Meritor, Inc.
Q3 2020 Earnings Call Transcript

Published: 29 Jul 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2020 Meritor, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Todd Chirillo. You may begin.

[Todd Chirillo:]

Thank you, Towanda. Good morning, everyone, and welcome to Meritor’s third quarter 2020 earnings call. On the call today we have Jay Craig, CEO and President; Carl Anderson, Senior Vice President and Chief Financial Officer; and Chris Villavarayan, Executive Vice President & Chief Operating 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 reporting 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 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 2 for a more complete disclosure of the risk 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.

[Jay Craig:]

Thanks, Todd, and good morning, everyone. I hope you and your families are safe and healthy. Let’s turn to Slide 3. As you will see in our results, the repercussions of COVID-19 had a significant impact on our financial performance this quarter as the commercial vehicle industry experienced extended shutdowns of production. Year-over-year for the quarter, revenue declined 56%. However, I’m happy to say we are now up and running in all of our facilities globally and are seeing truck volumes recover at a healthy pace. You will note that we exceeded the top end of our guidance we’ve provided you last quarter for sales. Truck volumes in North America, Europe and South America were slightly higher-than-expected as our OE customers ramped up production during the quarter. On the bottom half of this chart, we provide you with a glimpse of a trajectory for North America rear axle production from April to June as we saw production come back online. As I said last quarter, we took aggressive cost-reduction measures early to help minimize operating cash outflow in the near-term. The impact of those actions is favorably reflected in our results this quarter. Operating cash flow was far better than we anticipated even with the $124 million impact of our factoring program online. Our liquidity position at the end of the third quarter was $970 million. This represents approximately 29% of our trailing 12-month sales. Cash on the balance sheet was $280 million, providing a strong backstop to weather the uncertainties of today’s economic conditions. On Slide 4, we want to give you an update on specific actions we are taking to effectively manage the business during this time frame. The safety of our employees remains our highest priority. We have put in place numerous protocols in our manufacturing plants and office facilities, including employee entrant screening, social distancing, face coverings and avid cleaning. Last quarter, I talked to you about the appointment of our Chief Safety Compliance Officer. Since that time, he and his team have traveled to many of our facilities to ensure compliance with our policies and identify any areas that require improvement. This represents just one of the additional investments we have made to give our employees confidence in the safety of our work sites. I want to take the time to thank our employees for their patience and cooperation with the changes required to operate during the continuing pandemic. Wearing a mask for an entire shift is challenging at past, but it’s even more difficult with the warm weather we are experiencing in most regions. We appreciate their support of our safety protocols to keep our colleagues and their families safe. With the new safety practices implemented throughout our working environment, it has been encouraging to see that we are now operating on similar levels of efficiency in our manufacturing plants as we were prior to the pandemic. This gives us confidence that we can respond to rapid changes in volume that historically occur in our industry. We continue to track COVID-19 tests positive results and recovery statistics within the company so that we can react quickly if an issue arises in any of our facilities. In addition to our operations, we have now begun to gradually open administrative offices, including our corporate headquarters, which we are managing in a phased approach. As we told you last quarter, we have initiated various actions to reduce costs, including an 8% reduction in our global salaried workforce that we announced at the beginning of June. These actions will be substantially complete by the end of the calendar year. We expect to achieve more than $30 million of run rate savings through the M2022 time frame. In addition, we have implemented additional cost restriction programs that should have a benefit to the fiscal year 2021 earnings of more than $10 million. As you know, we’ve reduced paid for salaried employees early in the crisis to protect the business long-term. Since that time, we had stepped down those reductions, but are maintaining reduced pay from original levels ranging from 10% to 20%, at this time, for our employees in the United States and Canada. While implementing the measures necessary to manage the business in the near-term, we also remain focused on maintaining the long-term health of the company. We are investing in all key areas of our growth strategy, including the electrification portfolio. Commercial vehicle manufacturers globally remain focused on pursuing electrified drivetrains. Meritor is investing in a complete portfolio of electric drivetrains that we believe will be the preferred solutions for the global medium and heavy-duty commercial vehicle markets. And we are moving full speed ahead to have the 14Xe production-ready for customers in 2021. Currently, eight vehicles on dialers eM2 innovation fleet are running with Meritor’s 14Xe powertrain and have accumulated significant test miles since April of this year. We are also investing to expand our core business. An excellent example of this is our new single-piston air disc brake that will launch for trailers first and trucks within the next year. On Slide 5, I’m proud to share a number of business highlights that have occurred over the past several months. The wins on the left represent new or retained business in our truck, trailer and industrial businesses in various regions, in addition to an agreement with a Japanese manufacturer for electric drivetrains. Meritor will provide drive systems adapted to work with this manufacturers energy and control systems for electric test trucks to be built in 2020. In our core businesses, we have important new contracts for on-highway and trailer axles and a new award with Iveco Defence defense, for military application that will be deployed by the Dutch Department of Defense. Our operations in Australia were honored with supplier of the year from PACCAR and Penske, and we are excited that this month, we will celebrate production of the 100 millionth brake shoe in our Indiana facility, a benchmark, no other company can match. There is no doubt, this was a challenging quarter, but I am pleased with the way the company responded as the speed and decision-making and execution we’ve demonstrated. This allowed us to quickly refocus on managing the business toward achievement of our long-term objectives as demonstrated by the positive business highlights on this slide. With that, I’ll turn the call over to Carl.

[Carl Anderson:]

Thanks, Jay, and good morning. On today’s call, I’ll review our third quarter financial results, our recent liquidity action and our financial outlook for the fourth quarter. Now let’s walk through our third quarter financial results compared to the prior year on Slide 6. Earlier this week, we filed an 8-K regarding the change in our reporting segment. This aligns with the management and restructuring changes previously announced. As of the third quarter of fiscal year 2020, the company’s new segments are commercial truck, which now includes our trailer business and aftermarket and industrial. The prior year segment financial results have been recast to the changes. In our third quarter, sales were $514 million, down 56% from the same period last year. Sales in our Commercial Truck segment decreased by almost $600 million year-over-year to $336 million. The decrease in revenue was driven by significantly lower market volumes across the segment due to COVID 19. As Jay discussed, we did, however, see production levels in most of our markets begin to pick up in June. The one market that held up reasonably well in China as operations say over near-normal production levels during the third quarter. In our aftermarket and industrial segment, sales were $203 million, down $79 million from last year. While our aftermarket facilities continued to operate during the quarter, sales were lower due to changes in customer demand. Additionally, we did a $28 million less sales related to the termination of the WABCO distribution arrangement. The industrial business was also hampered by market conditions, but lower sales were partially offset by $37 million in revenue generated from our AxleTech business. Net income from continuing operations attributable to the company was negative $36 million compared to $85 million in the same period last year. In the quarter, we did recognize $12 million in restructuring costs, due to the headcount actions we began to implement to help rightsize the cost structure for the company. Adjusted EBITDA was $7 million in the third quarter of fiscal 2020 compared to $146 million in the same period last year. Adjusted EBITDA margin was 1.4% compared to 12.5% a year ago. Overall, this resulted in 21% downside earnings conversion, which we feel is a good result given the rapid revenue declines we experienced. The decrease in margin was largely driven by lower revenues, as well as $10 million of lower joint venture earnings. We were able to partially offset lower sales with $30 million of aggressive cost action executed in the quarter. While some actions are temporary, such as salary and benefit reductions, it allowed us time to evaluate a broader workforce reduction action, which we started to execute in June. Segment adjusted EBITDA for Commercial Truck was negative $23 million, down $120 million from last year. Segment adjusted EBITDA margin came in at negative 6.8%, down from 10.5% in the prior year. The decrease in segment adjusted EBITDA and EBITDA margin were driven by significantly decreased market from volumes for most reasons across the segments, partially offset by cost action executed in the quarter. Segment adjusted EBITDA for aftermarket and industrial was $31 million, a decrease of $19 million compared to the third quarter of last year. Segment adjusted EBITDA margin decreased from 17.7% to 15.3%. The decrease was driven by lower volumes, partially offset by the cost actions executed in the quarter. Turning to cash flow. On our last earnings call, we’ve provided operating cash flow guidance of an outflow from $150 million to $225 million. Our extra results of negative $102 million exceeded our expectation, as the team did an excellent job managing working capital and overall costs, which drove this result. In fact, if you adjust for the onetime factoring online of $124 million in the quarter, we were able to generate positive cash flow from operations. As a reminder, our banking programs primarily relate to receivables in our European operations, which allow us to receive cash shortly after the receivables are generated. As production continues to build, this will provide a tailwind to cash flow as we go forward. Next, I’ll review the new bond issuance we executed during the quarter on Slide 7. As the credit market significantly improved in June, we seemed an opportunity to further bolster the company’s liquidity position. We issued a five-year $300 million bond with an interest rate of 6.25%. This allowed us to completely repay our revolving credit facility, which is now fully available as undrawn liquidity. While we will have higher interest expense as a result of this transaction going forward, it is important to note this is a refinancing of borrowings, which were outstanding under our revolving credit facility. Excluding the cash use related to our factoring programs, which will unwind as production resumes, our net debt level has remained roughly flat this year. Overall, this transaction significantly bolstered our liquidity position, which now stands at nearly $1 billion. In fact, we now actually have more liquidity as of June than we had when we started the year. As a result, we have a clear runway on our debt profile and expect to be in compliance with the financial covenant and our revolver throughout the end 2022 planning data. Next, I’ll review our fourth quarter 2020 outlook on Slide 8. Our market outlook highlights our expectations for improving market conditions in both North America and Europe. Overall, we expect production in both the North American Class A and European markets to increase by over 70% on a sequential base. Additionally, we expect India to recover to approximately 40,000 units in the fourth quarter from very low production levels we experienced last quarter. Given these assumptions, we anticipate revenue of around $700 million in the final quarter of fiscal 2020. We expect adjusted EBITDA margin to increase approximately 6%, which implied sequential conversion on incremental revenue of almost 19%. We are beginning to see the benefit from the headcount actions we began to execute last quarter and expect this to further increase as we get into next year. In addition, we are planning for a sequential step-up in electrification-related investment that is providing a headwind drop in the fourth quarter. Adjusted EPS is expected to improve to a loss of $0.10 per share on the improved earnings. Free cash flows estimated at approximately $25 million, which includes $40 million in capital expenditures expected in the quarter. As we have discussed, the unwind of our faction programs was the use of cash in the third quarter. We expect this impact will start reversing in the fourth quarter as production levels continue to improve. As we enter the last several months of our fiscal year, we have demonstrated our ability to take decisive actions to quickly adjust to significantly lower volumes, preserving the actions we have taken to strengthen our balance sheet over the last several years. I will now turn the call back over to Jay, who will provide you with some additional comments regarding next year and in 2022.

[Jay Craig:]

Thanks, Carl. Last quarter, we discussed providing a 2021 outlook on this call, which is a quarter earlier than our normal practice. Due to the market uncertainty, back in the March and April time frame, we thought pulling forward this timing would be constructive. Since then, we have had an acceleration of production in most of our markets and are seeing build expectations increase through our first quarter of 2021. We think it is now prudent to provide our outlook for next year, on our November earnings call, when we have a better view of the sustainability of the increasing production trends. We did, however, model how the company would perform, should markets remain in a prolonged economic downturn. That can be found in the appendix of this presentation. This model reflects the benefit of the cost reduction actions we have recently put in place. Under these economic conditions, we would expect to generate approximately $2.9 billion of revenue and a 9% adjusted EBITDA margin. We also would expect to generate positive free cash flow in this type of environment. We believe this would be a floor to our performance. Should markets improve from these assumptions, we would expect greater than 20% conversion on the incremental revenue. We expect the cost actions taken this year will allow us to convert above our historical range of 15% to 20%. Now let’s turn to Slide 9. The main takeaway of this slide is to reiterate our focus on our M2022 financial targets. While the continued unpredictability of the virus drives volatility in the market outlook. We are confident that if conditions hold, we can achieve three of the four financial targets. As mentioned previously, a large portion of the cost reduction actions taken this quarter and next will benefit 2022 fiscal year results. This provides us with confidence in achieving the margin target of 12.5%. We continue to use similar market assumptions for our major end markets around the world. These assumptions assume a return to replacement demand for our products. Given the anticipated impact of the pandemic on our markets in fiscal year 2020 and 2021, we anticipate a reduction in cumulative free cash flow generation from our original assumptions. This reduced cash flow will happen to impact on the amount of future share repurchase activity and our ability to achieve our original EPS target. If, however, our end markets were to substantially improve, we may have a line of sight to achieving the EPS target as well. As I had said, we took aggressive actions to reduce our cost structure in the short-term to preserve liquidity and avoid any transference of enterprise value to debt. At the same time, we are making the appropriate investments to ensure the company is in a strong product position for the future. These actions have given us confidence to keep our M2022 objectives, largely intact. Until that time when COVID-19 has brought under control globally and markets begin to rebound to pre-pandemic levels, we will maintain our short and long-term strategy to manage cash flow effectively for the benefit of shareholders, while continuing to invest in our future. Now we will take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Brian Johnson with Barclays. Your line is open.

[Brian Johnson:]

Thank you, ma’am. Your market forecast for 4Q – good morning, Meritor team.

[Jay Craig:]

Good morning.

[Brian Johnson:]

Your market forecast for 4Q is higher than some third-party forecast. What are you hearing from customers? How much of those are given where almost halfway or let’s say, one-third into the quarter. How much of those are orders? As you kind of lookout to the freight environment, how much of it is supported by ongoing strength in trucking and so forth?

[Chris Villavarayan:]

So this is Chris Vill, Brian. Thanks for the question. Brian. I’ll take that one. So I think when you look at it, Act has not updated forecast for a bit of time here, they’re still at 38,000 if you look at bills, looking at June, that was running at 19,000. So if you took that and multiplied it by three, you would see that our forecast for Q4 is pretty much in line. We do see some customers taking some shutdown so through that period. As well, to your point, we already have – we already see where we are in July and August is pretty much full, and we’re working with our customers in June. So we feel quite comfortable with our forecast for Q4.

[Brian Johnson:]

Okay. Second question, decremental margins up 20%, far better than – I think we are the market we’re looking for. Can we expect this in future downturns? Or are there big chunks of semi-fixed costs that you were able to take out that if we have more modest fluctuations in build volumes would clearly be available?

[Carl Anderson:]

Brian, it’s Carl. Good morning. If you think about our decremental margins, I think the history of the company. We’ve always pointed is 15 to 20-point kind of range. I would say in more normalized downside type scenarios, we actually have trended a little bit better than that from a performance perspective. So I think as Jay has alluded to on the call, we did take some tough actions in the quarter as it related to headcount. And I think similar to how we’ve operated historically, whether they’re up markets or down markets, we do expect to perform quite well in those scenarios.

[Brian Johnson:]

Okay. And then final question. You did mention the Blue Horizon win. But also, about the pandemic, the quarter, I think, was noted by notable market caps for some electric and hybrid electric truck companies that debuted on the market grows back. What percent now; a, just the trend towards battery electric both fuel cell electric vehicles; and b, where Meritor’s role’s going to be in that?

[Jay Craig:]

Yes. I think, Brian, it’s following the trend we expected and spoke about now for a year or more, which is we’re getting into limited production awards, which obviously, we received the PACCAR award. I talked about some of the other customers that we’re working with prototype vehicles on the call today. And we expect to have, obviously, very good chance of receiving those limited production awards with those customers in the future. So we’re starting to see those volumes come through, and we would expect our electrification revenue to become measurable here over the next year or two and I think you’re starting to see the trend of the different fleets, individual owners and operators throughout the world, testing different vehicles and different configurations. And as those tests are successful and the trends remain moving forward, particularly on government regulation and incentives, I think you can see volumes begin to pick up from there.

[Brian Johnson:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of James Picariello with KeyBanc Capital Markets. Your line is open.

[James Picariello:]

Hey, good morning, guys.

[Jay Craig:]

Good morning, James.

[James Picariello:]

On the $30 million in run rate cost savings, what’s the timing on that fully achieved?

[Carl Anderson:]

We’re starting to see the benefit, obviously, on quarter end now, but I think most of the actions we expect to be done by the – in our first quarter. So we should kind of get the full run rate of that would beginning in calendar year next year.

[James Picariello:]

Okay, got it. On your M2022 targets, I mean, it sounds as though your market volume assumptions are unchanged, at least for North America and Europe relative to the original framework. Would the absolute revenue target still be that same number, just under $4 billion, as originally outlined?

[Carl Anderson:]

Yes. And really two – I mean, the one thing, most of the market assumptions that we had originally were replacement demand levels that we had back when we had our – when we rolled out our M2022 strategy. That really hasn’t changed is how we model. I think the one thing that we’re watching a little bit more closely, James, is really relates to foreign exchange. So there could be – obviously, that’s moving and has moved, and so that’s something we’re keeping an eye on as we think about what that could mean as far as absolute revenue dollars in 2022.

[James Picariello:]

Okay. Got it. So just to confirm, for – as we think about FY2021, the 15% to 20% conversion on next year’s revenue, maybe that’s trending closer to 20%. Would that be before the $30 million in savings or would that – would the sort of lean savings related to get that 20%?

[Jay Craig:]

No, Brian, this is our chance, this is Jay. As Carl said, the full run rate of those don’t begin until January 1 next year. So we’re not getting that entire benefit in this period, but a large portion of it is reflected here. But understand there is some negative in incremental comparatives. Because the salary reduction amounts are stepping down. So we kind of had those two levers going in opposite directions. But you’re right, we are converting at close to 20% in these assumptions.

[James Picariello:]

Okay. Got it. On buybacks, is there a particular net leverage level you’d like to be at to resume repurchases? I mean, how should we just be thinking about what the potential is for timing?

[Carl Anderson:]

It’s something that we’re watching closely, James, as you would expect. I think as we look at, obviously, our leverage in this quarter, on a trailing 12-month basis, it’s probably closer around 2.8, 2.9x. So just as a of EBITDA dollars have dropped, we’re seeing leverage increase so I think it really comes down to – I don’t think there’s a leverage target by itself. I think we’ll be really looking more forward to our conviction and overall assessment of how markets are performing, and we would take a closer look at that, but we’d be willing to lean out even with an elevated leverage ratio, we’d have to discuss that. But overall, our objective is still to drive and to have strong bill credit metrics for the company, which involve our terms but around at 1.5 times leverage ratio.

[James Picariello:]

Got it. That’s helpful. And Jay, I think last quarter, you mentioned an electrification pipeline of roughly $500 million. Can you just maybe clarify what that number was, what it maybe looks like today? And have you communicated what portion of that or what portion of the awards you have booked as of today?

[Jay Craig:]

Well, we have to pack our award so far. I think the pipeline, we still feel is something that similar range although with some of these new prototype programs, I think there’s a potential it could be increasing in the future. So I think what we’re most pleased with is our strategy of focusing on electrified drivetrains almost exclusively. It is paying big dividends. We feel like our product is market-leading or having numerous OEs put significant amount of test miles on those products. And they’re gaining confidence that this drivetrain is real, it works, it performs well in all environments. So we feel very bullish on that in the future.

[James Picariello:]

Got it. Thanks, guys.

[Jay Craig:]

Thank you.

[Carl Anderson:]

Thank you, James.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Ryan Brinkman with JP Morgan. Your line is open.

[Rajat Gupta:]

Hi, good morning. Thanks for taking our questions. This is Rajat Gupta on for Ryan. I just wanted to follow-up on the incremental margin question for M2022, the guidance seems to imply roughly 20% incrementals. Could you give us a sense of what the assumptions are like the aftermarket there? And then the incremental, decrementals across the two segments? And also, like what kind of investments related to electrification is baked into those assumptions as well? And I have a follow-up. Thanks.

[Carl Anderson:]

Sure, so good morning. Yes, as we look at M2022 and what Jay walked through on the slide, what – really, the intent of that was just to provide the context as far as where the company is and what we’re focused on as it relates to ensuring that we’re driving to achieve three, if not four of the financial targets that we’ve laid out back in December of 2018. So really, at this point, we’re not kind of getting into updating the rest of the other markets, but I – you should presume really at this point that what we’re assuming is that most of the assumptions are replacement, demand-level type of markets. And as we look at the overall business, that’s how we’ve kind of been able to kind of set this up as it relates to what we provided today.

[Jay Craig:]

And I would say also right on the electrification question, our assumption is continued development and launch of the entire eAxle drivetrain portfolio. So 14Xe, the 12Xe, the 17Xe and bringing those markets to production as necessary to meet what we see in the pipeline for opportunities. So we could see some increased spending as we bring those products into larger-scale production over that time period, and we’ve incorporated those assumptions into that outlook.

[Rajat Gupta:]

Got it. That’s helpful. And just as a follow-up, any update on AxleTech? Where the revenues were in the quarter? Like what kind of just what the profitability level there is right now? And just also, basically any update on how the synergies will track? That will be all. Thanks.

[Carl Anderson:]

Yes, really AxleTech, for the quarter, we had about $38 million of revenue in the quarter. So a little bit lower than what the original expectations were just kind of given the current state economic condition. As it relates to what it’s been in our control, what has been our execution on the various cost synergies. So I think those have come in line and kind of right on track of how we’ve originally modeled that business. But right now, we are experiencing some revenue headwinds, which is affecting the margin for that business.

[Rajat Gupta:]

Understood. Thanks so much, and good luck.

[Jay Craig:]

Thank you.

[Carl Anderson:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Joe Spak with RBC Capital Markets. Your line is open.

[Joe Spak:]

Thanks. Good morning, everyone. Todd, maybe you could just talk a little bit more about maybe what we sort of seen on the decremental margin side versus what sort of implied maybe on the incremental margin side? And is that really just sort of some of the timing in terms of transitioning temporary costs to sort of more permanent costs?

[Todd Chirillo:]

Yes, Joe, that’s exactly right. So if you think about the fourth quarter, as Jay talked about, we have been stepping down some of the pay cuts that we’ve had that we came out with – in last quarter. So you’re seeing that step down. At the same time, we’re beginning to ramp up some of the savings from the headcount action. So yes, you do have some overlap and some timing issues, one. I think, two, we also visited to the fourth quarter, we are seeing an increase sequentially in our electrification investments just based off of the number of programs and the number of opportunities that are in front of us. And those are kind of that really the two moving pieces. If you focus, specifically, on the fourth quarter as far as where our margins are forecasted at this point.

[Joe Spak:]

Okay. And then I just want to – apologies if I missed this, I joined the call a little bit late, but when you sort of returning to the end of 2022 targets, you have business wins on track, EBITDA margin on track, free cash flow is on track, the EPS lower. Is that any market assumption that’s sort of been driving it lower? And I guess, maybe what’s sort of the delta between now versus prior? And how should we think about the linearity, I guess, between – or the bridge from 2020 to 2022? Because you’re talking about 2020 and 2022, but 2021 is sort of absent?

[Jay Craig:]

Yes. Joe, again, our market assumptions are basically unchanged from when we launched the plan and announced it. We assume that around the globe that our markets, for the most part, return to replacement demand. So in North America, roughly 250,000 Class 8 units. We still think that’s a reasonable assumption. I know some people have said, well, with demand being depressed for 1.5 years, potentially maybe it could be higher than that. It could be, and the important thing for us is to make sure we’ve retained the resources in the company and in our supply base to respond if the market is stronger, which we have. But that we’re not relying on unusually strong markets to achieve the targets, I think what gives us the remaining confidence is the success of our cost reduction strategies and how many of those, we think will remain in place throughout this time period.

[Joe Spak:]

So – sorry, and what’s driving the lower EPS spend? Is that maybe I missed, sorry?

[Jay Craig:]

Sorry, the EPS, I did comment on that in the call, Joe. Sorry, I missed that. That’s just a mathematical issue of in 2020, obviously. And potentially in 2021, if markets remain depressed, our cumulative cash flow generation will be significantly less than we had in the original plan. And therefore, future share repurchases could be far less than what we originally modeled. Now if markets pick up next year, in 2021, earlier than what we anticipated in this model, we could close that gap very, very quickly.

[Joe Spak:]

Okay.

[Carl Anderson:]

And Joe, the other piece of that is we do expect to have a little bit higher interest expense as well in 2022 than what we originally modeled, just based off the refinancing we just did as well. So those are the bridges are in the share repurchase that Jay talked to as well as higher interest expense.

[Joe Spak:]

Okay. Lastly, let’s say, on India, I noticed a big sequential increase in your quarterly outlook. Are we through the worst of the depths or the declines in India, in the market?

[Chris Villavarayan:]

Yes. Joe, this is Chris Villavarayan. Good morning. I’ll take that question. We believe so. I think if you look at last quarter, in Q2, India made a grand total of about 8,000 trucks, and I think you have to go back 30 years almost to see something similar. And on top of that, if you remember, with the change from BS4 to BS6, the OEMs who had to liquidate all the inventory. So there was already a low point in inventory on the market when we think about the transition and COVID just kind of drove it to another significantly lower level. All that said, our belief is that as you think about the Indian government driving through actions to drive over the next two years, about $70 billion of infrastructure spend or $1 trillion in Indian rupees or their growth forecast of 8% as they’re driving through their 2025 plan. I think our expectation is that this market will have to continue to grow. So as we drive back to, let’s call it, replacement demand, we do see this picking. The only caveat to that is obviously the COVID-19 situation and just watching how that plays out here.

[Joe Spak:]

So is the fourth quarter rate, like maybe if we annualize that, is that a decent proxy for how you see that market playing out into 2021?

[Chris Villavarayan:]

No, I don’t think you can annualize that. I think we would probably see – what we’re playing out right now is that market is, let’s call it, a higher market to drive to fill back the pipeline on the inventory. And then we would probably see something that transitions back down and then back up in the back end of the year.

[Joe Spak:]

Okay, thank you very much, very helpful.

[Chris Villavarayan:]

Yes.

[Jay Craig:]

Thanks, Joe.

[Operator:]

Thank you. I’m showing no further questions in the queue. I will now turn the call back over to the management for closing remarks.

[Todd Chirillo:]

Thank you, and thank you for joining Meritor’s third quarter 2020 earnings call. If you have any questions, please feel free to reach out to me directly. Have a great day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may all disconnect. Everyone, have a great day.