare a victory.
Understood.
Just one final one with the Palkar partnership expansion announced last evening.
How long is that multi I know, it's a multiyear are you disclosing how long that relationship left and then with regards to the integration and software aspect of that relationship how sticky do you see that being longer term as EV adoption.
Expands and the partnership evolves well Sri Thanks, Greg.
Great question so.
I'd love to talk to so.
Terms of the relationship that we announced its through 2025, but just to put it in perspective across the.
B the two platforms on the day cab and the waste trucks.
Leasing fixed platforms and to just put it in perspective, that's about somewhere between 1500 to 1800 components across the power electronics, So the Picasso.
Battery management system as well as the powertrain so in total.
Between the two teams we brought 10000 parts to production in a period of 18 to 24 months.
<unk> saw how com.
Complex that.
That process was obviously was an integral part of working with us and that integration tie software between obviously the P cast the battery system that powertrain, but also their truck and all the validation that has gone through that and we've put this into production in December so certainly they've seen the value.
<unk>.
That we've brought to the marketplace and.
With them and provided us an extension and it's truly a validation of the value that the <unk> proposition. So we're very proud of it.
Thanks, I'll pass it alone.
Great.
As a reminder to ask a question you will need to press star one on your telephone withdraw your question press the pound key.
Our next question comes from the line of Joe Spak from RBC capital markets. Your line is now.
Thanks.
I guess.
My first question is.
It's really sort of bigger picture here, if we go back to your.
Capital markets say definitely made a.
A point of talking about additional.
System design.
On electrification, including including more more software features and I. Thank you again highlighted that today on the on the full design system and the whole system design slide.
I guess, what Im curious about is.
How much youre going to need to spend to hire the right people and how.
And your ability to attract those those if those individuals because.
Clearly.
There is.
I think there is a limited set of people with the skill set and you are competing against in some cases your customers in some cases are there other end markets like electrification et cetera, and in some cases just for maybe even in other industries. So maybe you can just talk a little bit about that and sort of how you see.
The cost related to that over the coming years and also your ability to get the right people you need to execute on that plan.
Well I think probably a good perspective to start on this Joe is probably off our slide five and if you. If you look at the fact that we have eight production contracts half of them coming from the medium duty space and half of them coming from the heavy space. It probably is.
A good starting point.
Customers certainly believe that we have the right building blocks in place. So then going to that slide that.
The following slide on slide six that walks through what did we do across both those spaces. So let me take a minute and walk you through on the full system. So on the <unk> system as we did in the capital market space, we talked.
Meeting, we talked to across the three segments that we are approaching this so when we think about heavy which is core to meritor, we invested in transpire, we acquired it and we used it as the building block to not only give us the access to test our product, but also work with customers such as Pac car to draw.
Try that system and bring it to production and for us to have been able to done that to do that.
Are folks that we have already put in place in escondido as well as in Detroit seems to have certainly supported that and it's certainly working for us.
So on that side of the belief that we have the right building blocks approach that on the transit space and the medium duty space. If you noticed we made announcements with <unk> to help us on the transit space and we made announcements with <unk> electric to help us with the full system as we and as we focused more on the power.
<unk>. So that's how we focused on how we want to approach the full system capability as well as working with our customers some of which obviously have that system and on the E. Powertrain, we certainly believe.
Again that we have the right building blocks more because of the wins across all of them with announced 14 wins on this side on our motors and Inverters, we work with Danfoss.
We believe as a strong partner, who obviously has scaled on motors and then we're putting inverter capability internally as well as working with external parties and again as we as this evolves. We will continue to look at M&A, but at this point.
Based on the validation that we're getting from the customers. We believe we have the right building blocks.
Okay.
But I guess just.
Maybe in building those building blocks already in retaining some of those some of the talent for those building blocks like.
Is that proving to be.
Costly or how do you think about that sort of on a go forward basis, because especially starting to try to get more into some of the software it seems like.
Yeah.
There could be sort of an incremental cost to your to your to your business and I'm not saying there is not a return on that but it seems like the cost is coming before the return and maybe I'll split that up into parts. Joe I'll answer the question on in terms of finding the talent and retaining the talent and maybe Carl can pick up what's the cost of it but in terms of certainly.
Finding the talent and returning the talent part of it is being in Detroit, We certainly have been successful in finding that talent.
Our approach with how we acquired transpires certainly gave us a baseline of folks and so we were able to build off that so to this point, we don't seem to have struggled with finding people. In fact, we continue to add and grow in this area and talking to my CTO, you certainly doesn't seem to be having a struggle just this.
Yet, but in terms of cost, yes, Joe as I mentioned in the strategy day, if I look forward from a from our from an R&D perspective, we are looking at increasing that quite substantially probably close to 30% from what our current run rate has been.
But I think the other.
Planning assumptions in how we're running the companies. We also are looking at pivoting some of our expense and cost we are that we support the traditional business.
Into what we're doing on electrification. So I think it's all embedded in our planning assumptions as we look to drive 2025.
Youre, absolutely right Youll see that cost increase.
As it relates to all the efforts we're doing there, but we're also doing a lot where we will be reducing some of the costs on our traditional products as well.
Okay. Thanks, and then just more.
Near term I guess.
Can you sort of update us on.
Steel costs and recoveries for the balance of the area. We've obviously seen at least spots deal sort of.
Come off the highs here, but I know there can be sort of lags in both directions in terms of how flows for your business. So how are you sort of thinking about.
Steel costs and recoveries for the for the balance of the year I know you didn't change your guidance, but it seems like.
Probably spot steel is sort of maybe move versus prior it has so I think from a forecast perspective, we were planning.
Originally to have steel decline throughout the year right. When we last spoke in November I would say that where I see spot prices today, they are coming in a little bit lower than what we've what we originally were planning for it but from a lag perspective, obviously steel is still a significant headwind for us this quarter as I referenced.
Earlier, we expect that also happened in the second quarter, and then you'll start seeing that kind of normalize as we kind of get into the second half of our fiscal year.
To be.
More neutral in the back half or kind of be like a year or like a year over year positive by tobacco.
It could be it could turn into a year over year positive, depending on where the spot prices kind of come to and it does get.
There is that lag effect as you referenced before depending on most of our contracts somewhere it's three to six months. So it depends but yes that would be our expectation at this point.
Okay. Thank you thanks, Joe.
Thank you. Our next question comes from the line of Bruce Chan from Stifel. Your line is now open.
Hey, Jeff Good morning, Darin Congrats on the results.
Don't really want to know what black it here, but I was wondering if you could maybe just give us some brief commentary on the order cancellations.
Sure that's not really in the picture today, but maybe you can just remind us of what.
Deposits are contract penalties, if any there are for cancellation and how do you couch the risk.
Cancellations to earnings and margins and when you think about the sensitivities that you've built into that 2025 plan.
So I think.
Obviously, maybe youre, referring back to about November December when we.
We saw a little bit of a spike let's call it two 6% on cancellations.
Class eight but honestly.
When I look at it Bruce the demand is incredibly strong out there I mean, we got 260000 trucks in the backlog, which is almost a year.
<unk>.
We sit here and we look at this current market and you wonder about the challenges, but if I go back to 2018, which was preparing for the second highest market we've ever seen in 2019.
Still had regions that were going the wrong way. So we had India going the wrong way, we saw South America kind of still coming out of the recession, but at this point when you look at 2021.
India bouncing back from there.
Their weakest if I go back to South America. They are running at a 150000 trucks up from 109 million in 2019, 2018 2019 timeframe in North America. If you look at between act and FTR, whereas somewhere between that $285 to $2 90 midpoint being $290.
<unk> forecast is $2 80.
And you got yet another almost 12 months in backlog, so we see enormous demand and.
I would say the silver lining is once we figure out how to resolve some of the.
Supply chain constraints.
I do see more of a demand story I think some of the elements of the cancellations was frankly.
<unk> re slotting going forward as well as fleets just adjusting their order board because they just can't get anything in the next.
Three to six months.
Okay got it that's very helpful and obviously the portfolio as we get later into the plant is looking a little bit different it's a little bit more diversified.
So maybe towards that end and I am not sure if I missed this earlier in your commentary but.
Maybe you could give some commentary on the <unk> revenue backlog I think that's something that you also mentioned during the capital markets day is that trending any differently as we sit here in February I know, it's only been a few months well I'll start off I think we had talked about a $500 million are a $5 billion in.
Backlog.
Right through till let's call. It the capital markets day, I would say that obviously from what we see and forecast that it's now we're significantly heading north of that but what we did was we switched from talking about backlogs to now driving defined revenue within the year so that.
Just to give us a better perspective of how meritor approaches things and so that's the one where in my prepared remarks, I talked about revenue that we planned for 22 actually being up 30% and our target for 2025 is $280 million, which were.
As we see where the backlog sitting we're pretty confident.
Certainly seeing a path to hit that platform as we approach this pretty conservatively as meritor.
Okay, Great. That's super helpful. Thank you.
Yes.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our next question comes from the line of Brian Johnson from Barclays. Your line is now open.
Yes. Thank you I wanted to talk a little bit more about the electrification going blue angle.
The first question is can you give us any sense of the win rates on the <unk> XC at XO.
So.
Second.
Would be where different Oems are on in sourcing obviously, the German truck companies in Denmark in particular tended to do more both engine and actual work in house Thats question number two and then question number three is.
Pushback, we get from investors is yes, you are making progress, but what about Cummins Eaton Allison, they're well entrenched with the same Oems that you serve.
Are they going to wake up one day and flex their muscle in this segment and does that worry you as meritor management.
So.
Good morning, Brian Love to take that question, so I'm going to break it into.
<unk> sections I think the first part.
Really in terms of.
The <unk> and the success rate on the <unk> XT, so again going back to that slide five.
All of that is.
With the <unk> with the exception of the.
The man.
Announced the Volkswagen announcement that we have that's that's working off what we call an echo axle. That's designed to work with our remote mountain system, but with the future being on a medium duty <unk> Z, but everything that we have announced.
On that page is or let's call. It the <unk> that we're working on are all working off the <unk> and then <unk>.
Super proud of that because it really shows.
I think whether folks are building ground up which are let's call. It the new entrants such as lion or.
Volta that have an option of building designing whatever technology, they want or the folks that are let's call. It the.
The traditional oes, whether it's daimler or whether it's <unk> or whether it's autocar pick the <unk>. So that's I think the first comment the second question in terms of vertical integration I believe that there is so much opportunity here and that there is naturally going to be more competition.
We're going to see more suppliers more Oems entering this space, but frankly, we face that today I mean, if you think about Daimler.
In North America.
They still buy 50% of their.
There are class eight axles from us even though they are vertically integrated.
But I see the opportunity for us to grow in this space, primarily because of three reasons. The first one is if you notice have the wins are in the medium duty space, we only have 15% share. There. So this is pure growth.
From that segment as we every entry that we make there the content is three to four times more content. So with that I mean, if you think about our actual volume and if you think about this transitioning we're getting so much more in revenue and content as we transition here and finally in concept of vertical.
Integration I think the Oems, whether it's Daimler as you defined it let's call it the European Oes.
They certainly see value here and with the announcement that we made both at <unk>.
The strategy day or today with the Daimler, they're working with us on the on the Thomas built school bus, which is an exclusive agreement and it's something that they certainly have the capability on their own and they certainly picked up so we're pretty confident that customers over time will see value and in any case across there.
Those three reasons, we see a path to continue to grow.
Okay, and any indication that the other.
We know data strategy pretty well.
But the other powertrain players in the North American truck space, whether you even see them in these RFP situations. We do is as I mentioned I think there are more competitors, but frankly, I think I look at it from what's our strength that we bring to the marketplace and it is really.
The fact that just put it in perspective, Brian we have.
Round, the world, where the number one commercial axle provider in North America. If you think about the fact that we have a scale up 70% of seven out of 10 that run on our product.
If you put it in perspective is 2000 and about 500 to 2000 axles. So the powertrains built off that scale and frankly, we've been designing efficiency into into axles for over a century. So we believe we have that capability will help us now in terms of some of the other competitors you.
You mentioned I believe that technologies moving into our space. So whether it's the engine or their transmission that technology is moving into the axle and who better understand that for the last 100 years, but so I think thats why we believe we have the strength here and we certainly see that validated with in terms of the cusp.
Tomorrow is the customers are being methodical.
They are testing, which we obviously expect them to do their testing many products. We obviously there is value.
Some of the things that our competitors are doing but we believe the market is so big and there is enormous opportunity here.
The basket is great for all of us.
Okay. Thank you and look forward to discussing that further in Florida and a couple of weeks absolutely look forward to a chip thanks, Brian .
Thank you. Our next question comes from the line of Ryan Brinkman from Jpmorgan. Your line is now open.
Hi, Good morning. This is Roger Capone, Brian I'm, just trying to one question on incremental margins.
You talked about being able to offset some of the commodities and freight pressures.
Through price.
Curious in terms of wage inflation.
It was managed pretty well in the first quarter, but on a go forward basis.
Given where we are with wage inflation did you see any.
Change in view to your incremental margins on a go forward basis.
No.
Would you mind, you said reflects that.
Future.
Sure. That's the only question. Thanks, Okay sure. Yes, we are definitely seeing wage inflation, primarily its a U S story for us. It's obviously something that's embedded in our current forecast.
And so obviously, we are finding other ways to offset that as well as we think about what it means for the rest of the year. So no change in margin, obviously, we kept everything unchanged.
From our guide that we had back in November So I think it's part of part of its internal continuing to drive internal efficiencies as well as discussions that we're having with our customers as it relates to pricing.
Understood.
Going forward and beyond beyond the current year inflation does persist you feel like you can continue to manage that through.
Through through other areas, maybe cost reduction or pricing.
Yes that is the plan I think I think in addition to kind of our normal approach and strategy I think youre going to see us obviously look to automate even further.
Many and most of our facilities as well as to provide other assets for us.
Great. Thanks for the color and good luck. Thank you.
Yeah.
Thank you at this time I am showing no further questions I would like to turn the call back over to Todd <unk> for closing remarks.
Thank you for joining our call today, if you have any questions. Please feel free to reach out to me directly.
And have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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