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.

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.

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…

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…

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

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.

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.

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?

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.

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?

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.

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.

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

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?

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%.

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?

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.

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?

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.

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?

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.

Our next question comes from Neil Frohnapple with Buckingham Research.

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?

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.

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?

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.

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?

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.

Our next question comes from Alex Potter with Piper Jaffray.

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?

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.

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?

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.

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

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?

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.

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.

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.

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

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?

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.

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?

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.

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?

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.

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?

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.

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.

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.

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

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?

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.

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 –

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.

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.

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.

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 –

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.

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

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.

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