Good day, ladies and gentlemen, and welcome to the Q3 2014 Meritor, Inc. Earnings Conference Call. My name is Ian, and I'll be your operator for today. (Operator Instructions) As a reminder, the call is being recorded for replay purposes. Now I'd like to turn the call over to Mr. Carl Anderson, Vice President and Treasurer. Please proceed, sir.

Thank you, Ian. Good morning, everyone, and welcome to Meritor's Third Quarter 2014 Earnings Call. On the call today, we have Ike Evans, Meritor's Chairman and Chief Executive Officer; 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'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 discussions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to Slide two for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call, you'll find the reconciliation to GAAP in the slides on our Web site. Now I'll turn the call over to Ike.

Thank you, Carl, and good morning. Please turn to Slide three. We reported another strong quarter driven by our M2016 initiatives. Despite continuing softness in all of our markets outside North America, we delivered an 8.1% EBITDA margin largely due to our continuous focus on reducing net materials costs and improving labor and burden performance. On year-to-date basis, we're demonstrating real year-over-year improvement. Although not shown on the slide, sales for the first nine months increased 63 million or 2%, EBITDA increased 37 million or 19% for a conversion rate of 59%. And EBITDA margin year-to-date is 8%, up 120 basis points compared to the prior year. Cash flow has also been strong year-to-date, and we expect to end the year with the strongest cash flow performance since 2010. Other third quarter highlights include a signed MoU with Volvo, that covers our global axle business, the antitrust settlement with Eaton, the announcement of an equity repurchase program, and for the second consecutive quarter we have increased our full year earnings guidance. We're increasing our guidance for adjusted EBITDA, adjusted EPS from continuing operations and free cash flow for the year. Kevin will provide you with more details, but the increase in our full year expectations for earnings reflects the strength of our third quarter performance driven by our M2016 initiatives, some of which I'll highlight for you in a moment. Slide four shows the sequential comparison of our results. Revenue increased 24 million from the second fiscal quarter to 986 million. Higher revenues from our truck and aftermarket businesses in North America partially offset lower sales in South America and the defense business which had a negative mixed impact on our earnings. Adjusted EBITDA was 80 million, up 2 million from the prior quarter. Continued improvements in net material and…

Thanks, Ike, and good morning everyone. On today's call, I'll review our third quarter financial results and take you through our updated 2014 guidance. On Slide 10, you'll see our third quarter income statement for continuing operations compared to the prior year. Sales were $986 million in the quarter, down slightly year-over-year by $7 million or 1%. This decrease is due to lower commercial truck production in South America and lower revenue from our defense business as FMTV's production volume continues to step down. The decrease in revenue was partially offset by an increase in North American commercial truck production and higher revenue from our aftermarket and trailer segment. Gross margin increased $14 million primarily due to $12 million warranty contingency that was booked in the third quarter of 2013. Excluding this, gross margin increased by $2 million despite the decrease in revenue, including the year-over-year step-down in FMTV production. This improvement was driven by continued execution of M2016 net material, labor and burden initiative. SG&A was $13 million lower in the third quarter of 2014 compared to the same period last year. The decrease includes the $20 million recovery of current and prior year legal fees associated with the Eaton antitrust settlement. This is partially offset by higher incentive compensation accruals and higher legal defense cost associated with asbestos-related claims. Next, earnings in our minority-owned affiliates were $201 million in the quarter compared to $15 million in the prior year. The increase was due to $190 million of affiliate income related to the gain recognized from Eaton antitrust settlement. Excluding this, earnings in our minority-owned affiliates decreased by $4 million year-over-year primarily due to the sale of our Suspensys joint venture, which was sold in July of last year and is no longer contributing to our earnings. Interest expense…

Thank you, Kevin. Let's turn to Slide 16. I said at the beginning of the call, our financial performance this quarter was strong, and our year-to-date performance clearly demonstrates that we are focused in the right areas. Our alignment around M2016 targets includes all areas of our global organization. Today, we discuss just a few examples of the work we are doing to continually improve our operational performance. I am proud of our teams around the world who are working together closely with our customers to improve the company and to meet our requirement. We're winning new business and the Meritor brand in strong and growing. This quarter we signed an MoU with Volvo in anticipation of extending our actual supply agreements with our largest global customer. And in July, we entered into a new contract with Kamaz in India and extended our partnership with Hino for another three years. You'll remember last quarter we signed a new four-year agreement with Daimler Trucks, North America. Although certain international markets remain soft, we are executing and converting on the F-Cycle and Class 8 trucks in North America. We're confident and we have momentum. As Kevin told you, increasing our guidance reflects good execution and effective cost reduction initiatives combined with strong conversion on incremental sales. Our year-to-date performance demonstrates that we are getting real traction to achieve sustained improvement in our fashion or performance. We remain on track with our M2016 objectives. And with that, we'll take your questions.

Thank you. (Operator Instructions) And that question comes from Colin Langan. Please go ahead, Colin.

Great, thanks for taking my question. Any color on how we should think about the profit impact from the change in the Volvo contract. I mean, is that something that we'll see rather immediately once the final contract is settled or is that something that may be a benefit over time because my understanding is that the European contracts have generally …

Colin, we spent over a year working with Volvo on this MoU. And we both expect to sign the long-term agreement prior to the expiration of this contract. However, due to the confidentiality provisions of the MoU, we can't provide you with any more detail. The bottom line though is we're confident, we have a solid path forward with this important global customer. And our focus is to continue to providing them with superior quality delivery and products that help [to freight] (ph) their trucks in a regional market. And that's as much as we can say at this point in time.

Any color on prior contract, so the changes occur immediately or if they usually face them?

I can't say any more than what I've already said, Colin.

Okay.

Colin, this is Kevin. As you look historically, I mean we've had -- this has been a 10-year agreement with Volvo in Europe, so we haven't had a whole lot of history in terms of that. But I think the expectation is that we would execute the long-term binding agreement at the end of this -- at the maturity of this contract, which is the beginning of October of 2014. And the new contract would kick in after that. That's the expectation.

Okay. That makes sense. Okay. Any color on the aftermarket, trailer business is up 9% year-over-year, what was driving that strong growth in that segment? Is that a market or is that market share?

It's primary market, Colin. We had really strong markets.

And that's inclusive of trailer, which our trailer market has been up and even our European aftermarket business which is up as well. So it's really across the entire segment.

Okay. And just one last one; and you talked about it a bit, why the expected slowdown into Q4, that's just the normal seasonal pattern or anything else going on in Q4?

Well, the first thing to keep in mind, yes, there is some seasonality there. Remember Europe right now is shutdown. And so we lose several weeks of production in the fourth quarter. So that has a big revenue impact on us as we go from Q3 to Q4 and obviously we lose conversion on that. Second, we do have a little bit more step down going into Q4 from the defense business and then of course South America remains soft. So I think those are the key drivers that we are focused on as we think about why our implied Q4 guidance would be softer than where we ended Q3.

Okay. Thank you very much.

Thank you.

Thank you for your question. We have another question for you. This one comes from the line of Brian Johnson. Please go ahead, Brian.

Yes, good morning. A couple of questions about these results and where they get you towards M2016; the first is, you had very good incrementals overall in the commercial vehicle segment. And you flagged the two headwinds, defense and South America and then the tailwind in North America. If you look within North America, were you comfortable with the incrementals that you were getting on what I assume was a revenue increase there given the 8% increase? And are you comfortable that as North America continues to grow, you can continue to bring that to the bottom line versus the problem Meritor had in the last up cycle of having premium freight over time and others actually detract from profits.

Brian, the answer is, yes, we're converting successfully. As we've committed before we said we will convert at least 15% rate on incremental revenue and we are executing on that. And we expect to continue to do so. Kevin, I don't know if you want to add any more to that.

I think that's right. And frankly that part of it as we think about. The reason I think Q3 came in a little bit stronger, we had really good material labor and burden performance in the quarter which overcame the steel. But we also had good conversion on the North American sales I think stronger than what we've historically seen when we were in the midst of an upturn. As we stay here today, we are not prepared to declare victory. We have a long way to go through this upturn, but I think we are pretty pleased with the incrementals that we've achieved today.

And Brian, if you remember in my comments in the call, we are delivering basically world class quality and virtually 100% on time delivery.

And we will probably hear more in the fall about this. But as you just look at the M2016 earnings kind of implied margin guide, do you need the North American Class 8 truck market to get back to 320 to 340 and further strengthening in Europe, Brazil, India and China, or is there enough momentum on the cost side of M2016 and perhaps that's what you are getting out of restructuring your European business and contracts that you don't need to get the revenue number there to get that kind of numbers you were talking about.

It's a good question, Brian. I think where we sit today -- we are not necessarily counting on North America to be sitting at a 300,000 Class 8 market. We generally use some of the services; LMC, FTR and others across the globe to assess what we think the markets look like. As you know, when we talked about our 10% margin guidance, we talked about it in the past as needing to hit 4.5 billion of revenue, which fundamentally, what's underlying that is recovery in markets like South America, India, China, Europe, more so the North America. In fact I think North America given where we sit today versus a couple of years from now could be a little bit lower at least on the truck side. I think as we sit here today, that 4.5 billion that we've laid out is probably -- it needs those markets to come back, and who knows where that's really going to be two years from now. But I'd tell you given where we sit today, we believe that we can achieve 10% margin even if we fall short of that 4.5 billion target, and I think will provide a little bit more clarity on that when we get into November timeframe on the earnings call.

Okay. Thank you very much.

Thank you, Brian. We have another question for you. This was from Patrick Archambault at Goldman Sachs. Please go ahead, Patrick.

Great. Thank you very much and congratulations on a good result. I am going to start by pushing my luck on the Volvo question. I guess is it at least safe to say certainly you would never have agreed to a contract which at least didn't keep the profitability similar or better. I think we can comfortably assume that just given how much of a priority this was?

Well, Patrick, thank you for -- it was a good quarter for us. Really it's not a delivery to be able to say anymore than I've already with regard to Volvo. Other than that we are both our companies are excited about the prospects I moving forward. I mean this is seven years for Europe and South America and four years for North America for axles and drive lines as well. So this is exciting. This is our largest global customer. It's 27% of our sales. So I mean we are excited about this as overall Volvo.

And I'm going to have to push my luck again. On the four years for North America is that I mean at least just structurally in terms of the way things are framed, is that kind of four years and then the contract is up for re-bid or renewal or is like is there an in-sourcing that happens after four years for the North America piece?

At this point who knows four years from now, but at this point in time Volvo and we've sat down and we view ourselves as a long-term commitment on our part or their part to be their actual driveline supplier for North America.

I'd add to that, Patrick, keep in mind that the North American agreement actually wasn't scheduled to mature until 2015, the spring of 2015. And as the parties were moving forward in the discussions around Europe and South America and Australia, we decided it was in the best interest of both companies to address that contract now even though it could have ordinarily waited a little bit longer. So we are extending four years from next spring, which is basically 2019. And I think that's indicative of the strong relationship we have with Volvo right now.

Got you. Okay. Thanks for the color. On a couple of other ones from me, just in terms of FMTV, can you just remind us of the cadence? Now it does step-down sequentially in your fourth fiscal quarter, are we at kind of close to zero at that point or just can you remind us of sort of when that eventually peters out and then actually if you could also just refresh us on the timing of some of the other potential opportunities to replace it like the HMMWV Recap and such.

Let me start with FMTV and talk about that, and then I'll turn it over to Ike to talk about the future programs. With FMTV we're seeing another sequential step down here in Q4. If you look at Q3, been on a year-over-year basis were down almost 60% in that business. And for the full year we expect to be down about $100 million FMTV and revenue. As we go into next year we expect that we will have roughly level production release the first few quarters of 2015 roughly the same as what our Q4 production is. So I think you are going to see a step down in Q4 and then probably flat for several quarter before the program ends. Remember there is 949 more vehicle sets to be produced in '15. And again that's indicative of basically several quarters of flat and then probably falling off at the end of the year next year.

Patrick, we continue to support both the marine's and the army's developmental programs as far as HMM-WV Recap or the HMMWV Recap program is concerned. On July 28th the government indicated that the Marine Corps is analyzing its acquisition strategies to enable mission achievement within budgetary constraints. We'll closely follow updates on this evaluation, but the bottom line for Meritor is as we've said in the past that our M2016 targets are not really dependent on any single program. We have a very robust pipeline. So if this doesn't materialize we will still be in good shape. But however we wanted to, but we can't give any further update because we don't know other than what I just told you. As far as the JLTV program, it's on track with final selection still expected, middle of next year. The government has issued a draft request for purchase as planned at the end of -- did it at the end of June. We provided our response to our partner, Lockheed Martin. And we've already indicated that the (indiscernible) is on schedule for down selecting the summer of 2015. So that's the status of both of those.

Terrific, and one last one if I may, just the reason for the decline in CapEx …

Yes. I don't think there is any significant reason. I think as I talked about on prior quarters, we tend to have some lumpy CapEx projects from time-to-time. And some of those projects have either not happened this year or on the timing that we expected. I think the other thing to keep in mind if we manage the CapEx pretty closely. We are not looking to cut CapEx, it hasn't been our strategy. But we need to make sure that the CapEx projects that we have in the hopper meet the return that's required to deliver a good return to our shareholders. So I think you can expect some lumpiness, and I think as you think about us going forward, 2% of sales is a good way to model us as you think about going forward even though we're running a little late on that so far this year.

Okay, it makes sense. Thanks a lot guys for taking my questions, and congrats again on a very good result.

Thank you.

Thank you, Patrick.

Thank you. Give me two seconds. And Kevin, we have another question for you. This is from Irina Hodakovsky from KeyBanc Capital Markets. Please go ahead.

Good morning everyone.

Good morning.

Good morning.

I had a question for you on the SG&A line, and Kevin you mentioned a $23 million recovery in legal fees, and increase in incentives and legal fees for asbestos. Overall, it seems if I add that 20 million that came as a substantial step-up in SG&A as a percentage of sales, I'm wondering if you can give us any guidance on how we should view this going forward into 2015.

And I think -- you're absolutely right. So, of you strip out the $20 million from SG&A associated with Eaton, our SG&A was up about $7 million. And there is a couple of drivers of that, one is we did have some increased incentive compensation accruals as we look at how we're tracking relative to our plan, which is we're tracking fairly well. Second, we did have some incremental asbestos related to legal defense cost. That's both defending cases as well as we're going after a couple of insurance companies with trials upcoming in the fall to allow us to obtain insurance coverage for claims that are coming out in six, seven, eight, nine years from now. So that's a couple of the key movers in the SG&A line that were negative.

And so they found isolated to the 3Q and we really shouldn't expect them to go on into 2015?

I think those were both probably a little higher than what we'd have expected. In incentive compensation I think we're doing a little bit of a true-up given our performance coming in a little bit stronger. The defense cost, I think we have to monitor. It really depends on what cases are going to trial, what cases we need to defend in the near-term. So it's something we keep a close eye on.

Thank you guys very much, and congratulations on a great quarter.

Thank you.

Thank you.

Thank you. And we have another question for you. This is from the line of Kirk Ludtke at CRT Capital Group. Please go ahead, Kirk.

Good morning everyone.

Good morning.

Good morning.

I might have missed it, but could you quantify the new business that you've won in the quarter and where you stand with respect to the $500 million target in your M2016?

We're going to dimension that on an annual basis, and we'll do that at the November earnings call. So, the Kamaz win is actually a contributor to the $120 million that we've earned today. It was actually a pretty good contract for us from a revenue perspective. The Hino contract is an extension. So that one, you won't us see counting towards the 500 million, but the Kamaz one does count, we're not going to dimension win-by-win, but we'll dimension it in aggregate when we get to the end of the year, November.

Okay, thank you. And with respect to Volvo, you have an MoU, and you haven't revised your 2016 target, so is it safe to say that the MoU is consistent with the targets?

The answer there is due to the confidentiality provisions of the MoU we can't provide you any more details on that.

Okay, it's worth a try. And then, with respect to the industry, in North America, are you seeing any bottlenecks anywhere? It doesn't sound like you see any bottlenecks in your system, but do you see any bottlenecks away from you?

We work hard on this. As we said, our capacity is around 300,000 North American markets. We work daily with our customers and our supply base to ensure that we were able to meet our customer's requirements. We're tracking all our commodities and we just stay on top of this. And the good news is we're converting, and we had 98.9% delivery rate in June. So I think we're delivering to our customers. I can't comment as to whether any other suppliers out there might be having pinch points.

Okay. I appreciate it, thank you.

Thank you.

Thank you, Kirk. We have another question for you. This one is from Robert Kosowsky of Sidoti & Company. Please go ahead.

Yes, just a quick question on the Kamaz business. Does this bring over some of the off-highway technology you have in China over into India, and do you see India being a bigger launch pad for off-highway, and where is that right now?

Not really, Robert. It's off existing platforms and it's a neat opportunity for us.

Okay, thank you very much.

Okay, thank you, Robert. And we have another question. This one is from Itay Michaeli from Citigroup.

Hi, thank you. This is Chris Reenock for Itay. I just had a question on margin. You talked about H2 in general should be a weak result, just based on South America and defense, but you still delivered in Q3 an 8.1 really strong margin. Just wondering besides the revenue's sequential step-down, what else are drivers of potential weakness in Q4?

Yes, I'd say outside of revenue, which is a big one because we do lose a lot of significant amount of revenue when Europe shuts down and we lose the contribution on that, so that's a big piece. But the other pieces are South America continuing to remain soft. It's our military business taking another step-down going from Q3 to Q4 as we've talked about it in the past as the high margin business. And then, we do have some hedge for some potential if we have any year end accrual adjustments. As you know, every year we do liability assessments, actuarial evaluations on some of our longer data liabilities, and sometimes those result in adjustments that can impact margin. So I think those are the three things in addition to revenue that we think about as potential headwinds in the fourth quarter.

Okay, great. And so again, understandably South America was weak, just wondering if you -- if and when you anticipate a flattening there and how you're looking at the region going forward?

We don't know. We don't have a crystal ball. All the economic indicators are not really good. So what we're going to do, we'll take the appropriate cost structure actions that we needed to do to manage effectively in this region, but no one has a crystal ball as to when this is going to return.

And so I think it will be -- have some uncertainty as we head into '15, and I think we'll give some more updated guidance in November as how we think about '15 is playing out. But I think we do -- it's important to keep in mind we do think longer term we're pretty bullish on the South American market even though we're going through some tough times right now. It's been a good market for us, if you look versus 10 years ago where this market was I mean it's more than doubled. So, it's a good market, lot of good opportunity up there and we make good money.

If you think about just six months ago, our customers and our sales, we were bullish on this market. So the market can be volatile. It can go down and it can come back just as quickly.

Okay, great. Thank you, and congrats.

Thank you.

Thank you. There are no further questions at this stage. Therefore, I'll hand back to Carl Anderson for closing remarks. Please go ahead, sir.

Thanks, Ian. We appreciate everybody's participation in today's call. If you do happen to have any follow-up questions, please feel free to contact me directly. And this concludes Meritor's third quarter 2014 earnings call. Thank you.

Thank you for joining today's conversation, gentlemen. This concludes the presentation, and you may now disconnect. Have a good day.