Good day, ladies and gentlemen, and welcome to the Q3 2017 Meritor, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Carl Anderson, Vice President and Treasurer. Sir, you may begin.

Thank you, Danielle. Good morning, everyone, and welcome to Meritor’s Third Quarter 2017 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’re recording, is a 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 consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Security 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. Over the next few months, we plan to participate in the following investor conferences: the Jefferies industrial conference on August 9, the Longbow investor conference on August 29 and the RBC global industrial conference on September 13. In addition, we are always happy to host investors at any of our facilities. Please contact me directly to schedule a visit. Now, I’ll turn the call over to Jay.

Thanks, Carl. And good morning, everyone. On Slide 3, you’ll see this was another excellent quarter for Meritor. Sales were $920 million, up 9% from the same quarter last year. This increase is due primarily to the stronger Class 8 market in North America as well as higher production in Europe and China and the continued positive benefit of new business wins. Adjusted EBITDA was $103 million this quarter, the highest the company has reported in over the past 7 years, resulting in adjusted EBITDA margin of 11.2%. Adjusted diluted EPS from continuing operations was $0.64, and free cash flow increased to $94 million. Higher-than-anticipated volumes in most of our end markets and continued operational performance across the company are improving our outlook for the full fiscal year. In past quarters, our margin performance was strong despite the revenue challenges associated with weaker end markets. Now that we’re seeing higher volumes come through in North America, Europe, China and even South America, our results are reflecting that benefit as we successfully convert on the incremental revenue. So as a consequence, we are raising our outlook again for the full year; and are particularly pleased to announce that we are taking our revenue guidance up by $150 million, with about 1/4 of that being driven by market outperformance. We’re driving increases in share beyond our prior expectations with key customers around the globe, particularly in North America, Europe and India. And we’re delivering new business wins as part of our M2019 program that are starting to come into the P&L this year. Take a look at Slide 4. We remain confident in our ability to meet the financial objectives we set for M2019. We are increasing our market share with key customers, renewing long-term contracts and winning new business in all…

Good morning. As you just heard from Jay, we had an excellent quarter across the board. We expanded bottom line earnings by 17%, generated significant free cash flow and continue to make good progress toward our M2019 targets. Let’s walk through the details by first turning to Slide 8, where you’ll see our third quarter financial results compared to the prior year. Sales were $920 million in the quarter, an increase of 9%. Roughly half of the higher revenue within North America, as we experienced higher Class 8 truck production. Our new business wins continued to come into the P&L, and our market share increased in certain product categories. We also had higher revenue in Europe and China as both of those markets continued to trend positively. As you can see in the line item volume, mix, performance and other, we had $22 million of higher adjusted EBITDA related to $81 million of revenue increase. We continue to see the benefits of our M2016 operational improvements, which are driving strong earnings conversion on incremental revenue. Also included in this line item are $6 million of higher net steel costs on a year-over-year basis, partially offset by $5 million of higher joint venture earnings resulting from the improvement in the North American market. Next you’ll see that we had a $6 million favorable supplier litigation settlement in the third quarter of 2016 that did not repeat this year. You’ll recall that this was an important contributor to last year’s margin exceeding 11%. Moving down the causal, you can see that SG&A was an $8 million increase this quarter, excluding the impact of the supplier settlement in the previous year. This can be explained entirely by an increase in variable compensation expense to catch up our accruals through nine months given that…

[Operator Instructions] And our first question comes from the line of Ryan Brinkman from [GP Mobile]. Your line is open.

This is Samik on behalf of Ryan Brinkman from JP Morgan. The first question I had is on the commercial truck segment. Your revenues there rose 14% year-on-year in the quarter, so I was wondering if you could break out -- also, the end of market that I look at, like Class 8 and Class 5-7 were up mid-single here, so if you could break out for us: How much of the growth was driven by the industry? And how much will you attribute to sort of market share gains in that growth?

I think, big picture, you can see -- I mean, when you look at the 2 big markets we have in commercial truck, North America and Europe, they were up 3% and 5% roughly. And so the way to think about it is the bulk of the rest was coming from our business outperformance. That’s new business wins. It’s product penetration increases, expansion of share with customers.

Got it. No, that’s helpful. And then in terms of probably strength here in terms of also the raising the revenue guide. You’re raising the revenue guide on the end market strength. How should we think about the sustainability of the end market strength going into 2018? Like, what’s your outlook in terms of how sustainable these end market strengths are going into the next year?

Ryan, this is Jay. I think the way we’re thinking about it is, right now even with that increase in market expectations, for the full year, we’re -- or our fiscal year, we’re starting to push towards replacement demand. And I think, as we look longer term at the U.S. economy and its health, we see no reason that the Class 8 market shouldn’t be able to sustain that replacement demand level going forward. Obviously, we’re not giving our guidance yet for 2018, but I think, as we look at the market fundamentally, we just think with a healthy economy that replacement demand expectation should be reasonable.

Got it, got it. And then just a last question. How should we think about sort of a typical incremental margin for the last quarter of the year? Because if I sort of look at what your guidance is implying in terms of revenue growth, which is sort of a $100 million increase; and put a 15% incremental margin on it, which you seem to have done this quarter as well, excluding the sort of backout of the benefit you had last quarter from the supplier payment, the math then sort of indicate that you could sort of outperform the 10.2% margin guidance you’re sort of issuing today for the year. So can you just help me in terms of is there anything that could depress incrementals in the last quarter?

Yes, I think, as you think about sequentially going from Q3 to Q4, the first thing I’d say is that supplier litigation settlement isn’t relevant to this year. That was a last year good news item. So that’s not embedded in our Q3 2017 guidance or results. As you think about what’s implied in our guidance for Q4, our expectation is that revenue from Q3 to Q4 drops by about $95 million, and that’s predominantly driven by the fact that we have the European shutdown, which always brings our revenue down sequentially from Q3 to Q4. We’ll also see some seasonal -- we’re coming off our seasonal peaks in our aftermarket and China businesses as well, so we tend to see a little bit of pullback in revenue in the fourth quarter there as well. But all told, it’s about $95 million of revenue step down sequentially. And we’re assuming, if you cut through the guidance, about a 20% conversion on that roughly $20 million of EBITDA lower. That’s what’s implied in our Q4 guidance.

And our next question comes from the line of Brian Johnson from Barclays. Your line is open.

Yes. You seem to have stronger end markets and new business wins, but you lowered your CapEx guidance. Is that timing of investments? Is that going to be added to next year’s CapEx? Or just how, given the growth, should we be thinking about that?

Yes, yes, Brian, this is Jay. I think that’s right. It’s really a timing issue. A lot of our projects are quite large. And although we’re encouraging the team to continue to invest, to achieve as much labor and burden and material cost savings as they can, it’s just a question of timing. And I think the run rate that you’ve seen us at the last couple years is what we think a go-forward picture looks like.

Okay. Can you help us refine in terms of bucketing or breaking down, obviously in the Commercial Truck & Industrial sector, just the growth between what was end market growth, what was market share wins, what was new business? And then were there some things either in industrial or military that kind of came through that we haven’t seen in prior quarters?

I think we’ll be bucketing that at the end of the year and then at our Investor Day as we scorecard ourselves against our M2019 targets. So we’ll give you more detail at that time. As I spoke to in our initial comments, of the revenue guidance increase, roughly 25% of that was due to new business wins. And another data point that we called out was, even though the India market is down, we expect to be up because of the market share gains with primarily our largest customer but across the market.

And our next question comes from the line of Mike Baudendistel from Stifel. Your line is open.

I think that’s me. Anyway, in the REV Group deal, I just wanted to ask you. They do so many different product types, I mean. Is that really -- are you doing business with them throughout their sort of products portfolio? Or is it sort of concentrated in certain types of products that they’re manufacturing?

No. Great question, Mike. In fact, that’s what makes us most excited about that announcement is, prior to this, we really didn’t have a single overarching agreement with the REV Group, so the opportunities were with each of the individual brands. This is the first consolidated agreement we’ve had with that group. So I think on both sides of the table we have expectations of increasing penetration with them as we become much more closely aligned with the engineering teams in the entire group.

Great. Can you give us a sense of how much revenue that they represents initially? I realize it’s going to ramp up overtime.

Again, we’ll be scorecarding all the M2019 wins at the end of the year. And as we start to look at the opportunities individually, we’ll certainly highlight the larger ones individually, when we come through at the end of the year. But again, we’re very pleased with just being right on track with where we expected to be and wanted to be on that revenue growth program overall.

Great. And I also wanted to ask you IVECO. You said that it was a continuation of an existing relationship with them. I mean, was it any larger than the prior relationship in terms of what you’re supplying to them?

No, it was a predual long-term agreement. We provide IVECO in Europe all their single-reduction drive axle needs that they require in Europe. But again, every major customer agreement that are long term is very critical to us and took an enormous effort by the -- by our team to make sure we execute it successfully.

Okay, great. And then sticking with Europe, can you just remind us if there’s market share changes within the OEMs in Europe? Are there more of the -- some certain ones that you’re more exposed to there and certain that are ones that are more of [Indiscernible]?

Well, the big customers we’re exposed to are Volvo, Werner and IVECO. And then we’ve won recently the Scania disc brake business, a large share of that, so you can look at Scania. And we have another win that we alluded to last quarter of another European OE that we’ll talk about in more detail in the future.

It sounds good. And also just wanted to ask you quickly: I mean you hired a Chief Strategy Officer in the quarter. I mean, should we think of that person as primarily being someone that prospects for acquisitions, or just looks at corporate strategy overall? Or just any detail there would be great.

Sure. The reason for that hire. We’re thrilled to have Cheri in our team. Cheri is someone we’ve worked with quite extensively before from the Boston Consulting Group, so we are excited to have her join us. It was primarily to support us in all our growth initiatives, both organic and through bolt-on acquisitions that we’re looking at. Obviously, a large part of our M2019, in fact, has come from revenue growth, and we want to make sure we go about that in the most thoughtful and organized way. And we have a lot of good opportunities that we needed to make sure we were sorting through properly.

And our next question comes from the line of Brett Hoselton from KeyBanc. Your line is open.

It doesn’t sound like you’re prepared to talk about your revenue target specifically or where you’re at. And I’m wondering what your -- what is your confidence level at achieving that 2019 revenue target?

It’s stated, Brett. We’re -- so far, what we disclosed last quarter and this quarter, we’re at $115 million towards that target of $450 million. I think we are very confident in our ability to achieve that target. I think we’re right on the flight path we expected to be. We -- as you would expect, we have detailed meetings with all the operating teams, going through their risk-adjusted pipelines. And what I’m most pleased about is the overarching strategy of becoming closer to the marketplace and our major customers. And then having significant additional new product launches is really getting a lot of traction, and you can see that in this quarter’s results. And we’re also looking at some interesting bolt-on acquisition opportunities, and we’re hopeful that we’ll have some of those consummated in the not-too-distant future.

And switching gears, can you talk a little bit about what are you seeing? You talked about near term the European market, commercial vehicle market; and the South American market. Can you kind of speak to those markets in terms of your outlook into 2018? Do you see strengths continuing in Europe? And where do you see South America?

I think it’s premature for us to give 2018 guidance, but if I look at each market individually, I think Europe is keeping up with replacement demand. We’re finally just moving along in a replacement demand market, which is excellent for us particularly with our market share gains. And so it -- what’s encouraging to us about that market for the future? There’s not a pull-ahead of an emissions or safety required change. So with -- and GDP is healthy in Europe and moving along. And South America, it’s stable, as we’d said. They really need political stability there. Any time you see the political environment becomes stable, you start to see a strong pickup in business activity, but then there’s a step back as another issue arises in that arena. So I think the bellwether we look for in that market is just political stability. And we think the underlying business demand will be quite strong.

And then finally, from a commodity standpoint, have you seen any particular headwinds, particularly from a steel standpoint?

Steel for the year has been a headwind, but I think we’re starting to see stability recently in that. So obviously I think the company has done an excellent job of dealing with that this year. And if you’ll recall, the majority of our contracts have pass-through mechanisms that have on average a six-month lag in them, so -- but we’ll recover the vast majority of those increases over time. But I think, during this time period where we’ve seen the headwinds in this fiscal year, I’ve just been very, very pleased with how the team has responded in getting additional material cost-downs since quite a while.

And to dimension that numerically, Brett, it’s the quarter year-over-year, it’s about $6 million headwind. And year-to-date, we’re about $21 million headwind, but as we sit here today and look at the full year, we’ll be in about $25 million to $30 million full year headwind, which is really unchanged from what we were thinking a quarter ago. So we’ve seen a little bit more stability in the steel indices in the last few months than what we saw in the early part of the year.

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

Just to follow up on that last point on steel. So if steels moderates here, it sounds like, at least for the fourth quarter, a little bit less of a net headwind. And then as we go into ‘18, again if things flatten -- if steel prices flatten out, you would be -- expect to sort of have a little bit of a potential benefit from a recovery. Is that the right way to think about it?

That’s right, because the steel recovery mechanisms will start to kick in at the tail end of this year and really into the beginning of next year for the steel price increases we’ve really seen in the last quarter or 2.

Okay. And then I don’t know if I’m reading too much into this, but look, I noticed you’ve called out steel more in the aftermarket segment, as opposed to commercial vehicle, so is there something -- is that because more of the recoveries are -- contractual recoveries are in that area in the commercial truck segment?

It’s a really good point. The -- as you think about the $6 million headwind we had in the quarter year-over-year, about $3 million of it was in Aftermarket & Trailer. $3 million of it was in commercial truck. And the reason we saw a little bit of a disproportionate hit to the Aftermarket & Trailer business relative to its revenue is because of pass-through mechanisms. Commercial Truck & Industrial, with the OE customers, has the traditional pass-through mechanisms with lag on about a 6-month basis. When you think of aftermarket, the aftermarket business in and of itself doesn’t operate with the same types of pass-through mechanisms. We tend to go out with pricing periodically maybe once a year, it could be more often than that, on a general basis, but the pricing is established, whether it’s up or down, based on a whole set of market dynamics, not just steel. So when we look at a particular quarter that we saw year-over-year we had a steel headwind in the segment but we didn’t have a specific recovery mechanism to offset that in the segment.

That’s helpful. And then just bigger picture, Haldex, with respect to their deal, they -- there was a release today that talked about some disruption in their business and order book. And I didn’t know if you were sort of seeing any benefit there on air disc brakes. And then it looks like -- I don’t know if that deal goes through, or not. It looks like it might not. I mean, is that something that would be of interest, or at least elements of that business of interest, to Meritor?

Well, Haldex, as far -- we compete in the foundation brake business. And Haldex’ share of that, particularly on the truck side, is fairly de minimis. And the -- so we haven’t seen any significant impacts. They’re more heavily weighted towards the trailer foundation brake side, which we’d certainly have meaningful share in North America but not so much in Europe. So I think I haven’t seen any near-term impact. As far as M&A opportunity, we don’t comment on specific opportunities, and so we will just hold off on any further comments on that.

Fair enough. And then last one, on the OPEB update. I mean, is it fair -- so it seems like the appeal could go through September, so in terms of thinking -- I’m sure you’re doing work internally, but in terms of thinking about an updated communication to the Street sometime around then, is that a fair thinking?

Well, I -- obviously, our next quarterly call will be in early November. And so we’ll, at the latest, have an update at that point. We did file a motion with the district court in the -- on the 19th of July and have had a hearing scheduled for late August. If there is a ruling from the bench at that hearing, we’ll update the market at that point in time, but we remain optimistic that this will get resolved over the coming months. And when it does and once we’ve communicated to the company and any impacted retirees, we’ll then update the market.

Thank you. And this concludes today’s Q&A session. I would now like to turn the call back over to Carl Anderson for closing remarks.

Thank you, Danielle. This does conclude our Third Quarter Earnings Call. If you have any further questions, please feel free to reach out to me directly. Thank you for your participation.

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