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spk07: Good day, and thank you for standing by. Welcome to Meritorious Incorporator 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 session. To ask a question during that session, you will need to press star 1 on your telephone. If you require any further assistance, please press star zero. It is my pleasure to hand the conference over to the Senior Director of Investor Relations, Todd Cirillo. Please go ahead.
spk00: Thank you, Carmen. Good morning, everyone, and welcome to Meritor's third quarter fiscal year 2021 earnings call. On the call today, we have Chris Villavarayan, CEO and President, and Carl Anderson, Senior Vice President and Chief Financial Officer. 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 recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to slide 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.
spk06: 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 constraints, 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's safety, quality, and delivery have remained excellent, and I'm very proud of the team. This strong performance has allowed us to gain market share in some of our major product lines in North America. Please turn to slide three. 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 freight and steel headwind in the quarter, we converted at 20%. Adjusted EBITDA margin was 10.5%, and adjusted EPS was 62 cents on higher earnings. Third quarter results are obviously a difficult comparable on a year-over-year basis due to the COVID impact in fiscal 2020. Carl will give you a sequential look that provides you a more relevant comparison. 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 logged on 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. Let's go to slide four. Given the strong truck market outlook and our confidence in generating significant free cash flow, we opportunistically began to repurchase shares again. Fiscal year to date, we repurchased a total of $59 million, or nearly 2.5 million shares. This completes our prior authorization that we announced in 2019. With that program complete, Meritor's 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 BB 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 five. In the first quarter of this year, we announced we would supply Meritor's electric powertrain to AutoCar for its refuse vehicle and to Volta trucks for the Volta 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 we've designed into our electric powertrain portfolio. Today, we're excited to announce a five-year agreement with Hyliion. Meritor will provide electric subsystems for its HyperTruck ERX. Hyliion's powertrain system will feature Meritor's 14XE integrated drive axles as the standard position propulsion on its vehicle up fits that use natural gas. Next, we're working with Hino Motors, who will be evaluating Meritor's 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 100% of the axles for their medium-duty business in North America. In addition, we announced an equity investment in Sea Electric, a global leader in commercial electric vehicles for urban delivery and logistics. Sea Electric partners with commercial vehicle OEMs, dealers, operators, and upfitters to deliver a range of zero-emission trucks with remote-mount solutions to the medium-duty commercial vehicle market. We will 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 six, we're 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 timeframes 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. Whether with traditional axles or our e-powertrain, we're focused on expanding growth opportunities in electrification. And remember, Meritor breaks are an integral part of every e-powertrain. Carl will now provide you more detail on the financial results, and then we will take your questions.
spk03: 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 2021 outlook. Overall, we delivered solid financial performance with an adjusted EBITDA margin of 10.5%, adjusted earnings per share of 62 cents, and we generated $18 million of free cash flow. Now let's review our financial results starting on slide seven. As you will recall, during the same period last year, our production was significantly impacted by the pandemic. As a result, to help provide a more meaningful comparison, we are also presenting a 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 remains 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 still costs of approximately $14 million which more than offset conversion on higher sales. Adjusted diluted earnings per share was 62 cents, down slightly from 68 cents 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 used cash on the balance sheet to complete the redemption of the remaining $175 million of six and a quarter notes due in 2024. The completion of this debt repurchase returned our gross debt balances to near pre-COVID levels. As a result, in May, standards importers 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 in 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 eight. Commercial truck sales increased almost 140 percent, 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 in commercial truck were $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 higher steel and freight costs, which more than offset conversion on increased sales. Aftermarket industrial sales were $258 million, up 27% compared to the third quarter last year. 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 sale 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 nine. Given the strong demand we see across our global markets, we are raising our production guidance. In North America, we now expect Class A production to be approximately 285,000 units near the upper end of our previous range of 270 to 290,000 units. Orders have been in line with our expectations as build slots are full for the remainder of 2021 and 2022 order books are not fully open. In Europe, we are raising our production outlook to approximately 415,000 units, an increase of 35,000 to 55,000 units from our prior view. We had expected European production to sequentially step down in the third quarter. However, production came in stronger at 101,000 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 145,000 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 had expected both steel and freight costs to stabilize in 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 have both more than doubled since the beginning of our fiscal year. Freight costs also increased significantly in our third fiscal quarter, with the 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 three- to six-month lag. As a result, we are taking additional steps to mitigate these costs. 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 steel recovery mechanisms given the unprecedented run-up in steel costs. Let's turn to slide 11 for an update to our fiscal year 2021 outlook. 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 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 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 M2022 goals. As we announced last quarter, our investor day will be in early December when we will present our M2025 plan. Now, we will take your questions.
spk07: And thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. And we have a question from the line of Joseph Spack with RBC Capitals.
spk01: Good morning. A couple questions. I just wanted to start with a bunch of the EV updates. I think prior you said, you know, you sourced about $400 million of a $5 million target on the EV 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 winds versus that original M22 plan, like where are we tracking overall?
spk06: Good morning, Joe. So I'll take that one. So, yes, we set a target of a $500 million pipeline for EV 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 four wins last time. We're announcing a couple this 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.
spk01: Okay. Maybe one more on some of the issues. I'll get back in queue, but the sea electric investment, does that come with any commitment to use America or product? It was a little unclear that the release sort of indicated like it was an avenue for you to do so. And then I guess they're more focused on meat duty perspective, at least from the information I was able to gather. maybe somewhat similar to what you got from Transpower. So I'm curious if you can sort of maybe talk about the differences there and if there is something different and like, you know, why, you know, Transpower is sort of focused on larger trucks, but why was that sort of not scalable to medium?
spk06: Sure. Excellent question. Love to answer it. So let me start with the first question, which was on C-Electric and what's our commitment. Our commitments are to work together to essentially, first of all, you know, the medium-duty, the immediate path to market seems to be with a remote mount. And so what our initial path is to work with them together to essentially work with our traditional axles. Now, a traditional axle works differently under an electric environment. You've got to think about the fact of coast loading is different and when you think about regen braking. So with that in mind, we'd 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 using our existing 14XE product. So 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 our electric e-powertrains because it provides them an opportunity to put more batteries as well as drive more efficiency and cost. Now, to the second question about what's the difference between C and Transpower, that's a great question. So the best part about C is they started out in the east. This is a company that started in Australia. They had strong relationships in Australia and then grew in the East and then moved 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 two companies, Transpower was very focused on the heavy side and C 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 a million miles. We have about the same, just under with a million miles of experience. So you bring the two companies together, and you have enormous experience in field experience as we drive this transition. It also helps us cover more regions in the world.
spk01: If I could just quickly follow up, I totally get the geographic and customer diversity play, but just technically, Like, is there something that prevented Transpower from scaling down to other classes of vehicle? Like, that's what I, what was unclear to me from a technical perspective, what the difference is.
spk06: Transpower is, let's call it, more focused on Class 8, and there is a size and scale difference when you go into Class 5, Class 6. So, yes, there is a difference. Okay.
spk01: Thank you.
spk06: You're welcome.
spk07: Thank you. And our next question comes from Brian Johnson with Barclays.
spk02: Yeah, just I want to follow up on that line of questioning. Kind of when you – and then I want to just ask about some of the basics of the business. You know, when you look at your electrified portfolio versus obviously the Toledo-based rival, you know, where would you say that you're particularly strong and then where would you say – you still have some development work that we'll probably get an update on in December.
spk06: That's a good question, Brian. So when we think, I think, you know, it maybe is akin to our announcements today. So if you kind of look at it, you know, we're very strong in the heavy side. And if you think about it, you know, and we're also further ahead in my perspective on the electric powertrain. And we're launching our e-axle first to market this, later this year, right? So as we think about the fall, we'll have our 14XE in production and ready to go to customers. So I think that's, you know, as we think about, you know, why are customers picking us on this side, it's primarily the availability of product, the speed to market, the weight and efficiency difference. So by integrating an e-powertrain, you're saving somewhere between 400 to 800 pounds. 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 is as we think about this growth market that we have been pulled into, which is a great opportunity, is developing the 12XE and then also focusing on the 17XE, which we launched last quarter.
spk02: Okay, thank you. And then on the cost side, you know, are there anything we should think about in terms of contractual or extra contractual recoveries just vis-a-vis 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.
spk06: That's a good question, and I think, you know, as you know, some of our larger agreements are three to six months is what we've said. I'll start this, and maybe I'll hand it over to Carl. But the inflation and cost challenges that we're facing is no different, and as you know, is being faced by everyone, customers and suppliers alike. I believe it's well documented. We're hearing it on all the earnings calls. And this is being pushed into the marketplace. That said, you know, we've already started having conversations with our customers. These conversations are usually never easy, but it is about a partnership. And as I said in my prepared remarks, you know, the one good thing is, you know, or the many good things is 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 there will be a positive outcome. And I'll turn it over to Carl.
spk03: Yeah, I think, Brian, just one other thing to add on that. I think it just speaks to Meritor's ability really just to execute during this time period. If we think about our delivery, and quality and what we've been able to do over the last, you know, over the last years, but obviously over the last several quarters, that has also resonated with our big customers during this time period.
spk02: Okay. Thank you.
spk03: Welcome.
spk01: Thank you. You bet.
spk07: Thank you. And our next question comes from Sherif El-Sabahi with Bank of America.
spk05: Hi. Good morning, guys. Good morning. Good morning, Sherif. So to start off, I just wanted to ask a bit on the EV side as well. With Hyliion, if I'm not mistaken, they were using a Dana product for their original hybrids. What's sort of driving the win for you there on that new agreement? And is that an exclusive agreement for the five years?
spk06: So we have a standard position with them for five years. And what's driving that is, I think, is my belief that, you know, first we're first to market. We have an e-powertrain that essentially fits with their product. And, again, it is the fact that we are creating the space, you know, moving away from a remote mount and creating the opportunity for them to, you know, put a different, use more space for their fuel source. So I think that's the first thing, the availability and first to market. And that has also, and the fact that, you know, that comes with it, the innovation and the capability that we've driven, that we've essentially tested this for hundreds of thousands of miles to get here to put it into production. With that in mind, I think there's other opportunities. It's also akin to our space. Hyliion is in the Class 8 space, so the hyper truck ERX 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.
spk05: Thank you. And then just on 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?
spk06: Well, I think, you know, the semiconductor shortage has been pretty well documented, I would say. You know, we've experienced that. Obviously, you've heard from all the customers in the last two quarters, and I do see that extending through the next two quarters. And, you know, obviously in our existing products, when you think about a traditional axle, there is no chips or no semiconductors. And so, you know, as we think through this, we do see disruptions on our customer side, but an axle is something that we've provided, and what they're doing is still building the truck out and, you know, in some cases, offlining them until they get the chips. But it hasn't driven a significant impact in that sense. Understood. One last comment on that, Sheriff, is I do believe capacity on – As we've heard on CHIPS, we'll come back in the back end of the year starting to 2022, so it'll help us all grow into the new year.
spk05: And then would you be able to give us a bit more color on your expectation for the industrial markets?
spk03: Yeah, so I think what we're seeing there, Sharif, is the industrial markets for us continue to show pretty significant increases of what we've been seeing. I think, you know, whether it's through our Axel 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 forward.
spk05: Thank you. I'll get back in queue. Thank you.
spk07: Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. We have a question from the line of Bruce Chen with Stifel.
spk04: Hey, good morning, gents. Nice 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 in the release, you also talked about electrification costs being higher. Wondering if you can give us a little bit more color as to what that means. Are these related to the new product wins? Is this something else that we should think about?
spk03: Thanks, Bruce. I think as we look at electrification, we do see it continuing to increase a little bit for the rest of this year. Originally, we were planning to be around $35 to $40 million of expense this year. I think as we see it today, we're probably going to be running closer to about $45 million. incrementally will be up. So especially as we think about our fourth fiscal quarter, we do expect a little bit of a headwind from that as we think about where 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 we're making in that business is to position the company for the next several years. So it's all connected.
spk04: Okay, so we should think about this sort of as a high-class problem as opposed to maybe some of the steel issues and the freight issues. I would agree with that, yes. Okay, terrific. And then, you know, sort of a related question here, but, you know, when you think about, you know, these new agreements and new partnerships that you're signing, what sort of investments, you know, do these require? So when you think about these electrification costs, you know, is this mostly – you know, tooling, staff, you know, what kind of goes in, you know, to the process? And then, you know, how do we think about risks of, you know, maybe some of these contracts not materializing or getting pushed out and what that means for your business?
spk03: Well, a lot of what we've seen to date is, you know, we've been developing, you know, our 14XE 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 meeting duty or in Europe, that will have a different actual configuration. And so those, if you would, expense and development work begins to increase. I think specifically as relates to production, and various investments, obviously that will be part and parcel to what the market does and when the volumes really begin to kind of increase to more material from a size perspective.
spk06: And maybe I'll pick up there a bit, Bruce. If you think about our product, you know, we consistently message about three of them. So there's a modularity to it or a flexibility. We talk about a 12X for the medium duty, a 14X, and a 17X. And so if you think about the 14XE, that in most of the announcements that we have today, what we're talking about is a singular platform. So it's product development for all that we're driving. And then our strategy 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 per OEE.
spk04: Okay, that's terrific color. And then one last follow-up here, Chris. You gave us some really good color around the semi-shortage and when 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 imminent. Do you have a timeline or an expectation as to when that starts to resolve? I know I'm asking for you to look in your crystal ball a little bit here. I don't.
spk06: I think that's a double-edged sword. In a sense, it's a good thing. It's great that our fleets are very healthy. When you think about local transport, that's a crystal ball call. I don't know how that's going to work out. It's just a question of, as we have seen cyclicality and 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, you know, really well as I think about the last quarter and the strength. It's really, you know, a testament to the team and their ability to really work through that. Okay, fair enough. Thanks a lot.
spk04: Thank you, Bruce.
spk07: Thank you. And this concludes our Q&A session for today. I will turn it back to Todd Cirillo for his final remarks.
spk00: 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.
spk07: And with that, we thank you for your participation in today's program, and you may now disconnect.
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