Meritor, Inc.
Q2 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Meritor Incorporated 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 conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Todd Chirillo, Senior Director of Investor Relations. Sir, you may begin.

[Todd Chirillo:]

Thank you, Daniel. Good morning, everyone, and welcome to Meritor's second quarter 2019 earnings call. On the call today, we have Jay Craig, 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's protected by U.S. and international copyright law and may not be rebroadcast without the express written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Now let me refer you to Slide 2 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 Jay.

[Jay Craig:]

Thanks, Todd, and good morning. Let's turn to Slide 3. We had another great quarter with total company revenue up $90 million from a year ago. Adjusted EBITDA margin was 12%, one of our strongest margin quarters on record and adjusted diluted EPS increased 37% to $1.03 per share. Similar to our first fiscal quarter, higher truck production in North America combined with revenue outperformance drove the majority of the revenue increase. Carl will give you more detail on the financials, but we are pleased with our excellent performance in the first half of the year. Our strong first half results combined with our forecast for the remainder of the year leads us once again to raise our outlook for the full year. As you know, we now have less than six months before we complete M2019, the second three year plan we expect to successfully deliver. The turnaround that we have executed at Meritor over the past several years has significantly increase shareholder value. As I've said before, we have not only strengthened the company in all financial aspects, we have also expanded our customer base, growing our relationships with long-term partners and developed a robust product line across multiple applications that now extends into electric drivetrain solutions for the future. We have sustained the momentum that began in 2013 and are excited to roll into the M22 plan, which we will execute with the same figure and commitment that we have with the past two. On Slide 4, we want to give you a few highlights from our off-highway business that we announced at the Bauma Construction Show in Germany a few weeks ago. As we said, we are on a strategic path to grow our off-highway business and have been making significant investments for a cadence of new product launches. The investments we're making are to sign to provide our customers with the most innovative, best performing products for their specific applications, all purpose built for the unique demands of the off-highway market. We began our reentry into the off-highway business in 2017 and have made significant progress in just two years. We believe this is because we have several important competitive differentiators including our ability to leverage the scale of our on-highway business, reduce lead times, service parts replacement, typically within 24 hours and innovative product solutions. At the Bauma show, we announced a range of planetary axles for material handling equipment highlighted by Meritor’s new electric forklift axel under our blue horizon brand. We also announced three new breaking solutions designed specifically for the demands of the off-highway market. We have new business with customers in the United States and in Europe such as BAS Mining and Astra of CNH Industrial Company, each of which displayed vehicles with Meritor 610 series axles. Our team is doing excellent work to grow our off-highway relationships around the world. Meritor has the legacy in this business with proven product expertise, quality, dependability, and service reliability. Now let's look at Slide 5 for an update on our electrification activities. This slide illustrates the range of customers and vehicles that are equipped with Meritor’s electrification solutions. Currently, we have 22 programs, which we expect to result in more than 130 vehicles being built over the next couple of years in collaboration with TransPower. Last week at the ACT Expo Show in California, Meritor’s products were visible in many of our customers vehicle displays including the Kalmar Dock Spotter, Peterbilt Class 6 all electric 220 with Meritor’s e-axle, Peterbilt all electric Class 8 579 electric vehicles, The Nikola Two with Meritor’s independent suspension that has the lightest weight and best turning radius in the industry. And we are working with Daimler on the Thomas Built Bus in addition to providing five e-axles for its medium duty innovation space. Beyond North America, we are working with other major OEMs on their electrification programs including MAN in South America, Ashok Leyland in India and others. Over the past couple of years, we have remain focused on the challenge of developing battery electric vehicle powertrains that optimize efficiency range, rate, packaging and ride and handling while providing a robust system that maximizes uptime and provides a return for the customer's investment. We know that no two duty cycles all regions are the same and that require a flexible and scalable design that delivers to a wide range of performance expectations. The collaboration between fleets, OEMs, and our systems integration partner TransPower across a wide range of applications is a key success factor that will bend the development cycle and accelerate battery electric vehicle technology from a prototype to low volume production and eventually series production. In conjunction with TransPower, Meritor has been awarded a $17 million contract with shippers transport to supply 38 DINA terminal tractors that will operate in Long Beach and the Port of Oakland. These terminal tractors will be equipped with a TransPower designed electric drive system, energy storage subsystems and controls. They are being developed to operate 16 hours a day and hauled up to 130,000 pounds of cargo. Delivery of these vehicles will begin later this year. In closing, just like last quarter and many before it, I'm pleased with our performance in the second quarter. And now, I'll turn the call over to Carl for a more detailed review of the financials.

[Carl Anderson:]

Thanks, Jay, and good morning. On today's call, I'll review our second quarter financial results and our updated 2019 guidance. As you heard from Jay, we had another strong quarter of financial performance. We saw a year-over-year increases in revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share. Building on the strong results for the first six months of 2019 and our expectations going forward, we expect to significantly outperform our M2019 adjusted diluted earnings per share objective of $2.84. Let's walk through the details by turning to Slide 6, where you'll see our second quarter financial results compared to the prior year. Sales were $1.156 billion in the quarter, up 8% from a year ago, driven primarily by a 22% increase in North America Class 8 truck production. We now expect that these higher production levels will continue for the remainder of our fiscal year. And while end markets are strong, we’re also seeing the benefit of continued revenue outperformance across both of our segments, which contributed approximately one-half of the overall net sales increased this quarter. Driven primarily by conversion on the higher revenue, we generated adjusted EBITDA of $139 million resulting in an adjusted EBITDA margin of 12%. As you can see from the chart on the right, earnings from stronger revenue were partially offset by foreign exchange headwinds as the U.S. dollar strengthen against most major currencies. This impacted sales by $39 million and adjusted EBIDTA by $6 million compared to the prior year. Additionally, you may recall last year we accrued an $8 million environmental liability related to a legacy site, which was a headwind to our performance in the second quarter of last year. Overall revenue was up $90 million, which helped to drive $17 million of higher adjusted EBITDA in the quarter. On the left hand side of the chart, you’ll see that were reporting $73 million of GAAP net income from continuing operations, an increase of $16 million from last year. Adjusted income from continuing operations was $88 million resulting in $1.3 per adjusted diluted share, a 37% increase over last year. For the first six months of the year, we have now generated adjusted diluted earnings per share of $1.81. And finally, free cash flow was $19 million this quarter, compared to $22 million in the same period last year. We have invested in higher working capital to support strong global demand and a moderately higher capital investments in the quarter. Both of these have offset the impact from expanded margins and higher overall earnings. Let’s move to Slide 7, which details our second quarter sales and adjusted EBITDA for both of our reporting segments. Earlier this week, we filed an 8-K regarding the realignment of our reporting segments. This aligns with the management changes announced in March. As of the second quarter of fiscal year 2019, the company’s new segments are, commercial truck and Aftermarket, Industrial and Trailer. The prior year segment financial results have been recast for these changes. In our commercial truck segment, sales increased by 7% to $876 million. The increase in revenue was primarily driven by higher truck production in North America, partially offset by unfavorable foreign exchange. Segment adjusted EBITDA was $88 million down to $6 million from last year. Segment adjusted EBITDA margin for commercial truck came in at 10%, down 150 basis points compared to the prior year. The decrease in adjusted EBITDA and EBITDA margin was driven primarily by higher net steel, freight and layered capacity costs partially offset by the conversion on higher revenue. We expect these higher costs to begin decelerating in our fourth fiscal quarter based on operational actions executed over the past several months. In our Aftermarket, Industrial and Trailer segment, sales were $329 million, up 11% from last year. The higher sales were driven by increased industrial, trailer and aftermarket volumes in North America and from pricing actions within our aftermarket business. Segment adjusted EBITDA was $52 million, an increase of $14 million or almost 40% compared to last year. Segment adjusted EBITDA margin grew 300 basis points to 15.8%, this growth was driven primarily by the pricing actions, executed, recover commodity, freight and tariff costs within our North America aftermarket business, along with a conversion on higher volumes. Next I’ll review our updated fiscal year 2019 global market outlook on Slide 8. Although we’ve seen some softening of North America Class 8 truck orders this calendar year. The backlog continues to be strong, which is driving a backlog to build the ratio of approximately eight months. This gives us confidence that production level should remain elevated for the rest of our fiscal year. Therefore, we are increasing our production estimate to approximately 350,000 units. Our forecasts for the U.S. trailer market has increased by 10,000 units, driven by strong orders and higher industry backlogs. Additionally, we have adjusted our revenue forecast for the China market to a range of approximately $190 million to $200 million. While our market expectations for China are relatively unchanged, this change in revenue was primarily driven by a shift of some export production which will now be service directly from our European operations. In Europe, we are keeping our production forecast unchanged. However, we are beginning to see some signs, the market may begin to soften later this year, as well as from the uncertainty surrounding Brexit. Our forecast for the remainder of the markets remained the same. Overall, solid to strong global end market support our continued positive outlook for 2019. Based on these updated assumptions, you can see we are again raising our guidance for fiscal year 2019 on Slide 9. We now expect revenue to be approximately $4.4 billion, up a $100 million from our prior guidance. Additionally, we are raising our outlook for adjusted EBITDA margin to approximately 11.7%, up 20 basis points from our prior guidance. By converting on strong top line revenue, we expect to generate an increase in adjusted income from continuing operations. This higher income is expected to drive adjusted diluted earnings per share to approximately $3.50, an increase of $0.20 from our prior guidance. And finally, we are maintaining our free cash flow outlook at $175 million to $185 million. The increase in cash flow from revenue growth is expected to be largely offset by a corresponding increase in working capital investment. We are now planning a slight reduction in capital expenditures as some of the projects from the previous outlook are now expected to move into next year. We are excited about the strong start to the first half of the year, and we continue to be focused on delivering a successful conclusion to M2019. Now, I’d like to turn the call back over to Jay.

[Jay Craig:]

Thanks, Carl. Let’s turn to Slide 10. As I said earlier, we’re on track to finish M2019 strong and begin M2022. Each of our plants builds on the one before it, and M2022 is no exception. One of the primary focuses of M2019 was diversified revenue growth, which we’ve achieved in off-highway, specialty, defense, trailer and components. This was profitable growth that drove our margin expansion of objectives and will be a continued focus in M2022. We have grown revenue roughly $1 billion in the last three years, of which more than half is from revenue outperformance. We are tracking towards delivering adjusted diluted EPS growth of 120% since 2015, and we also achieved our long-term credit target a year early. These achievements have set us up for the next chapter, which is M2022. We believe this plan will expand margins to strong industrial comparatives and drive more earnings gains and declining end markets while generating significant cash flows. We’re proud that the actions we’ve taken and the alignment we’ve demonstrated to our objectives have positioned us to be one of the top performing companies in our space. Now, let’s take your question.

[Operator:]

[Operator Instructions] Our first question comes from Neil Frohnapple with Buckingham Research. Your line is now open.

[Neil Frohnapple:]

Hi, good morning. Congrats on a great quarter.

[JayCraig:]

Thanks a lot Neil.

[Carl Anderson:]

Thanks, Neil.

[Neil Frohnapple:]

Just first, could you talk more about the commercial truck EBITDA margin performance in the quarter, the 150 basis point moderation from the prior year, curious if you’re able to quantify at all the headwind from that steel, freight and layered capacity. And Carl, I think you said that those costs should moderate in the fourth quarter, but just anymore granularity you can provide. And then as I guess related follow-up, if you could talk about some of the actions you guys implemented over the last few months to 8 margins there that would be helpful?

[Jay Craig:]

Sure, thanks a lot Neil. Great question. I’ll take a start at it and ask Carl to supplement with any additional details. There are really three things I’d think about in terms of that cost. So as you know, we’ve obviously seen a large increase in the end markets particularly in North America, but in addition to that, we’ve gained a significant market share over that same time period. So our focus has been to make sure we deliver on those gains in market share, which the team has been very successful at. But that’s caused us to incur some layered capacity including some internal to the – to the company such as shipping components from Europe and Brazil that we haven't done previously, which increased the freight costs and also bringing on some outside layered capacity suppliers where we didn't think it was prudent to build additional internal capacity. And that really has a kind of a double negative impact because we are also using some of the inventory from build – from previous periods with higher cost matching against the current period revenues. And then I would say the third issue is as the company has performed, we've determined that we should – we can and should increase our investments in electrification and that flows through commercial truck as well. So as I talked about during the call, we've seen some great activity in that area and we're very pleased with our market position. And as Carl mentioned in his comments, we expect those costs to begin to abate, particularly the freight and layered capacity as we get into the fourth quarter. But I would say overall with the company converting at 17% to 18% conversion margins, I believe the team is making all the right choices to balance short-term profitability against long-term strategic initiatives such as electrification.

[Neil Frohnapple:]

Absolutely, okay, and then aftermarket industrial and trailer margins were significantly better than I think anyone would have expected. So can you just help with the outlook here for the remainder of the year? I mean was there anything in Q2 that won't carry into the back half of the year? So just a question really on sustainability of those margins.

[Carl Anderson:]

Sure. Thanks, Neil. It’s Carl. Just – if I get update you on that – if we look at the second quarter, primarily it was really driven by certain pricing actions we've executed in our North America aftermarket business. As you may recall, we did some actions back in July of last year as well as in January of the current year. As we do look forward for the next several quarters, we are seeing higher investment expenses really associated with some of our off-highway and specialty businesses that will really kind of kick in the third quarter and the fourth quarter. So while the pricing actions you will see kind of carry through, they should – there would be an offset kind of based off some of these additional investments we're making.

[Neil Frohnapple:]

Okay, very helpful guys. Thanks, again.

[Jay Craig:]

Thanks, Neil.

[Carl Anderson:]

Thank you.

[Operator:]

Thank you. And our next question comes from Faheem Sabeiha with Longbow Research. Your line is now open.

[Faheem Sabeiha:]

All right, good morning, and congrats on a great quarter. And Carl, congrats on the promotion.

[Carl Anderson:]

Thanks, Faheem.

[Faheem Sabeiha:]

Just a couple of questions on the EV front. It sounds like you guys increased investments there. And then with the – it looks like you guys got a $17 million revenue opportunity from the terminal trucks. But I guess can you guys update us on revenues from EV programs this year and next year?

[Jay Craig:]

Sure. Thanks a lot Faheem. This is Jay. Yeah, I think our revenue expectations are still relatively consistent with what we’ve spoken about before. We talked about potentially upwards of $20 million of revenue in that area this year. I think we still feel comfortable with that. And then as far as we tend to look out to the time period in M2022 beyond that and as I've said before, we don't see it as a significantly meaningful part of our revenue in that time period, but if we get a significant production contract during that time, we will be updating that estimate obviously to the upside. So – but what I feel most pleased about and given the update and the time I spent last week at the ACT Expo. I think we are being represented more than our fair share of the test platform vehicles among all the OEs. So when that first production contract comes, once again, I think we have very good odds of being the winner in that arena.

[Faheem Sabeiha:]

Okay. And I guess with the 130 vehicles you guys called out. I think previously you guys said that the content is 5 to 10 times more than your traditional content. But I guess can you guys maybe breakdown of those 130 vehicles? What percent of them are say at the 10 times content? What percent of the five times content?

[Jay Craig:]

Those vehicles actually would be multiples of that multiple because they're prototypes. So the price and cost of those vehicles just quite a bit higher than what we expect in a production environment. But those are fully integrated electrification solutions. So they would be at the higher end of the content spectrum for us, if that's ultimately what moves into production.

[Faheem Sabeiha:]

Okay, thanks.

[Jay Craig:]

Thank you.

[Carl Anderson:]

Thank you.

[Operator:]

Thank you. And our next question comes from James Picariello with KeyBanc Capital Markets. Your line is now open.

[James Picariello:]

Hey, good morning guys.

[Jay Craig:]

Good morning.

[James Picariello:]

So you already had the question on the steel freight and capacity costs, but I'm interested in what the implication is for the commercial truck segment in the back half because even if we assume aftermarket industrial trailer margins remain strong in the second half in order to get to the full year consolidated guide that would require a sequential step up in the commercial truck margins this upcoming quarter. And then in that final quarter when we likely do see truck builds come down, there's some implied resilience in profitability there I think. So I am just curious what the context is there and your thoughts.

[Carl Anderson:]

Yeah, sure, James. As we look at – there's a couple of things driving that. One, if you look at kind of the steel headwinds that we've had throughout the first half of this year, we are believing that most of that on a year-over-year basis is will be kind of behind us as we especially get out into the fourth quarter. So I think that's one of the costs that you will begin to mitigate as I referenced earlier. The second component is really as Jay was alluded to as far as those layered capacity costs really starting to kind of come down in the fourth quarter. So it's a combination of both of those. And keep in mind if you do look at the second half of the year as it relates to Class 8 truck production, really it's very similar to what we've been experienced in the second quarter. So even our fourth fiscal quarter, we expect that the market is going to continue to be robust.

[Jay Craig:]

Yeah, the one thing I would add, James, is just at a higher level as – remember our strategy as – if we can gain market share during these up turns that we believe we’ll stick in more normalized markets. We will take advantage of that as long as we can continue to hit our profit objectives. And I think what you've seen these past two quarters is exactly that phenomenon where we have been approached by OEMs to take on additional production. And we've determined that we could do that through our system with reasonable profitability levels. And we think that bodes well for long-term franchise value as end markets come back to more normalized levels.

[James Picariello:]

Got it, that's helpful. And then focusing on the industrial piece, the off-highway, growth is clearly strong in the first half. Some of the larger heavy machinery OEMs are showing a deceleration in growth, which just makes sense giving the high level of growth that we've been seeing. But what's your expectation for the rest of the year for the Aftermarket Industrial and Trailers segment? Within your guide trailer builds come down in the back half. You do have some new business that you've won within trailers, so maybe some resilience there, but yeah, particularly for the industrial side, what's your expectation?

[Jay Craig:]

Yeah, James, as we look at second half versus first half, it's really – it's relatively flat. It's pretty stable that based off our expectations embedded in our guidance.

[James Picariello:]

Okay. If I could just slip one more the acquisition by WABCO or of WABCO by ZF, do you have any expectations for what ZF will decide on regarding the aftermarket business?

[Jay Craig:]

It really hasn't changed the terms of the agreement. We’ve reached with WABCO. We both still have put in call options on that business. So, we see really no change, particularly given the modeling assumption we put in the M2022 program where we expected that option to be exercised by one of us during that time period.

[James Picariello:]

Thanks. Thanks guys.

[Jay Craig:]

Thank you.

[Operator:]

Thank you. And our next question comes from Joseph Spak with RBC Capital Markets. Your line is now open.

[Joseph Spak:]

Thanks. Good morning everyone and congrats Carl on the new role as well. I hate to keep going back to these layered capacity costs, but you just mentioned, I think that you still expect Class 8 to remain strong during the year, but I thought you also said you thought the capacity costs would abate a little bit by the end of the year. So I just want to understand that – and really bigger picture – I mean, at what level do this layered capacity was really abate? And if you could call out the headwind, I think that's important because as you look to your M2022 plan, you're really calling for expanding margins in a lower volume environment. And I think what you're saying is that you're actually just a more efficient company at lower level. So if you could help us with that, that'd be appreciated.

[Jay Craig:]

No, I think you're exactly right, Joe. To start with the latter half of your question that is the expectation that we can expand margins at lower volume levels. And we've proven – we did that in the last downturn. So I – but we have a good track record at that. What we see, as I've mentioned, we don't believe it's an efficient use of capital to necessarily invest to chase these peak margins at this point in time as long as we're achieving our profit objectives, which we certainly are – we're exceeding them overall. And so those layered capacity costs at times can be measurable. I mean, the cost of shipping components, for example, from our plants in Europe and Brazil compared to producing them internally in North America has a measurable negative impact. Now we're putting in some actions as you would expect that we’ll come into a place over the next three months that will cause some reduction in those costs. And that's why we expect to see a benefit in the fourth quarter.

[Joseph Spak:]

Okay. Maybe just on the sales, there was a comment in release and I think in your prepared remarks as well about the outperformance and sort of the share gains. But if I look – and I don't know, maybe this is – maybe FX is playing with this a little bit, but it looks like you had a 7% increase in commercial truck. And that's sort of seems to us like maybe what the industry did from a build perspective. So how do you measure your outperformance versus sort of the industry in the quarter?

[Jay Craig:]

Yeah, so I think Joe as a reference, we’d about – we had a $90 million overall totaled increase in revenue and about half of that was really driven by revenue outperformance in the quarter.

[Joseph Spak:]

Okay, thank you. And finally, if I could slip one in on electrification where it seems like you're making some nice progress here. You talked about going from sort of almost like prototypes or sort of low volume and then serial production. How does the cost and reimbursement work with your customers, especially for those earlier stages? Like do you incur most of your R&D? Is it shared – like what should – how should we expect them to try as you work – walk through maybe that that progress you laid out?

[Jay Craig:]

A portion of it is shared, but there's pure R&D obviously that's absorbed by us. So for example, the development of the electric axle product line, it's really our cost and we've actually accelerated that development because we're seeing demand throughout the spectrum of vehicles for our design, people have gravitated to it. So that cost is absorbed. But as you see launch of these prototype vehicles, those costs tends to be reimbursed.

[Joseph Spak:]

Okay. So those R&D costs are sort of – where are we at the right run rate in the numbers now or should there be somewhat of an acceleration?

[Jay Craig:]

I think we're meeting the run rate we expected when we took the step up as we saw 2019 outperforming our expectations from an earnings perspective. We decided to lean forward a bit more into development. So we're at that run rate.

[Joseph Spak:]

Okay, thanks very much. Congrats again.

[Jay Craig:]

Thanks, Joe.

[Carl Anderson:]

Thanks.

[Operator:]

Thank you. And our next question comes from Colin Langan with UBS. Your line is now open.

[Colin Langan:]

Oh, great. Thanks for taking my questions and I congrats Carl as well on the promotion. Just to follow up on aftermarket, I'm not sure if I – I kind of missed this part. Sales are up 11% that seems quite strong for an aftermarket business. I mean is that the trailer part? Or as the core aftermarket growing that much and is that sustainable and [indiscernible]?

[Jay Craig:]

Yeah, Colin, it's really a combination of both higher performance on our industrial business as well as in trailer. So if you look at that segment now has both industrial and trailer in as well. So those are kind of the two primary businesses that drove that higher revenue.

[Colin Langan:]

So the underlying aftermarket.

[Jay Craig:]

Aftermarket was up slightly as well, as we looked at just the performance as well. But I would say the other – the other businesses where also kind of the tailwinds to the quarter.

[Colin Langan:]

Got it. And just can you just remind us your exposure to China and what you're staying over there?

[Jay Craig:]

Well, I think in China, remember we're primarily exposed to the off-highway heavy construction business. So we're seeing more stability in that market than you see people reporting on the on-highway truck business. So that that's why our outlook has remained consistent as we look at this time period for finishing out 2019. Certainly, the truck market has had a lot more volatility, but our exposure to that is a bit lower.

[Colin Langan:]

Got it. And just we step back and look at the overall increasing guidance. I mean is it basically the North America heavy truck and trailer outlook has improved or is there other factors that are driving improvement?

[Jay Craig:]

Yes, Colin, I think those are kind of the primary markets driving $100 million increase, but we – so we took out the Class 8 market 20,000 units and trailer market about 10,000 units. Most of really the other end markets we – left unchanged.

[Colin Langan:]

Okay. And just lastly, on tax, it seems like they were running at bit lower, I mean, is that – I mean is that [indiscernible]

[Jay Craig:]

Yeah, it's really just more timing. I think as we think about – the kind of the effective tax rate, we did see more revenue, more profitability in the U.S. which can help drive a little bit lower effective tax rate, but as we think about going forward, we still think that 15% effective tax rate is the right way to model us.

[Colin Langan:]

Okay, great. Thanks for taking my question.

[Jay Craig:]

Thanks, Colin

[Operator:]

Thank you. And our next question comes from Mike Baudendistel with Stifel. Your line is now open.

[Mike Baudendistel:]

Thank you. I just wanted to ask you on the multiyear opportunity in the off-highway business, can you just remind us how big is that business in revenue and sort of what's your objective over the next few years?

[Carl Anderson:]

Yes, I think – we think about that business, Mike, as far as industrial, it is a pretty significant part of our aftermarket industrial and trailers segment. And you have to keep in mind, it's not only kind of North America as Jay alluded to, it's also kind of in China as well. And you kind of see what we've done there as far as revenue, which is in China, it’s $190 million to $200 million. I think the industrial, business for us. I don't think we've actually put out absolute number, but I would say, it's a pretty significant part of that overall segment.

[Mike Baudendistel:]

Got it. And also wanted to see if you can provide a little bit more detail on the pricing action in the aftermarket business. Was that sort of across the board or was that sort of concentrated in certain – in certain markets and do you think there's more room as they are going forward?

[Carl Anderson:]

Yes, really it was North America specific, and it was a really design – if you recall last year, kind of given the run up in steel, in additional freight costs. So we did execute some pricing in July as well as going in January. But it was – it's targeted across certain products, but at the same time it was really kind of focused on those recoveries.

[Mike Baudendistel:]

Got it. And then I know you don't give guidance beyond the fiscal year, the current fiscal year, but just, some of your peers. So I said that inside the calendar fourth quarter starting to expect some, some slowing. I mean, do you have any similar expectations?

[Carl Anderson:]

You're correct. We don't give guidance behind our fiscal year, other than I think one of the few companies through the announcement of our three year plans, because very specific guidance about what we expect in those time period. So obviously, if the takeaway, I think from that last plan announcement is, we reduced market expectations to normalize markets throughout the world, and still showed a meaningful expansion in earnings and generation of significant cash flow.

[Mike Baudendistel:]

That's right. Thanks for the reminder on that. That's all I had. Thank you.

[Carl Anderson:]

Thank you.

[Operator:]

Thank you. Our next question comes from Alex Potter with Piper Jaffray. Your line is now open.

[Winnie Dong:]

Hi, this is Winnie Dong for Alex Potter. My first question is on the electrification. There's a growing number companies who seem to be mimicking, Meritor strategy as it relates to the axels whether it's through M&A or through organic product development. I was wondering how Meritor introduce the competitive landscape evolving? And in this context, how does Meritor intend to send your leadership role and electric truck drivetrain? Thanks.

[Jay Craig:]

Thanks, Winnie, very good question. Obviously it's something we watch very closely. Again, we're very pleased with, where our positioning is so far in the marketplace and our momentum is continuing. There are other critical capabilities we bring to the market in addition to just acquired technology. Obviously, we have a field sales force for example, here in the North America of 110 individuals to provide very quick follow-up particularly with prototype execution, which has viewed as critical by our customers. And we have 110 years of expertise on gearing and housing technology. So we're interested to see people in some ways copy, what our strategy looks like. But we think some of the embedded advantages we have from our long expertise in Drive Axles and drivetrain, should allow us a defensible market position.

[Winnie Dong:]

Thanks. Thanks for the color. And I just one more follow-up. Thus the updated guidance for years still any share buy back in about half of the year or does it not – so many share buy back? Thanks.

[Carl Anderson:]

It does not assume any further share repurchases for the year.

[Winnie Dong:]

Okay, thanks.

[Carl Anderson:]

Thanks, Winnie.

[Operator:]

Thank you. Our next question comes from Brian Johnson with Barclays. Your line is now open.

[Brian Johnson:]

Yes. Good morning. Congratulations Carl. And also congratulations Jay for mentoring CFO, now far larger company. I want to ask about the – so it's kind of a, I think a validation. In terms of – I just wanted to kind of understand where you're going with breaks and off-highway and maybe a, – I have three questions. A) Just a little bit of basic/recap on the WABCO relationship versus what you're doing in off-highway. Two, did you decide to enter this because of clarifying the relationship with WABCO or is that something where customers pulled in? And three, building on the last, I think, good question – as you kind of think about e-systems, especially for stop-and-go truck in a highway uses, you think about regenerative braking. So it's getting into the breaking area. It's sort of going to allow you to do full solutions including regenerative braking.

[Jay Craig:]

Sure. Thanks a lot Brian. And obviously we wish Kevin's the best of luck in this new role. As far as break, let me break it into three pieces. So the brakes market overall has been an area of significant investment for us, particularly as North America transition from on high value market from drum disc, and with the win of the Cascadia standard position a little over a year ago, that positions us extremely well for the transition to disc breaking That also leverages into the off-highway business as well because it brings us smart scale, and disc breaking us those applications get migrated potentially into the off-highway markets. And our acquisition of WABCO, which is directed specifically at off-highway drivetrain, also helps leverage our position and off-highway and provide smarter axles to put brakes on that – in that market. And then lastly in EV, we have shown are disc brakes that's specifically designed for our electric application. So it's lighter, and has different performance expectations as you correctly notice, that's more of the hand of the motor itself is used for breaking and it's regeneration of power. So I think we're extremely pleased, but based on a very concerted effort and focused investment in those areas over the last several years.

[Brian Johnson:]

Okay. And any – in M2022 is there a projection for how big break could be overall or do we have to kind of think about period – in a particular segments or…

[Jay Craig:]

Just closed one externally, but I think as she would know us so well Brian, we take in that program a 50% haircut on our gross revenue opportunities and we've rocked those up from a zero base budget. And we certainly have an internal expectation of the returns on the brakes, investments we've made, but we do not disclose those individual opportunities for competitive reasons externally.

[Brian Johnson:]

Okay. But within M2022 part of the contact grow to, as you mentioned earlier, normalizing, cyclical volumes would include contribution – 50% of the expected contribution of big growth and brakes.

[Jay Craig:]

That's correct. Yes.

[Brian Johnson:]

Okay. Thank you.

[Jay Craig:]

Thanks, Brain

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today's call. I’d now like to turn the call back over to Todd Chirillo for any further remarks.

[Todd Chirillo:]

Great. Thank you. And thank you everyone for your participation. This concludes Meritor’s second quarter 2019 earnings call. If you have any follow-up questions, please feel free to reach out to me directly. Thank you.

[Operator:]

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