Cummins Inc.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021 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. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to one of your speakers today, Dr. Todd Chirillo, Senior Director of Investors. Sir, please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to Meritorious First Quarter Fiscal Year 2021 Earnings Call. On the call today, we have Jay Craig, CEO and President, Chris Villa-Varion, Executive Vice President and Chief Operating Officer, and Carl Anderson, Senior Vice President and Chief Financial Officer, all of whom will be available for questions following the call. The slides accompanying today's call are available at Meritor.com. We'll 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 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 reporting. 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 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 a reconciliation to GAAP in the slides on our website. Now, I'll turn the call over to Jay.

Thanks, Todd. Good morning, everyone. Let's turn to slide three. As you can see from our results this quarter, we're off to a tremendous start for the year. I want to thank Meritor employees for the excellent performance. Regardless of the environment, this team exceeds expectations as demonstrated last year and right out of the gate in fiscal 2021. Our Class 8 truck orders in North America, our largest market, rose to the fourth and fifth highest months in history. In November and December, we executed exceedingly well, as you will hear from Chris and Carl. In fact, with truck volumes materially rising in almost all our end markets, we are raising our full year outlook significantly. This 2021 rebound provides us with increased confidence and a clear path to 2022 objectives, particularly because we believe that some of this year's headwinds will become tailwinds next year as we complete our current M plan. At the same time, we are investing in the revolutionary technologies we are bringing to market. These technologies will give commercial vehicle OEMs optimal solutions to meet regional CO2 reduction targets and will also provide a host of other benefits. At this point, I will turn the call over to Chris for highlights from the quarter and come back later for closing comments. Thanks, Jay.

We're obviously pleased with our results this quarter. On revenue that was essentially flat year over year, our adjusted EBITDA margin was 60 basis points higher than the same period last year, and free cash flow was up significantly. Carl will give you more details on the financials in just a moment. But the primary takeaway is that we are optimistic about the demand for commercial vehicles throughout the remainder of fiscal 2021. We expect significantly higher volumes in most markets as most economies deploy fiscal and monetary stimuli. The vaccine rollout gains momentum and the demand for goods increases, particularly in North America. On the right half of the slide, we highlight business wins this quarter. you will remember that last November we said we expected to exceed our M2022 new business target of $300 million. We're going to talk about some of those contracts that are driving that outperformance in our truck and industrial businesses, as well as production awards for our electric powertrain. Moving to slide four, you will see a few examples of customers with whom we have recently secured new business on a variety of applications. In India, we have additional axle contracts with Ashok Leland and Daimler India for medium and heavy-duty vehicles. We now have standard positions with Terex for front and rear drive axles and brakes on concrete mixers. We will supply an existing customer with independent front suspension for recreational vehicles, and we have entered a new three-year LTA with John Deere for 100% of its applicator axle. Transitioning to electrification, Slide 5 gives you a look at additional contracts we've secured for our e-powertrain. As mentioned last quarter, we believe we'll be the first supplier to manufacture electric powertrains for Class A trucks. These new contracts reflect the application flexibility we've designed into our electric powertrain portfolio and the growing demand for Meritor solutions. The e-powertrain is an integrated product engineered to allow for a variety of subsystems, including axles, transmissions, motors, wheel lengths, and brakes, to function as one efficient system. We've entered into a five-year agreement to supply Meritor's 14XE electric powertrain for auto cars' refuse vehicles. With Lion Electric, a Canadian manufacturer of zero-emission vehicles, We signed a three-year agreement to supply our heavy-duty tandem electric powertrain for Lion's AT tractor. And we've also secured a three-year contract with Volta Trucks in London. Meritor's 14XE will be equipped on the Volta Zero, a full electric 16-ton commercial vehicle designed for inner-city parcel and freight distribution. We expect revenue from all these contracts to ramp up in 2023. With the industry recognition we have already received for this product, the growing number of production contracts, we are highly confident that Meritor's electric powertrain represents game-changing technology for commercial vehicles. Carl will now provide more detail on our financial results. Thanks, Chris, and good morning.

On today's call, I will review our first quarter financial results, discuss the upturn we are seeing in most of our global markets, and provide an update to our fiscal year 2021 outlook. Overall, as you heard from Chris, we delivered strong financial performance in the quarter. Adjusted even margin was 11.5%, and we generated $34 million of free cash flow. Now let me provide the details of our financial results compared to the prior year on slide six. Beginning with total company results, revenue came in at $889 million, ROUGHLY FLAT FROM THE SAME PERIOD LAST YEAR. NET INCOME FROM CONTINUING OPERATIONS WAS $32 MILLION COMPARED TO $39 MILLION IN THE PRIOR YEAR. LOWER NET INCOME WAS PRIMARILY A RESULT OF HIGHER INTEREST EXPENSE, WHICH INCLUDED $8 MILLION OF DEBT EXTINGUISHMENT COSTS INCURRED IN THE FIRST QUARTER OF FISCAL YEAR 2021. THIS WAS PARTIALLY OFFSET BY COST REDUCTION ACTION EXECUTED IN THE SECOND HALF OF LAST YEAR. ADDITIONALLY, joint venture earnings increased $5 million from a year ago. This was driven primarily from a $6 million one-time gain recognized from a joint venture in Brazil relating to a value-added tax credit. Overall, this drove adjusted EBITDA of $102 million in the first fiscal quarter of 2021, which translates to an adjusted EBITDA margin of 11.5%, a 60 basis point increase from the prior year. Adjusted diluted earnings per share was $0.60, down slightly from $0.64 last year. And free cash flow improved by $69 million from a year ago, as we saw a tailwind from our factoring programs, and we had $32 million in lower incentive compensation payments in the quarter. Now let's look at our segment results compared to the same period last year. Sales in commercial trucks increased by 4% to $691 million. The increase in revenue was driven primarily by slightly higher market bonds in Europe and India. Segment-adjusted EBITDA for commercial trucks was $63 million, up $6 million from last year. Segment-adjusted EBITDA margin increased to 9.1%, an increase of 50 basis points over the prior year. The increase in segment-adjusted EBITDA and EBITDA margin was driven primarily by conversion on higher revenue cost reduction action executed last year, and higher joint venture earnings. This was partially offset by higher freight premiums and a $6 million increase in electrification spend as compared to last year. Aftermarket industrial sales were $234 million in the first quarter, down $41 million compared to the prior year. The decrease in sales was primarily driven by the termination of the distribution arrangement with WAPCO, which occurred in the second quarter of fiscal year 2020. As we saw last quarter, even with lower revenue, segment-adjusted EBITDA margin increased 80 basis points to 15%. The increase was driven by cost reduction actions executed last year, which more than offset the impact from lower revenue. I'll review our current global market outlook on slide 7. In the North American Class 8 market, we are now projecting production levels between 270,000 to 290,000 units, a nearly 20% increase at the midpoint from our prior outlook. We have seen a full quarter of strong order intakes, including two months of orders greater than 50,000 units, and just last night, January, preliminary orders came in at over 42,000 units. This aligns with the strong production forecast we are seeing from our customers all pointing to a significant production recovery in 2021. Turning to Europe, we're also seeing a steady increase in this market. We now forecast production will be in the range of 360 to 380,000 units. South America is another market where we are experiencing a strong rebound. We are now forecasting production to be in the range of 135 to 145,000 units, almost a 50% increase at the midpoint from our prior outlook. At these levels, it would be the strongest Class A production year since 2014. And in India, we are maintaining our previous forecast of 230,000 to 250,000 units. Keep in mind, this still represents an increase of approximately 80% year-over-year from historically low volumes in 2020. Let's turn to slide 8 for an update to our fiscal year 2021 outlook. Given the market assumptions we just reviewed, we are now forecasting sales to be in a range of $3.65 to $3.8 billion. Adjusted EBITDA margin is expected to be in the range of 10.6 to 10.8%, an increase of 100 basis points as compared to the midpoint of our previous guidance. With the upturn, we are encountering several headwinds which will impact earnings conversions as we move through 2021. Increasing demand across the global economy is driving significant increases in steel, our largest material cost. While we have cost recovery mechanisms in place with most of our OE customers, they generally are on a three- to six-month lag. As a result, we are currently seeing $15 million to $20 million in higher steel costs in fiscal 2021 due to the timing impact of these cost recovery mechanisms. Additionally, at these significantly higher market levels, we are anticipating higher incentive compensation costs of approximately $15 million. With these headwinds, we now anticipate earnings conversion of approximately 19% on incremental revenue compared to last year. Overall, if you were to adjust for these two items, our conversion on the incremental revenue would be around 22% to 23%, more in line with our expectations. Moving to adjusted diluted earnings per share, our outlook for 2021 is now in the range of $2.25, $2.50. And finally, we expect to generate $110 to $125 million of free cash flow. On slide 9, I want to provide an update to our path for achieving the company's M2022 margin target of 12.5%. As we have seen in prior M plans, the steps for achieving our targets may change. but we typically are able to adjust to the current operating environment and deliver on our target. The 12.5% margin target is no exception. As we discussed on the previous slide, we are seeing increased costs related to both steel and incentive compensation in 2021. Next year, we do expect these costs to normalize, providing a 60 to 80 basis point tailwind. We also anticipate converting on incremental volume and new business winds at greater than 20%. Additionally, as we announced last quarter, we are in the process of executing a footprint optimization plan which will result in the consolidation of four locations into existing facilities. This will provide an additional tailwind of $12 to $15 million, as $5 million of costs to execute the consolidation in 2021 will be behind us, and approximately $7 to $10 million of savings from the smaller footprint will be realized. The conversion on increased revenue and the footprint optimization are expected to provide an additional 90 to 130 basis points of incremental margin next year. Overall, the path to achieving our 12.5% margin target remains clear. Before I turn the call back over to Jay, I want to take a moment to express my deepest appreciation for his extraordinary leadership he has shown through his many years at Meritor. On both a personal and professional level, I wish Jay all the best and look forward to working with him in his new role. Now I will turn the call over to Jay for final remarks.

Thanks, Carl. Let's turn to slide 10. With this being my last call with you, I wanted to make a few comments before we go to questions. My first earnings call with Meritor was in the second quarter of 2008, and except for a few quarters in 2013 and 2014 when I was running the business, I have not missed one. So I guess that puts me somewhere close to 50 calls. While I doubt that all CEOs and CFOs look forward to them, I can honestly say I always did. Our investors and analysts, many of whom have been with us a long time, always drove us to be better and challenged us to look at the business from different perspectives. Your insight, comments, and questions contributed to the successful transformation of the company over the past several years. As I transition to the role of Executive Chairman, I have full confidence in Chris's ability and that of his leadership team to maintain the trajectory of high performance that we have demonstrated for quite a long time now. Growing our base business, expanding our electrification capabilities, and maintaining excellent levels of operating performance will continue to be the highest priority as we remain focused on returning value to shareholders. As we near the successful completion of our third M plan, we recognize the discipline and execution that it took to become the company we are today and will proceed with the same diligence. For this, I want to thank all our employees around the globe that have helped us achieve the enormous stretch targets we have set for ourselves. I will miss working day to day with such a diverse talented, and driven team. I also want to thank our board of directors for their support and guidance. We have a strong board with a diverse set of strengths that has played an important role in the company's journey. I look forward to continue to work with them as executive chairman. I wish all of you my best in the future, and with that, we will take your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question does come from the line of James Piccirillo with KeyBank Capital. Your line is open. Please go ahead.

Hey, good morning, guys, and Jay, congratulations again on your retirement. It's a It's been a pleasure. Within your FY21 guidance here, can you just talk about what the implied incrementals are, what the additional EV-related spend might be? And then, Carl, you did mention color on incrementals to FY22. Can you just talk about those incrementals, how we get to that targeted 12.5% for FY22 within that framework?

Sure. Good morning, James. Yeah, as it relates to fiscal 21, as I referenced, you know, we do expect all-in to have about 19% conversion on the incremental revenue that we're seeing. We are faced with a couple headwinds, as I referenced, both steel and incentive compensation. But as it relates to electrification, in the quarter, we did have $6 million of higher electrification spend compared to a year ago. We are also probably tracking closer to the $30 million of electrification expense within fiscal year 21 as well. So overall, as we look forward, we're very confident in our ability to continue to deliver and get close to that 20% kind of incremental margins for fiscal 21. But more importantly, really, as I laid out, we're definitely on track to deliver on our 22 targets.

Got it. The $30 million in electrification spend, that's cumulative, right? That would be like an incremental $10 million or so. Is that right?

Yeah, it's about $7 million to $8 million higher than we did a year ago.

Got it. And then can you just, I mean, maybe I just missed this, but can you provide an update on what the number is in terms of EV awards that are booked? And then what the, you know, is the pipeline potential that $200 million is? Has that changed at all? And, you know, just maybe talk about what, you know, what the latest two, you know, the last two awards. You know, is that a highly competitive process?

Thanks. James, it's Chris. I'll take that question. So what we talked about is a line of sight for $500 million, which with the announcements we've made today, we've booked business to $400 million. and we still have our line of sight for the last $100 million to the targets that we had provided earlier. And then talking about the three agreements that we announced today with Lime Electric, Volta, and AutoCar, that accounts for a total of $200 million of business in total. We're not breaking that out by ear.

Understood. Thanks, guys.

You're welcome. Thanks, James.

Thank you. And our next question comes from the line of Ryan Brinkman with J.P. Morgan. Your line is open. Please go ahead.

Hi. Thanks for taking my questions. Can you hear me?

Yes, we can.

Okay, great. Thanks. Given the mention on slide four of exposure to the RV market via front suspensions and the record wholesale shipment numbers that have been coming out of the Recreational Vehicle Industry Association lately. I just wanted to ask about what your revenue exposure is to this area, what kind of growth you might be seeing. Are you primarily benefiting from the increase in industry volumes, or are you also in any way incrementally targeting that market with new products, et cetera? Also, since you last reported earnings, I think we heard the very first announcements relative to the potential for electrification in the RV space, which came from Lordstown Motors and Camping World in December. Do you have any thoughts on electrification in this corner of the market and what role that Meritor could potentially play?

Sure. Ryan, it's Crystal. Ryan, I'll start the question and then maybe hand it over to Carl to just provide some of the financials. But very quickly, with the acquisition of Axeltax, obviously this has been a very important market. And so as part of M2022, we also had a strategy to grow in this market. And so what we're doing is exactly executing on that strategy. The new wind is part of a growth strategy and is not associated with the current market growth. So we had a plan to grow this business and that's exactly what we're doing. Specific to electrification, we are looking at, let's call it independent suspensions with wheel and motors, but that is something that we're exploring a little bit further. With that, I'm gonna turn it to Carl.

That business kind of resides in our industrial segment, and if I look at what we're seeing in that, especially entering into 21 in total, we do now see our industrial business up high single-digit percent on a year-over-year basis at this point.

Okay, very good. Thank you. And then just last question, relative to the electrification opportunities that were identified on slide five, I'm curious if the potential pipeline has maybe grown in And I'd be interested, too, if you have any thoughts on GM's new BrightDrop plans and whether that automaker's relatively greater vertical integration of electrified driveline components on the light vehicle side might or might not translate into similar vertical integration on the commercial vehicle side. Also, just what you're seeing generally in terms of the latest developments with regard to commercial vehicle manufacturers' plans to either insource or outsource the types of electrification components that you're able to provide. Sure.

Well, I'll take that question, Ryan. Just maybe first perspective, from a broad spectrum, when we look at the three customer awards that we presented today, Autocar, a nameplate that's been around for 123 years, and then if you look at Volta, it's a brand new entrant, and Lion's been in the market for about 10 years. So it's great to see that from a broad spectrum of customers, They see the value in Meritor's product. Now, specific to where we see this growth, we do see the first thing that we're focused on is obviously completing our pipeline. And to that point, we're testing with a multitude of OEs right now around the globe. So hopefully we can talk about more wins here, but right now we're targeted on closing out on our 500 million book of business that we talked about. Specific to the GM and let's call it the skateboard, I think when you look at the best part about it is in terms of whether you look at always integrating this, the best part of electrification is in any sense, I think what it does is it drives competition and it will speed us faster towards sustainable energy. And in any sense, as we look at the real estate we have, it just means more content for us, no matter what happens. And in that sense, our perspective is that as long as we're in this space, this will continue to grow for us.

Yeah, and I'd say, Brian, this is Jay, one last comment. There's always been a significant difference between the commercial vehicle and the live vehicle OEs and the level of vertical integration of components. So we've obviously had a significant share of the drive train market across the CV industry, and we expect that to continue into the future based on the discussions that we're having so far moving to electrification.

Very helpful. Thank you.

Thank you. And our next question comes from the line of Joseph Spack with RBC Capital Markets. Your line is open. Please go ahead.

Thank you very much, and I want to echo my congratulations to Jay again, and then obviously the rest of the team. You know, back on electrification, a couple questions here. You know, you mentioned a bunch of these startups. There's obviously a lot more we've seen, you know, trying to come to market than on this page. Can you just talk to us a little bit about how you approach the opportunity? Because obviously they're sort of all incremental, but it does require you guys to commit resources and capital, and the exact path of some of these ventures is maybe a little bit unclear. So how do you think – you almost have to be a little bit of a VC in that respect, right? So how do you think about sort of approaching – the opportunity with some of these startups?

So, Joe, I'll take that question. And I think, you know, the perspective that we use is if we look at the Class 8, you know, let's call it the medium and the heavy-duty Class 8 markets, and we look at what is the percentage of electrification, and we aim for that or a fair share of that. And, in essence, work with every OE that is approaching that space and provide our product. But in overall and how we capacitize, we're looking at what we believe will be the model of what growth will be there in electrification as a percentage of the overall market.

Okay. So it's not necessarily – you don't necessarily view it as sort of like a bet on any one of these individual companies because the product is somewhat fungible between them?

Yeah. I think, Joe, to that point, I think for us it's more about the product as far is we think about how that fits in with whether a couple of the startups with existing customers and obviously the large customers we have today. That is kind of the focus, and we do believe, you know, our product is a differentiator, and that is really kind of the path to market for us across all of these potential opportunities.

Okay. So maybe then just to follow up or two quick follow-ups on that, like one – Can you talk about the range of activities on electrification, like, you know, from like either holy axles or components and how that might, you know, vary with different potential customers? And I guess, you know, also, you know, we touched a little bit on the EV spend, but it seems like that might need to continue to sort of move higher, especially if the new winds continue to move higher. So I wanted to get some thoughts on that and when you might, you know, sort of get to, you know, a break-even or sort of self-funding level on the investments.

Well, let me start off, and just following on Carl's comments, if you look at the three announcements today, they're all based off the 14XE powertrain. So it's a perfect example of using the same product and making, as you called it, fungible across the three OEs. So that's one perspective that we're using. On top of that, the announcement we made with PACCAR, the last one was for a full EV kit. That includes the PTAC, the battery system, as well as the electric powertrain or the 14XE tandem. With that, I'll turn it over to Carl.

Yeah, Joe, as we look at it, we're not chasing all the various startups. We're really just focused on what's fitting our product portfolio. So that's kind of one of the first lines that we look through. And as Chris just discussed, you know, we both have the kit side as well as the 14XE and the axle side and 17XE in the future. And, you know, as we look forward, our expectation is, you know, when it kind of flips to profitability, it's probably outside the 22-time horizon. But, you know, as we see it now, you know, that that could come potentially as early as in 2023, depending on what we're seeing in the market at that time.

Okay. Maybe I could just sneak one more in my car. I thought I heard you mention some additional optimization and restructuring. I'm just curious if you could provide a little bit more details on that because, right, it seemed, as you mentioned sort of earlier on, it seemed like the markets are moving in your favor, sort of going more up than down. So I just wanted to better understand that.

Yeah, so nothing was new. This was just, we did talk about this last quarter as plan. So in total, you know, we are expecting, as you kind of compare 22 to 21, it's probably somewhere about $13 to $15 million of tailwind, you know, if we think about EBITDA as we enter 22 once we're fully complete these facility closures.

Okay. Thank you very much.

Sure. Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star then 1. And our next question does come from the line of Brian Johnson with Barclays. Your line is open. Please go ahead.

Good morning. And I want to echo congratulations to Jay, who I'm sure will still be up on the strategic direction. I think I've been at probably 95% of those calls since then. So in terms of the 14 acts and these interesting wins that Just when I thought I knew every electric bus and truck company out there, you find another one. But the question is, can you just remind a few things? One, just remind us of the content opportunity, obviously not your price list, but if you think about an electric urban truck like Bolt was talking about with the 14XC axle versus, you know, if you did one for one of your traditional OEMs, what type of content you might have.

Sure. Brian, I'll take that as Crystal. Brian, it's about five times in terms of content off our traditional BACO platform.

And then we're certainly well aware of data. The competitor is sort of in that space, and then they focus more on medium duty. A question we get, though, is given Cummins, Eden, Allison are also very important competitors, class five through seven and class eight suppliers. What do you see from those powertrain suppliers coming over into the electric truck and bus marketplace?

Well, I think the one thing is, as I look at it, and as I mentioned, competition is obviously something that will make us all better and drive towards electrification and drive the products to be better across the whole spectrum. But specific to our products, I think the one great thing is we're going to be first to production here in the summer of this year. We have over 100 vehicles on task. In essence, if you look at our product, I think the best part about it is the fact that it's fully integrated. You have a motor integrated with an axle, integrated with wheel ends. And that's the sense of what we're putting together that's only about 100 to 150 pounds heavier than a standard axle. So if you put that in perspective, you're removing an engine and a transmission and shrinking it into that space.

Right. And given the high margins we've seen in the transmission space, one way to think about it is you're basically taking both engines and transmission content and margin and bring it over to Meritor. Is that a fair generalization?

Well, that's, as you said, maybe the best way to answer that, Brian, is if we... Yeah, I think, Brian, I would say over the last six years, you've seen that margin move up not only from cost reductions, but from all the new products we've introduced, even on the traditional side. And I would say our expectations for the electric products are real different. We'll be introducing products we think have more content and higher margin.

Okay. And then kind of a follow-on question, which is kind of as you look at these SPACs and the new entrants, most of them are kind of pre-revenue. I know you sort of answered this question earlier. How do you get comfortable with that? it's actually worth your time. And I guess the second one is with some of the larger fleets and larger Class 8 manufacturers, you know, how would you, if someone doesn't go with a startup truck operator but wants to go with a employer provider, how are you positioned there?

Well, again, I think, you know, we're focused on the product and let's call it the weight class. So, When we come in, we're looking at it as what is the 14XE powertrain cover, and if we think about it as the Class 8 line hall space or just down to a medium beauty, the top end of a Class 7 space, and we're taking a product and positioning it where it can go across, whether it's to a new entrant or to a company that's been well entrenched and a customer of Meritor for many, many years. So, you know, and there's perfect examples of both ends of that spectrum, even in our announcements in the last two quarters, whether it's AutoCar and PACCAR on one side or Lion and Volta on the other side.

Okay, and final question. You didn't have your trademark analyst day at a hotel this year, but we are both coming up on the success of the Meritorio 22 as well as, you know, strikes us back. kind of kicking the tires again, so to speak, or the axles on some of your products. E-products is going to be interesting. Do you have any thoughts about an event later in the year that would bring those two important things together?

We do, Brian. And I think, you know, just as you have experienced with Jay, we've, you know, in essence, always done, you know, started preparing for the release of it a year in advance. And so we're in the process of developing our M2025 strategy. And ideally, we'd like to have it with all of you in person probably at the end of the year or worst case, let's call it the beginning of next year. But that's our goal right now is to drive for the end of this year.

Okay, thank you. Let's look forward to that.

Great, thank you.

Thank you. And our next question comes from the line of Atey Mecheli with Citi. Your line is open. Please go ahead.

Great. Thanks. Good morning, everyone. Just two follow-up financial questions. First, on the M2022 revenue target that you expect to exceed, hoping you can just update us, remind us of the latest end market assumptions, particularly relative to the original end market assumptions behind the $4 billion or so revenue target. And then secondly, just on free cash flow conversion, I think last quarter you were still talking about 75%. Just curious if there's any change to next year's free cash conversion outlook.

Good morning, Itai. As it relates to maybe the free cash flow first, yeah, no change in our planning assumptions for 22. We still expect to drive and achieve that 75% free cash flow conversion. I think in the short term – In 21, I think our pre-cash flow was kind of high, 60%, just about 70%, as we are expanding a little bit of our CapEx spend this year by about $10 million, which is one of the drivers to that. As related to the end market assumptions, we're not updating them today, but what we did say back in November, we were still planning for... you know, replacement demand market levels in North America and Europe primarily in 2022. And it's something that, you know, just based off the strength of the market that we're seeing here in 21, you know, we will be taking a closer look at that once again as we kind of get later out this year and provide a further update as we kind of get into 22.

Great. That's very helpful. Thank you. Thank you.

Thank you. And our next question comes from the line of Bruce Chan with Stifel. Your line is open. Please go ahead.

Good morning and congratulations. Maybe I want to wax a little bit more philosophical here for a second. You know, I think a lot of investors have been drawing comparisons this freight cycle with the last freight cycle, which is maybe natural, except that the wavelength this time around has obviously been very compressed. And I'm wondering, as you talk to your customers on, you know, the commercial vehicle side especially, what your perception is in terms of where we are in the cycle inning-wise. And then maybe just a little bit more broadly with the continued growth in the EV opportunity, how do you think about cyclicality in your business going forward?

Sure. Let me – Bruce, I'll take that question. So in terms of the market, obviously going back probably fall of last year, Not too many of us could have predicted this return. However, as we looked at the last November, December 4th and 5th highest truck order intakes, and then with January at 42,000, in essence, what we're seeing from our customers is all of them are cautiously raising line rates up, primarily focused on three things. One is COVID. The second one is looking at the impact of the supply chains And then the final one is also being mindful of finding folks to be able to staff up the shifts. But with that, what we're seeing right now is the back end or the mid to back end of this is line rates are starting to come back up with most of our customers. So that's one perspective. In specific to electrification, I think, you know, it's a very fair question. I think, you know, when you think about electrification, the cyclicality should come out because you think about a growth that is, you know, much more muted as it goes through. I think we'll see far less cyclicality. So I hope that's helpful.

It is. Great. I appreciate the time.

Thank you. Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Schilder for any further remarks.

Thank you for joining Meritor's first quarter earnings call. If you have any questions, please feel free to reach out to me directly. Thank you, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.