Meritor, Inc.
Q1 2018 Earnings Call Transcript

Published: 31 Jan 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Meritor’s First Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be 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 turn the conference over to Carl Anderson, Vice President and Treasurer. Sir, you may begin.

[Carl Anderson:]

Thank you, Shannon. Good morning, everyone, and welcome to Meritor's First Quarter 2018 Earnings Call. On the call today, we have Jay Craig, CEO and President and Kevin Nowlan, 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 are recording, is the property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We considered 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 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, Carl. Let's turn to slide three. We have started the fiscal year with outstanding financial results. The Meritor team around the world continues to demonstrate our commitment to meet customers’ expectations in all areas. As we see increased demand for our products, as volumes strengthen in all of our regions, once again, we are successfully converting additional volumes to strong earnings growth. Our revenue in the first quarter was just over $900 million, up 29% from last year. This was driven by the higher volumes, the ramp up of new business wins that are providing a meaningful contribution and favorable foreign exchange impacts. With this revenue tailwind, we generated an 11% adjusted EBITDA margin this quarter, a 180 basis point expansion over the last year and adjusted diluted EPS of $0.62. Free cash flow was $15 million in the quarter. Notably, this is the first time we have had positive free cash flow in our first fiscal quarter in eight years. Kevin will provide more financial analysis in a few minutes, but we are very pleased with our results this quarter as we continue to demonstrate our progress toward achieving our M2019 targets. One of our key M2019 financial metrics was to achieve net debt to adjusted EBITDA of less than 1.5 times. Currently, we are at 1.8 times, almost a full turn lower than last year at this time and we're well on track to achieve this objective. In the beginning of January, S&P raised our corporate credit rating from BB- to BB, reflecting this improvement in our credit profile. Based on the outlook for higher volumes in our global end markets that Kevin will address later in the presentation and the new business wins that are tracking better than expected, we are raising our full year guidance across the board. As you know, we set an aggressive target in our M2019 plan to expand adjusted diluted EPS by 80% to $2.84 in fiscal 2019. Given our new financial outlook, we expect to achieve EPS in the range of $2.50 to $2.70 this fiscal year. This puts us close to achieving our most challenging target, M2019 targets 12 months early. Our success in driving the improvement we've had is due to the alignment and dedication we have throughout the organization. We are all working towards the same objectives. At Meritor, our team delivers on its commitments, whether they are safety, quality, delivery or financial, we make it happen. We announced a couple of weeks ago that we have realigned our operating segments so that we are structured more consistently with the way our customers are doing business globally. With Chris leading our new global truck group, Joe will ply-in his experience to the aftermarket and trailer segment and Rob focusing his time on industrial, where we see great growth opportunities. We are well positioned to continue the trajectory we've been on for the past several years. Now let’s move to slide for a look at China. We thought it was worth calling out that since 2015, our jump-off point for our M2019 targets, we are now anticipating an 80% increase in revenue or $80 million in the region this year. Our revenue growth initiatives in China include new products and new customers. We see China as a major growth opportunity for us as we look beyond 2019. Our DUALite family of products is the largest single program in this region, as market trends are supporting the mid premium axle strategy that we've talked to you about at our last two Analyst Day events. While we have a strong presence in China for quite some time, particularly with our long term relationship with Axiom G, we've been under represented in the on highway market when you consider that over 1 million commercial vehicles were produced in China last year. We believe that the market dynamics are shifted and are now well suited to Meritor’s high performing products. We see a clear indication that the mid-tier sector, our sweet spot, could account for close to 20% of this market in the future. We explained in December that the fleets are growing and consolidating, making operating costs a higher priority. When you combine these factors with some of the regulatory changes that are happening like overloading enforcement and safety improvement, we see a move toward a total cost of ownership model. In anticipation of that shift, we introduced our DUALite product family in 2016, which is a broad range of axles and brakes. A number of OEMs are in production with DUALite now including JAC, Isuzu and [indiscernible]. On the off-highway side, we are also introducing new products like the ZL50+ loader axle, which we believe positions us for growth in that segment as well. On slide 5, you'll see more examples of new business in multiple product categories across regions and customers. We've talked about our global hub reduction platform that is creating opportunities for us around the world. Here, we're showing you new business with Iveco and MAN for that product. We have a common design and a standard production system globally. We have successfully launched this product into every region of the world where we operate. The basic elements are the same, but with our strong engineering teams in each region, we can customize the product to meet the specific needs of our customers. We also have new axle and suspension business in Asia Pacific with Tata, Kenworth and Ashok Leyland in addition to various wins across our aftermarket business. All of these are contributing to our M2019 revenue outperformance target. We will scorecard these wins for you at year end, so you have a full understanding at that time as to how we're tracking. On slide 6, I wanted to mention the number of programs we’re currently working on in the electric space. Some of these are in production, others are preproduction, but the important point is that Meritor is supporting a variety of customers around the globe on their electric vehicle programs. Applications include line haul trucks, buses, forklifts, trailers and tractors. We are supporting these programs with core Meritor content, including front and rear suspensions, wheel ends, drum and disc brakes and gear boxes. On other programs, our content comes from our eAxle offering and products now part of our portfolio as a result of our recent strategic transactions, including battery packs, single and dual motors, fuel cells and storage and fully integrated drivetrain systems. I talked at the Analyst Day about the three different architectures, remote motor, one motor and two motors, the capabilities we now have will allow us to serve electric vehicles regardless of their architecture as demonstrated with the 14 active programs we're now working on with various customers. Keep in mind, we don't necessarily see these programs as significant near term revenue opportunities. Rather, we are positioning Meritor for the long term because we believe electric drive trains will be a meaningful part of the future. We are confident that this expansion of our capabilities is one of the best opportunities beyond 2019 for revenue growth that will also position us to remain in the forefront of drivetrain technology. Now, I’ll turn the call over to Kevin for more detail on our financials.

[Kevin Nowlan:]

Thanks, Jay and good morning. On today's call, I’ll review our first quarter financial results and our updated 2018 guidance. Overall, as you heard from Jay, we delivered strong financial results in our first quarter. It starts with a significant increase in revenue, which was driven by strong end markets and new business wins coming into the P&L. Even more important than our demonstrated ability to grow topline is our ability to convert that increased revenue into expanded earnings performance. This is the result of the fundamental changes we have made to the operating profile of the business, since the launch of M2016, which is enabling us to effectively drive this conversion. With these first quarter results, we're on track to deliver on our M2019 financial commitments and to continue driving value for our shareholders. Let's walk through the details by first turning to slide 7 where you’ll see our first quarter financial results compared to the prior year. Sales were $903 million in the quarter, up more than 200 million from a year ago with every major geography reporting stronger revenue. North America Class 8 truck in particular was the highlight with production up 19,000 trucks from a year ago. But that only explains about 40% of our revenue growth in the quarter. We also saw strength in Europe, driven by a combination of stronger currency and new business wins, in China, where our end markets has strengthened considerably and we can't forget Brazil, which is also starting to see some renewed strength. While we're seeing strong end markets, it's important to note that a significant piece of our revenue growth is also coming from our new business wins, which are expected to drive about 40% of our year-over-year growth for the full year. As you can see from the causal on the right, we converted on this revenue at about 15% or $27 million, independent of currency and a couple of discrete items in the quarter. As we profiled at Analyst Day, we did have two distinct initiatives that are impacting our results this quarter and as we look ahead. First, you'll recall that after prevailing in the Sixth Circuit in September, we modified healthcare benefits for most of our US retirees. As you can see from the causal, this yielded an $11 million year-over-year benefit this quarter. Second, we sold our interest in the Meritor WABCO joint venture at the end of last fiscal year. As a result, our equity earnings in affiliates were reduced by $6 million this quarter. Importantly, both of these matters will continue to impact year-over-year performance through the balance of fiscal year 2018. When you sum it all up, we expanded gross margin by 280 basis points over last year to 15.5%, a gross margin level we haven't delivered in at least a decade and fundamentally it's being driven by our ability to deliver strong conversion on incremental revenue. From an adjusted EBITDA perspective, we generated $99 million and an 11% adjusted EBITDA margin, which was 180 basis point expansion over last year. When you look at our GAAP net income from continuing operations in the table on the left, you'll see that we're reporting negative $35 million. The lower income was driven by $77 million of higher non-cash tax expense arising from the enactment of the US tax reform in December. I'll be discussing this in more detail in a subsequent slide. Adjusted income from continuing operations, which excludes the $77 million impact was positive $55 million, resulting in $0.62 per adjusted diluted share, a 148% increase over last year. And finally, free cash flow was $15 million this quarter compared to a cash outflow of $31 million in the same period last year. Expanding margins, higher adjusted income and an improved balance sheet are all factors that helped drive this free cash flow result in a quarter in which we generally haven't delivered positive free cash flow due to seasonal fluctuations. Let's move to slide 8, which details our first quarter sales and EBITDA for each of our reporting segments. In our commercial truck and industrial segment, sales increased by 37% to $738 million. The increase in revenue was primarily driven by higher production in all of our markets with North America experiencing the largest increase. In addition, we saw continued benefits from new business wins as well as favorable foreign currency impacts due to the strengthening euro. Segment adjusted EBITDA was $80 million, up $38 million from last year. EBITDA margin for commercial truck and industrial came in at 10.8%, a 300 basis point increase over last year. The increase in both EBITDA and EBITDA margin was driven primarily by conversion on higher revenue and lower retiree and medical expense, partially offset by lower affiliate earnings from the Meritor WABCO sale. In our aftermarket and trailer segment, sales were $195 million, up 6% from last year. This increase was primarily driven by higher volumes across the segment. Segment adjusted EBITDA was $21 million, down 1 million compared to last year. EBITDA margin was 10.8% compared to 12.0% last year. This segment tends to have lower revenue and margin performance in the first fiscal quarter due to seasonality. In this particular first quarter, margin was under a bit more pressure as we've been driving incremental investments to support our revenue growth initiatives, which Rob spoke about at Analyst Day. As we start delivering more significant revenue growth coming from these initiatives, we expect that our margins will return to targeted levels probably as we head into fiscal year 2019. On slide 9, I wanted to provide more detail on the impact of the new tax legislation and how it will affect us going forward. In the quarter, we had $77 million of non-cash tax expense, resulting from the US tax reform. This includes $43 million related to the revaluation of our deferred tax attributes due to the federal corporate tax rate being lowered from 35% to 21%. In addition, we had $34 million of tax expense related to the one-time deemed repatriation of accumulated foreign earnings, which has no cash impact due to the use of foreign tax credits. As we look at the impact for 2018, we expect that our overall effective tax rate will be reduced from approximately 30% to 25%. We also expect that our operating losses will continue to minimize our federal cash tax payments in the US throughout our M2019 planning horizon. As a result, we believe that our effective cash tax rate assumption of roughly 15% still holds through 2019. Due to the complexity of the tax reform legislation, we are still evaluating and analyzing other aspects of the law that could ultimately have some impact on our results. We expect that this review will be completed by the end of the year. However, as we sit here today, we don't anticipate that new legislation having any meaningful impact on our M2019 performance metrics. Next, I’ll review our updated fiscal year 2018 global market outlook on slide 10. Building on first quarter production levels of 67,000 units combined with continued strong orders and higher US GDP expectations, we are increasing our North America Class 8 production estimate to 280,000 to 300,000 units in 2018. This is now an 18% to 27% increase from 2017 levels. We're also increasing our medium duty and US trailer expectations by 10,000 units for each of these markets. In Brazil, industrial production is beginning to accelerate as the economic recovery gains momentum. Business confidence and consumer confidence are also improving, which is supporting the market's expectation of higher growth. All of this is causing us to increase our production estimates to a range of 75,000 to 85,000 units for 2018. The European market continues to strengthen. We now expect medium and heavy duty truck production to be up 10,000 units from our previous expectations. And finally, as Jay highlighted earlier, we are seeing a significant revenue increase in China in both our off-highway and on-highway businesses. As a result, we now expect revenue in 2018 to be approximately $180 million, up 40 million from our previous expectation. Overall, we see growth accelerating in most of our major markets around the globe and believe we are well positioned to capitalize on this momentum. Based on these market assumptions, you can see we are raising our 2018 guidance on slide 11. We now expect revenue to be in a range of $3.8 billion to $3.9 billion, up 200 million from our prior guidance. As a result of the higher revenue and our conversion on that revenue, we are taking our adjusted EBITDA margin forecast up by 20 basis points to a range of 11.0% to 11.2%. We expect that the higher adjusted EBITDA will drop right to the bottom line. So we are also raising our adjusted diluted earnings per share from continuing operations guidance by $0.30 to a new range of $2.50 to $2.70 per share. And finally, based on our higher earnings expectations, we are increasing our free cash flow guidance to be in a range of $110 million to $125 million, even after considering the incremental working capital investments we're making to support revenue growth. As I compare this outlook to 2017, we're now expecting to increase revenue by approximately $0.5 billion to generate adjusted EBITDA of approximately $425 million, an 80 million increase over last year. To expand adjusted EPS by $0.60 to $0.80, putting us right on the cusp of our M2019 target and to increase free cash flow by over $30 million. We are very pleased with the strong start to 2018 as we continue to build momentum on our journey to successfully delivering on all three of our M2019 financial objectives. Now, we'll take your questions.

[Operator:]

[Operator Instructions] Our first question comes from [indiscernible].

[Unidentified Analyst:]

So I’m glad to see you folks raise your end market projections, but if you were to translate to North America Class 8 guidance to a calendar year basis, which one of the third-party forecasts would you say your projection more closely matches.

[Jay Craig:]

To be honest, we don't really focus on the full calendar year as much as we do our fiscal year as we're looking at our planning assumptions and right now we feel comfortable with that guidance at 280,000 to 300,000 units. I think if you look at ACT, I think they're probably pretty close to the level that we're projecting for our fiscal year 2018 forecast.

[Unidentified Analyst:]

And looking at the implied incremental margin at the midpoint of your new guidance ranges, it still assumes incremental is at the lower end of your historical range. So just wondering is that still mainly due to inefficiencies if the industry ramps up production or do you also have higher steel costs and higher incentive comp embedded in there as well?

[Kevin Nowlan:]

Yeah. I mean, the 15% conversion is within our range of 15% to 20% as we've indicated in the past when you tend to start getting into significant growth in the markets or peak markets, we tend to convert at the lower end of that range, because you do see certain efficiencies whether that’s freight related, whether that's efficiencies in the plant, but all those inefficiencies are embedded in that 15%. So we're pretty happy with the conversion that we're actually driving right now as markets are strengthening across the world.

[Unidentified Analyst:]

And looking into 2019, your baseline assumption was based on North America Class 8 market size of 260,000 to 280,000 units. So just wondering if you continue to anticipate a market of this size or does that assumption change to reflect your higher outlook for ’18? And is your $2.84 target now under review?

[Kevin Nowlan:]

As we look ahead to ’19, I think it's too early to say whether how ’18 is going to impact that. Obviously, the stronger ’18 gets, the more risk you would have looking out that you have lower market assumptions going forward, but as we sit here today, we feel pretty comfortable about the 260,000 to 280,000 planning assumption for ’19. And so we're not making any changes to our outlook at this point to our $2.84 per share.

[Jay Craig:]

And I think that adds to your question of relooking at the target, I think similar to what happened under M2016, we've already begun the work to begin our M2022 strategy. And so if our numbers come in to what we're guiding to this year, I think you can expect that in December of this year, we’ll be communicating to the Analyst and Investor community what our targets are from 2022. The one thing you can be certain of, it will be anchored with by financial metrics that we think drive appropriate level of shareholder returns.

[Operator:]

Thank you. Our next question comes from Mike Baudendistel with Stifel.

[Mike Baudendistel:]

Just wanted to ask you, I mean, you mentioned in the press release that you're investing more in the aftermarket and trailer segment, maybe, can you just describe sort of what you're doing there and then I had a high level how you plan to grow that aftermarket in trailer segment?

[Jay Craig:]

Sure. This is Jay. I think you heard Rob Speed speak about at our Analyst Day, we've made some of these investments this quarter and last quarter. So we've opened in the latter half of this quarter a West Coast Distribution Center. And so we expect that will be driving increased revenue and in fact the early analysis we're seeing from the returns on that investment and are right on track for what we anticipated. We also launched the Mach brand for our discount brand in aftermarket and there were some investments there and we’re investing in people resources also to continue to expand in the areas that Rob articulated into new markets. And as Kevin stated in his comments, we think the fixed cost absorption of those investments will start to reach normalized levels as we exit the year at run rates and margins that we've seen historically at or above 14%.

[Mike Baudendistel:]

Also just wanted to ask you on some of the revenue growth opportunities in off-highway, I mean that's been one of the objectives that you've been talking about and I just want to, maybe could you perhaps quantify for us how much revenue you're doing currently in the off-highway business and sort of where you expect to get over the next few years?

[Jay Craig:]

Well, we don’t break that segment out separately, but we feel like we're right on track there. One of our most recent wins was in the off-highway area with larger customer we've been targeting in that area. Also obviously the Fabco acquisition, we did at the end of the calendar year is directed at off-highway and one of the ancillary benefits we're seeing from that acquisition is it's also giving us increased opportunities in the electrified drivetrain area. We've had a couple wins directly related to Fabco’s gearing capabilities that have been adopted to electrify drivetrains. So we feel like we're right on track and we think the advantages we have in terms of our cost base or advanced engineered products and our speed of delivery really being well received in the marketplace.

[Mike Baudendistel:]

Also just wanted to ask you, you increased your outlook for China from 140 million to 180 million and just wanted to see, how much of that was due to the Chinese market outlook getting better versus things that you're doing sort of to take share and sort of [indiscernible] which is having a bigger impact there?

[Kevin Nowlan:]

Yeah. I would say, I mean, if I look at the jump-off of 2015 even when we were 100 million in revenue in China and now where we're trending toward $180 million this year, the majority of that increase is coming from markets, but there's a meaningful minority of that that's still coming from new business wins that we're driving. It's not single digit millions, it’s double digit millions, but it's a little bit less than half.

[Mike Baudendistel:]

And then the last thing for you, is there a figure you can give us for the new business wins in the quarter like you have the past few quarters?

[Kevin Nowlan:]

I think we're not going to scorecard the new business wins quarter-to-quarter. We'll update that as Jay mentioned at the end of the fiscal year, similar to how we would scorecard for M2016, but what I can tell you is we're on track and even our full year guidance now effectively implies that there's about $200 million of additional revenue outperformance ’18 versus ’17, which is higher than what we indicated back at Analyst Day when we said it was about $175 million. So the new business wins are coming in a little bit stronger than we guided to in the December timeframe.

[Operator:]

Our next question comes from Neil Frohnapple with Buckingham Research.

[Neil Frohnapple:]

Just a quick follow-up on China there. So you mentioned the increase is coming from markets. Is that both off-highway and on-highway. I think there's kind of belief out there that China truck was extremely strong in 2017 and we’d see some sort of stuff down in ’18. So just curious if that comment was for both on and off-highway?

[Jay Craig:]

I would say it’s from both, although, a little more heavily skewed towards off-highway and with our primary customer Axiom G, but as Kevin mentioned, we are seeing a lot of uptake on our new products in the Chinese on-highway market. So we've we benefited meaningfully from that as well.

[Neil Frohnapple:]

And then can you talk about what is specifically embedded in the updated EBITDA margin guidance from a steel cost standpoint. I believe you indicated last quarter Kevin that it could be a slight tailwind for the full year as you recovered some higher costs from FY17, but again given the recent rise in steel prices the last few months, curious on how that will now impact the P&L for the full year?

[Kevin Nowlan:]

Yeah. On an overall basis, we think it will still be a modest positive. You have to remember steel indices are up quite a bit year-over-year, anywhere from 15% to 40%, but the bulk of those increases occurred in the first half of our fiscal year last year. So those costs came into the P&L for us last year and our recovery mechanisms started to kick in on their normal six month lag basis. So we're starting to get those recoveries in the P&L right now. So even on a Q1 to Q1 basis, steel was probably a slight positive for us when you net off the impact of recovery minus the increased cost of steel. We have seen steel prices ticking up the last couple of months. The indices have been ticking up, so we'll watch that pretty closely. Our guidance assumes that they'll remain relatively flat there and overall we’ll have a modest tailwind year-over-year.

[Neil Frohnapple:]

And then if I can just sneak one more in Kevin, I mean the higher free cash flow outlook for the year, can you potentially do more share repurchases than originally anticipated or any thoughts on deployment point of the incremental capital?

[Kevin Nowlan:]

Yes. Sure. As we think about how to deploy capital from this point forward, remember, we executed a lot of our debt related transactions in the last part of the calendar year 2017 and so as we look ahead in 2018 and 2019, the cash that we're generating from this point forward is really available for two primary purposes, one, to support our strategic growth initiatives and two to execute on opportunistic share buybacks. So you should look at us pursuing both of those types of things with the available cash we generate over the next 20 months or so.

[Operator:]

Our next question comes from Alex Potter with Piper Jaffray.

[Alex Potter:]

You mentioned that obviously you've got some market tailwinds here helping with guidance and with revenue, but you also mentioned just now that your new business wins are tracking better than expected, you've got $200 million worth of incremental revenue coming from there versus 175, what qualitatively or specifically are we talking about here, like what products are driving the outperformance, which ones are doing better than you originally anticipated?

[Jay Craig:]

I don't think there's anything in particular. As you would expect, we have some discounts or hedging on our estimates as we look forward and what we're finding it the estimates that we have in our analysis that shows our new business wins and when they’ll come on track. It’s almost coming in spot on, not needing the discount or the hedged reduction in our expectations. So we just seem to be executing right on plan in terms of launching those products with customers and actually getting those wins into our financial statements.

[Alex Potter:]

I was wondering as well, you mentioned obviously there's a lot of activity in electrification, the big focus I think for the industry is also investors, you guys have certainly been very proactive. But like you mentioned, it's probably a post 2019 issue, you still got battery cost that presumably have to come down the cost curve, what's your best guess if you can sort of look into your crystal ball, regarding how long it will take for this to be a meaningful revenue contributor to your P&L?

[Jay Craig:]

Well, as you know, with the TransPower investment we announced at Analyst Day that we expect will be 30 million of revenue in our M2019 numbers. That will be from electrification through that investment. So it's a measurable amount. The way we look at the opportunity longer term is really, you have to look at segmentation and I won't get into too much detail, but I would challenge most people what does a transit bus look, like in most major metropolitan areas, five years from now, I think the expectation reasonably is most of them will be fully electric and you can look at other product categories and say, okay, there are certain product categories, small pickup and delivery for example where that trend may move more aggressively. So that’s the way we are looking at it, making sure our products are positioned for the highest growth markets, both long term and near term. So we're looking at really a much more granular market segmentation and I can share we have the right products there.

[Operator:]

Our next question comes from Brian Johnson with Barclays. You may begin.

[Brian Johnson:]

Yeah. A couple of questions, just first around EBITDA margins, just want to see if my numbers are right and then ask about kind of cadence through the year. And then second around continuing the electrification theme. Around the EBITDA margin, it looks like based on your increased guide, you're sort of guiding to about 14%, 15% incrementals. If I back out WABCO and the OPEB, it also looks like you're delivering around mid-teens incrementals in the commercial truck and industrial. A, is that right and B, if you made 11% on an overall basis this quarter and if aftermarket and trailers, you said, walks better through the year, is the 11% that you've guided to sort of the lower bound, recognize of course macro markets may move one way or another?

[Kevin Nowlan:]

I think you've characterized correctly the way we're thinking about our guidance in terms of converting incremental revenue at 15%. Looking at all the puts and takes in terms of taking our guidance up 200 million and effectively our EBITDA dollars at the midpoint, up about $30 million. There are lots of puts and takes in there, but overall we feel comfortable with that. In terms of whether we could outperform the 11.0%, I mean our range is 11.0% to 11.2%. We think that contemplates the potential for upside to get to 11.2, but we’re comfortable with the guidance we’re giving.

[Brian Johnson:]

Okay. Second, Volvo has made course big clients to sell electric trucks in Europe in 2017, my understanding at least on some press reports are those that are in the medium duty range, which would make sense for the use case. A couple of things. One, can you just -- are you involved with traditional medium duty trucks in Volvo as part of your big block business with them and then two, can you say anything about your involvement with their electrification plans.

[Jay Craig:]

Sure. Yeah. Volvo is launching medium duty electric truck consistent with the architecture they have on Volvo inner city buses. So it’s a remote mounted electric motor and our content on that medium duty vehicles are traditional drive axles and driveline right now. I would tell you with Volvo like all our OE customers we’re having extensive discussions between our technical teams about adopting our eAxle technology as we do with all our customers who are working very closely with them -- on that advanced technology and you will see it later this spring, but one of our OE customers launch a demonstrator with the axle on it. So we're seeing a lot of interest in demand in that product and then all our capabilities.

[Operator:]

Our next question comes from Joseph Spak with RBC Capital Markets.

[Joseph Spak:]

Just I appreciate the comment you said I think 40% of the growth is driven by new business wins for the year and I know you said you don't want to sort of score yourself for the quarter, but is that roughly the same order of magnitude you experienced in the first quarter?

[Kevin Nowlan:]

We're not scorecarding quarter-to-quarter, but that 40% was reflective of $200 million of revenue outperformance this year on 500 million of revenue increase year-over-year.

[Joseph Spak:]

Okay. And I guess sort of the pull forward on that, is that -- it seems like it will be more volume based than anything, because if I remember correctly, I felt like some of the new wins and products like the integrated offerings and the air disc brakes, like that was more back half weighted in your year. So is it really a volume factor that's driving that higher thus far?

[Kevin Nowlan:]

I think it's a combination. There is a little bit of a tailwind from the volume implications, but it's a mix. It's also program simply hitting the cadence that we've been planning for internally, but that as Jay mentioned, we discount when we plan internally and give guidance externally. So we're executing better, but the markets are helping a little bit as well.

[Joseph Spak:]

And then just going back to free cash flow, I appreciate you sort of reiterating support strategic growth, which I think was always sort of the priority and I think on the share repurchases or even maybe some other capital structure actions, it always seemed like that was sort of more opportunistic. And so now that the cash is coming in higher or better, does it tilt it a little bit more towards some of the repatriation or some of the strategic growth initiatives whether it be the electrification or other opportunities also stepping up, so it remains pretty balanced?

[Kevin Nowlan:]

Yeah. I think it’s going to be a mix of both, but I think you should think there's some level of balance there. I mean, we have certain initiatives that we're looking at and actively pursuing, but I think you should also expect that we’ll be deploying cash toward opportunistic repurchases of shares as well.

[Joseph Spak:]

And then just finally on China, I believe most of what you're supporting is for the China market, but you clearly have sort of discussions with customers and plans there I mean and as sort of you think about your own sort of capacity in footprint, are there any sort of export plans for any of those products eventually or is this really sort of in China market opportunity?

[Jay Craig:]

Well, we actually are exporting out of China to Japan for customers. So I think as I mentioned, we are building to Western quality standards in China. I think as we look at the broader export opportunities that surrounds that component by component opportunities. So we are sourcing certain components from China now and we continue to look for further operatives to do that, particularly as we bring to market more on-highway products and develop a broader supply base there to support the local market.

[Joseph Spak:]

And last housekeeping, just back to steel, can just remind us what percent of the steel buy is indexed, are you covered on the vast majority of that.

[Kevin Nowlan:]

We’re covered with our OE contracts on the commercial truck industrial side through the bulk of our OE relationships contractually. Aftermarket, we generally -- it's more of what the market will bear and how we want to implement pricing strategies up or down based on a lot of different factors, material price.

[Operator:]

Our next question is from Colin Langan with UBS. You may begin.

[Colin Langan:]

Can I follow up on the comment on the aftermarket margin, I thought maybe I misheard that you said that you'll get the normal rate around 14%, but I haven't actually -- I don't think we've had a full year. When you say the margins are going to improve from the current levels, we should think of a kind of sequentially improving, is 14, is that what we should exit the year, is that the right?

[Kevin Nowlan:]

Well, we mentioned that the 14% is our target for that business. We did achieve that in 2015 for the full year. We were a 14% margin business. We stepped down the last couple years, but what our expectation is as we drive the revenue growth and get the typical types of conversions we see in that business, which offset a lot of the fixed cost investment that Jay talked about, we should be exiting 2018 and into 2019 approaching that type of a run rate.

[Colin Langan:]

And then just on taxes, you highlight you have a 25% now GAAP tax rate with a 15% cash tax rate. Any sense of how much longer the gap between cash and GAAP taxes will last? I mean how much more protection will NOLs give you, is it going to be another 5, 10 years, any thoughts there on the –

[Jay Craig:]

Obviously, we have a lot in the way of net operating loss carryforwards as well as foreign tax credits that we're able to deploy to shield our taxes here in the US from actually making cash tax payments. At a minimum wage effect, the carry through, the M2019 planning period, but I would say we expect to probably -- into the early part of next decade as we've talked about before, but obviously, we'll have to assess that as we start to plan for what's beyond M2019 and what tax planning strategies we want to implement to be able to continue to generate the types of tax positions that we have here and in certain other jurisdictions abroad.

[Colin Langan:]

So when we think of the tax reform, your tax rate -- cash tax might have gone up to like closer to 30% since early next decade, there is like a 5% savings.

[Jay Craig:]

The 5% book reduction is effectively the blended impact of getting a 14 point reduction here in the US and no changes effectively everywhere else and so that's the way to think about it. So yes when we ultimately become a cash taxpayer, if that day comes, then we'll have the benefit of lower tax rates at that time.

[Colin Langan:]

And just lastly, I want to follow up from the Investor Day, you talked about obviously a lot eAxle. When we think about the eAxle versus your traditional axle, if you take out some of the emotor which I believe you're using some suppliers for, is the value add -- any sense on the percent difference on the value added concept, between sort of the traditional and –

[Jay Craig:]

We think the content is significantly higher and remember we are sourcing motor components from UQM, but the actual design of the operating system is ours. So we're sourcing a road or a state other components but we've provided what we believe is the optimal design for driving vehicle -- commercial vehicles with that axle. So it's like sourcing any other components on a mechanical product as well.

[Operator:]

Thank you. This concludes the Q&A session. I would now like to turn the call back over to Carl Anderson for closing remarks.

[Carl Anderson:]

Thanks, Shannon. This does conclude our first quarter earnings call. Please feel free to reach out to me directly with any follow-up questions and thank you for your participation.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.