Cummins Inc. (CMI) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Meritor second-quarter 2018 earnings conference call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Carl Anderson, Group Vice President of Finance. Sir, you may begin.

Thank you, Takeeya. Good morning, everyone, and welcome to Meritor's second-quarter 2018 earnings call. On the call today we have Jay Craig, CEO and President, and Kevin Nowlan, Senior Vice President and President of Trailers and Components, 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 US and international copyright law and may not be rebroadcast without the express written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. 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, and good morning. Let's turn to slide 3. We're happy to report today strong sales and profits for the quarter. For the second fiscal quarter of 2018, we had sales of more than $1 billion, a 32% increase year-over-year. This was primarily due to higher production in all our global markets, new business wins, and favorable foreign exchange. Adjusted EBITDA margin was 11.4%, up 120 basis points year-over-year. And adjusted diluted earnings per share was up 114%. As I said, these results reflect the higher levels of production in our end markets globally. You'll see later in the presentation that we are raising our market outlook for the year in nearly every region. Even as markets are growing, we continue to gain rear axle share with our largest customers. In high markets like these, our customers know they can rely on us to meet their demand. It goes without saying, however, that at these volumes we are seeing some stress in the system. The good news is that, although incurred some premium freight and higher labor and burden costs as a result, we are still converting well and consequently are raising our guidance for the year. I attribute this to the diligent execution of our team in effectively meeting the needs of our customers while at the same time efficiently managing the supply chain complexities and incremental costs inherent at these volume levels. I am pleased to tell you that with the revenue tailwinds we expect to continue in the second half, in addition to the new business wins and other outperformance to the market, our full-year guidance has improved measurably. Kevin will give you the details, but I want to highlight that, at the top end of our adjusted EPS guidance for the year, is now higher than the aggressive M2019 EPS target of $2.84, which you may remember was an 80% improvement from our jump off point in fiscal year 2015. Throughout the entire M2019 time frame, we have earned meaningful new business, increased our share with current customers and converted on increased revenue as global end markets have strengthened simultaneously. We have talked several times about our balanced approach to capital allocation that we have executed for the past several years. We are currently on track to achieve our net debt to adjusted EBITDA target of 1.5 times this year, a year earlier than planned. Our consistent free cash flow generation provides funding opportunities for strategic growth initiatives while also returning value to shareholders through share repurchases. We executed on both of these actions over the past several months. We bought back 1.4 million common shares in the quarter and earlier this week we acquired the business of AA Gear & Manufacturing. More on this important transaction in a couple of minutes. Also in the quarter, we announced executive repositioning. In addition to his responsibilities as Chief Financial Officer, Kevin Nowlan will now lead our Trailer and Components businesses and Global Purchasing. Joe Plomin will continue to lead Global Aftermarket business with additional responsibility for Industrial, which includes off-highway, specialty and defense. And Chris Villavarayan continues to run our global truck group, as we announced in January. He is also taking the lead on our electrical technology offering that we'll talk more about today. In conjunction with the organizational changes, we modified the Company's financial reporting segments, which are now Commercial Truck & Trailer, Aftermarket & Industrial. We filed an 8-K on Monday with recast results for these segments. Last quarter we gave you an in-depth look at our business in China. This quarter, as we turn to slide 4, we want to highlight the recovery we're seeing in South America and talk about the new business we recently were awarded with important customers in that region. From an economic perspective, Brazil's GDP is expected to grow between 2.5% to 3% this year. This improvement is accelerating truck sales. We anticipate growth in this market for medium and heavy-duty trucks to be approximately 35% year-over-year. And even with this significant increase, production volumes are still well below peak levels we saw in 2011, leaving us more room for market growth in the coming years. As trucks volumes rise, we are pleased to announce new business wins in Brazil with important long-term customers. First, we will supply front and rear axles for MAN's new delivery truck, in addition to supplying our hub reduction axle for the Constellation heavy-duty truck application. We have also been awarded axle business with Mercedes-Benz and IVECO for school buses. Obviously, this improvement in the market is a welcome change following the severe recession of the past few years. We have an excellent team in Brazil and look forward to continued growth in the region. If you turn to slide 5, you'll see more detail on the AA Gear & Manufacturing transaction. On April 30, we closed a deal to purchase substantially all the assets of AA Gear and its subsidiaries. We expect revenue from this transaction to be in the range of $20 million to $25 million next fiscal year. Most importantly, however, we believe it's suite of process engineering and production capabilities for gear and shaft components will help accelerate our growth strategy. AA Gear has strong customer relationships with some of the world's leading OEM and Tier 1 manufacturers across a wide range of end markets, including agriculture, construction, heavy truck and diversified industrials. Key customers include Caterpillar and CNH Industrial. We believe this is an excellent fit for Meritor and strongly aligns with our M2019 objectives. Let's turn to slide 6. On May 1, at the Advanced Clean Transportation Expo in Long Beach, California, we introduced our new Meritor Blue Horizon technology brand. We chose this venue to introduce Blue Horizon because of the significant presence of several OE customers in North America who are advancing their interest in electric drivetrain technology. The Blue Horizon brand reflects a move toward even more innovation and advanced technology. It also represents a product evolution and revolution to meet the different needs of existing and new customers. Most importantly, it supports the continuation of our leadership in engineering and advanced technology. All Blue Horizon products will be grounded in the Meritor tradition of reliability and durability, even as our solutions become lighter, more efficient and more technically sophisticated. Products launched under Blue Horizon will deliver flexibility in global platforms, integration of motors into axles and customized gearing for all segments of the commercial vehicle industry. In past quarters we have talked about the number of electric vehicle programs we have won globally. That number continues to grow. Meritor's experience and insight are vital to the creation of an entirely new electrical architecture that maximizes power, technology, efficiency and safety on the road. Whether it's battery electric vehicles or plug-in hybrid electric vehicles, we will offer a completely integrated system that can be installed on an existing vehicle or glider, or a kit that can be installed on an OEM assembly line. Our new integrated eAxle system is the next step in the evolution of electric drivetrains, putting batteries between the frame rails and powering the axle directly for reduced energy loss and weight. As we said previously, we are confident that this expansion of our capabilities is one of the best opportunities for long-term growth. To that end, we are very pleased to announce, as we turn to slide 7, that Meritor, through its strategic alliance with TransPower, is collaborating with Peterbilt to equip 12 all electric Class 8 day cab tractors and three refuse trucks with all electric drivetrain systems. Meritor will supply high efficiency and lightweight axles, drive lines, and brakes that maximize system efficiency, extend range and increase payload. Electric drive train power and control systems, as well as batteries and accessories, will be supplied by TransPower. The 80,000 pound short-haul Peterbilt drayage trucks will support operations at ports throughout California, including Los Angeles, Long Beach, San Diego and Oakland. Two Peterbilt refuse haulers will be tested by Sacramento County and a waste hauler will operate the third truck. The Meritor and TransPower systems are expected to deliver a 125 mile operating range for the drayage trucks and up to 95 miles for the refuse haulers. Our understanding of customer needs enables us to create the products that can do what needs to be done regardless of the class, segment or rating. With that, I'll turn the call over to Kevin for more details on the financials, and then we'll take your questions.

Thanks, Jay, and good morning. On today's call I'll review our second-quarter financial results and our updated 2018 guidance. As you heard from Jay, we had a really strong quarter of financial performance. We saw revenue increase by $260 million, expanded adjusted EBITDA by $40 million and accelerated the progress toward achievement of our M2019 targets. Let's walk through the details by first turning to slide 8, where you'll see our second-quarter financial results compared to the prior year. Sales were $1.066 billion in the quarter, with every major region reporting stronger revenue relative to last year. In North America, Class 8 truck production was 73,000 units, up 22,000 trucks from a year ago. We believe that production levels will continue to expand for the remainder of the year due to strong net order intake in recent months. Sales in Europe were also up, primarily driven by an appreciating euro. Beyond North America and Europe, we're seeing our other major markets China, India and Brazil growing year-over-year. And while end markets are strengthening, we're also seeing the benefit of revenue outperformance globally. Driven primarily by the higher revenue, we generated adjusted EBITDA of $122 million and an 11.4% adjusted EBITDA margin. Overall we converted incremental revenue into EBITDA at the lower end of our historical range. As you can see from the chart on the right side of the slide, we are showing several discrete items that were part of the earnings walk year-over-year. First, we routinely reassess the environmental reserves required for all of our sites. As a result, we determined that we needed to accrue an incremental $8 million liability this quarter related to a legacy site. Additionally, last year you may recall that we settled a dispute with a joint venture and recorded a one-time legal charge of $10 million. As we've discussed over the last couple quarters, we have two items that will continue to impact year-over-year performance through the balance of this fiscal year. These include lower equity earnings in affiliates as a result of the sale of our interest in the Meritor WABCO JV at the end of last year. That resulted in lower year-over-year earnings of $5 million in the second quarter. And lower OPEB expense from the modifications we made to our US retiree healthcare benefits. That produced a $10 million year-over-year benefit in the second quarter. On the left side of the slide you can see that we expanded gross margin by 170 basis points over the last year to 16.7%, which is one of the highest on record. Adjusted income from continuing operations was $68 million or $0.75 per adjusted diluted share, a 114% increase over last year. And finally, free cash flow was $22 million this quarter. Expanding margins and higher adjusted income were somewhat offset by increased inventory levels as we support strong demand from our global customers. Let's move to slide 9, which details our second-quarter sales and EBITDA for both of our reporting segments. As Jay said, based on the new management structure we have modified our reportable segments to be Commercial Truck & Trailer and Aftermarket & Industrial. In our Commercial Truck & Trailer segment, sales increased by 38% to $854 million. The increase in revenue was not only driven by higher production in North America but also by significant increases in the rest of the world. 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 $96 million, up $44 million from last year. EBITDA margin for Commercial Truck & Trailer came in at 11.2%, a 280 basis point increase over last year. The increases in both EBITDA and EBITDA margin were driven primarily by conversion on higher revenue and the legal charge from last year that I previously mentioned. In our Aftermarket & Industrial segment, sales were $256 million, up 13% from last year. This increase was primarily driven by higher sales in our Industrial business, which included revenue from the business we acquired in the fourth quarter of fiscal year 2017. Segment adjusted EBITDA was $36 million, up $4 million compared to last year. EBITDA margin was 14.1% compared to 14.2% last year. The increase in segment adjusted EBITDA was driven primarily by the favorable impact from the changes to retiree medical benefits, partially offset by higher material and freight costs. On slide 10 I wanted to spend a few minutes discussing steel prices and tariffs since that has been a hot topic over the last couple months. In March, the US announced tariffs on raw steel imports. However, a number of countries granted exemptions from those tariffs. Our primary exposure to imported steel from nonexempt countries is on a small amount of raw steel purchases from China. We anticipate a relatively minimal direct impact on our 2018 earnings from these tariffs. However, since January, we have seen a significant increase in the hot-rolled coil index, which is up 27%, while the scrap index is up a modest 3%. These are two key indices for our North America businesses. In a majority of our Commercial Truck & Trailer sales contracts, we have recovery mechanisms linked to market indices that adjust prices on an average lag of six months. In our Aftermarket business, there is not a similar contractual mechanism to adjust prices. Pricing changes are usually made one or two times each year subject to overall market conditions. Due to the increases we are seeing thus far in steel prices, linked primarily to changes in certain indices, we're anticipating a second-half headwind of approximately $5 million, which is included in our updated 2018 earnings outlook. Next I'll review our updated fiscal year 2018 global market outlook on slide 11. Due to the level of first half production, combined with strong Class 8 orders, a healthy backlog to build ratio, and continued positive economic fundamentals, we are increasing our North America Class 8 truck production estimate by 15,000 units to a range of 300,000 to 310,000 in 2018. In Brazil, industrial production is continuing to accelerate as the economic recovery gains momentum. Business and consumer confidence are also improving, which is supporting the market's expectation of higher growth. As a result, we are increasing our production estimates for 2018 by 25%. India is also seeing increasing production levels driven by an improving economy and significant infrastructure investment. We have increased our 2018 outlook there by approximately 15%. And finally, we continue to see a significant revenue increase in China, both in our Chinese construction and mining business and in our export business. As a result, we now expect revenue in 2018 to be approximately $190 million to $210 million, up about 10% from our prior outlook and more than double where we were just two years ago in that business. Overall, we see growth continuing in most of our major markets around the globe. And that, along with the success of various revenue performance initiatives, is driving our strong performance. Based on these market assumptions, you can see on slide 12 that we are again raising our 2018 guidance. We are now forecasting revenue to be in a range of $4.0 billion to $4.1 billion, up $200 million from our prior guidance. We're expecting an adjusted EBITDA margin of approximately 11.2%, which is at the high-end of our prior guidance. We expect that the higher adjusted EBITDA net of tax will drop right to the bottom line, so we are also raising our adjusted diluted earnings per share from continuing operations guidance to a new range of $2.70 to $2.85 per share. Just to reiterate what Jay said earlier, we are excited that we are now on the cusp of achieving our M2019 adjusted diluted EPS target of $2.84 a full year ahead of plan. And finally, based on our higher earnings expectations, we are increasing our free cash flow guidance to be in a range of $120 million to $135 million. We are very pleased with our performance so far in 2018 as we continue to execute on our journey to delivering on our M2019 commitments. Now we'll take your questions.

[Operator Instructions]. Our first question comes from the line of Alex Potter of Piper Jaffray. Your line is now open.

Good quarter. I wanted to ask first about some of the supply chain stress you mentioned in the prepared remarks. If you could elaborate a little bit on where specifically you are feeling it, what parts of the supply chain seem to be pinch points, and then the extent to which you're able to capitalize on maybe pinch points elsewhere to win market share for yourself.

Thanks, Alex. This is Jay. Very good question. I would say, as we typically see in strong upturns like this, we're seeing it in base forgings and castings. So, not unlike the past upturns we've executed successfully on. We have some layered capacity suppliers we bring online at slightly higher cost, and that's why you see even though we're converting at what I think are strong margins, strong incrementals, they are slightly lower than we have in previous quarters just because of bringing on that incremental capacity. We actually are right now backfilling for some of our competitors. So, we've once again been asked to step in and been able to successfully do that. I don't want to understate how the whole industry feels right now, though. I think the entire industry is operating very close to capacity, which we are as well.

Okay, understood. Maybe a little bit more on China, too. Obviously there's strength there in off-highway and construction and infrastructure, and you touched on exports as well. I'm interested to hear the extent to which you are starting to get additional traction in the on-highway business in China. Maybe not now; I sort of doubt it was impacting the quarter, maybe I'm wrong. But have you any incremental evidence to suggest that you might be able to start capturing more revenue in that segment going forward?

Sure. Yes, another good question, Alex. We talked about China, focused on that last quarter, like we focused on Brazil this quarter. And we have had market share gains and wins in the on-highway, particularly in bus and coach, continuing with Yutong and our other bus and coach customers, in bringing forth a tool light product that we've been integrating into China, which is taking our class leading Western axles and localizing them in China to get them to the right price points. So, we're seeing good progress. And I would say on path to the plan that we set out a year or so ago to increase our penetrations in that area.

Okay. Thanks very much. Good quarter.

Our next question comes from the line of Faheem Sabeiha of Longbow Research. Your line is now open.

Congrats on a great quarter. Can you bucket the $200 million increase in your revenue outlook between higher end market growth, outperformance from new business wins and FX?

It's a mix of really those first two in particular. The markets are a big piece of the equation. As we've told you, when you look at Class 8 truck, just to put some dimension around that, taking the midpoint of our guidance of about 15,000 trucks translates to about $60 million. So what that tells you is, hey, that's a big contributor, but there's a lot of things going on as well. Brazil production going up is a meaningful increase, as well as other markets and new business wins. So it's really a mix of those things across the globe.

Okay. And then speaking of Brazil, in light of the more positive outlook in South America, can you guys tell us what your market share is in South America? I mean, you highlighted a few recent axle wins in your slide deck; I'm just wondering if there's additional share opportunity for Meritor in this market.

I think we haven't talked about specific market share, but I think we have talked about that we have a market leading position in Brazil, and continue to grow upon that with the wins that we talked about with the various OEs during this call. And that's no surprise as we localize more products into that market, like the hub reduction axle, like our medium-duty product, the 13X. We expected to get market share gains as we expand our product offerings in the local market. So, I think as we stretch our product portfolio, even though we have strong market share positions in traditional Class 8 single reduction axles, we're starting to see the increased penetration from the new product launches we have there.

Okay. And just one more question around EV. Now that we're seeing the benefit of your investment in TransPower, combined with your EV offerings with the recent Peterbilt program, is the long-term plan essentially to offer these platforms on a nationwide scale?

Actually on a global scale. We are taking the technology solutions offered by TransPower and actually rolling those out globally. So, that partnership is much broader than just California or just the US. Quite frankly, we see more demand right now globally for our eAxle than we are able to meet in this prototype phase, so we're almost allocating them to individual regions and our major strategic customers. So, that's what one of the powers we saw that investment and partnership in TransPower, they saw as well, is given that we're one of the few true global brands in commercial vehicle supplier world, we could bring enormous value to TransPower by bringing their products globally.

Okay. I'll pass it on. Thanks.

Our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is now open.

This is George Clark on for Joe. You touched on this earlier, but are you confident that you will be able to continue to drive incremental margins in that mid to high teens range throughout the rest of the year despite some of the higher industry volume? And how are you offsetting some of those inefficiencies?

Our guidance assumes right now you can see we took our revenue guidance up $200 million, and implicit in that is that we took up our conversion on that about 15%. So, we're continuing to count on our ability to convert kind of at the low end of our historic range, which tends to be what we see in these types of markets. But we manage it very closely, and we watch the potential for layered capacity costs and other inefficiencies coming in, but we're managing that very effectively, like right now. It gets more challenging as markets continue to accelerate and to grow, but we've done an effective job at managing that thus far.

Okay. And then you guys had another strong backlog quarter. Are you seeing some of these measures come on earlier than you had previously expected? Is that pulling forward from maybe 2019? What is the dynamic there?

I think by and large there's two things going on. One is we had a lot of volume, new business wins coming on that we anticipated would come on in the year 2018. We had big amounts coming on in 2018 and in 2019, and we're seeing those. Plus I think with the markets being stronger, we assume our new business wins linked generally to a more normalized market. So as markets are stronger we're getting a little bit of a tailwind on some of those new business wins as well, that they come in a little bit stronger than what we were originally planning for.

All right. Thank you very much.

Our next question comes from the line of Neil Frohnapple of Buckingham Research Group. Your line is now open.

Jay, as you mentioned, you have a chance of achieving the M2019 EPS target one year earlier, which is very impressive. But could you just talk about your confidence level in achieving the target next year in FY19, given how strong FY18 is coming in from a global market outlook standpoint? And even if NAFTA Class 8 truck is down in FY19, sort of your ability to still achieve that?

Well, thanks, Neil. That's a good question and obviously something we look at very closely as well. Because like M2016, these aren't point of time targets. This is transformational for the Company and we plan to grow on those achievements. It's a little early to talk about 2019 guidance, but obviously the significant number of new business wins we think will serve as a measurable dampener to any market downturn we see. And also, as Kevin just mentioned, we tend to convert at lower levels during peaks because of bringing on layered capacity and incurring some premiums. So as those markets step down, we could see further expansion of our conversion metrics as we're able to more aggressively manage those stepped-up costs during peak markets.

Okay, that's helpful. And then the incremental environmental reserve of $8 million in the quarter related to a legacy site. You would have delivered a 12.2% EBITDA margin in the quarter if that did not occur. And I know these things can be unpredictable, but do you feel like the $8 million is more one time and there won't be additional cost related to this in the back half of the year?

Again, Neil, we highlighted that. That's one-time cost. It's difficult with some of these sites to say will we ever have another dollar of investment. I wouldn't go that far. But I think the actions that we accrued for that we're in the midst of taking, our very aggressive clean-up of the site, that we think will hopefully put this behind us. And so, we've taken a more aggressive approach towards this particular site to try and put that liability behind us.

Okay. And then one last one. I mean, just given where the stock is trading, can you just talk about the thought process of buying back your own stock versus doing additional bolt-on acquisitions? And you did buy back some shares in the quarter, but just given the increase again in the free cash flow outlook, could you potentially do more buybacks than previously anticipated with the stock trading significantly below intrinsic value?

Absolutely. I mean, we're going to be opportunistic and balanced as it relates to deployment of our capital from here on out through 2019. We anticipate obviously generating more free cash flow over the balance of the year and you can anticipate we'll expect to have strong free cash flow again in 2019. We will look at bolt-on acquisition opportunities that make sense for us and we'll look at continuing to be opportunistic in the market, just as we were in the second quarter repurchasing 1.4 million shares. So we'll be balanced and opportunistic.

Okay, great. Thanks so much.

Our next question comes from the line of Mike Baudendistel of Stifel. Your line is now open.

Just wanted to ask you on this all-electric program with Peterbilt, is there more Meritor content on those all-electric trucks versus a similar piece of equipment that are diesel?

At this point in time I would say is fairly neutral. As our eAxle comes online and gets through the prototype stage we'll actually be running one of those on a school bus application by the end of this month. I think the expectation is if that product proves out to be as efficient as we believe it will be, I think we could start to see that eAxle replace some of the components on the vehicle, because it allows for much more battery capacity than the architecture that we're moving forward with on those Peterbilt vehicles right now.

Got it. And then I just also wanted to ask you on this acquired assets of the AA Gear & Manufacturing, does that play into the EV strategy at all? Because I remember from your investor day that part of the additional content on some EVs would be the additional gearing near the wheel end. Is that - does that play into that - the thought process on the acquired assets there?

Very insightful question, Mike, because of one of the capabilities AA Gear brings us is precision ground gears, which we think there'll be increasing demand for in an electric environment. Because those ground gears are quieter in operation and, obviously with the elimination of the noise from the internal combustion engine, the vehicle becomes much more sensitive to other components and the noise they generate. So, we are very excited about that capability as well. But I would say overall it's just clearly right in line with the strategy we laid out for M2019 in our components business. And we like Fabco's acquisition, like the investment in TransPower, hopefully you can see that our acquisitions are very logical and connected to our strategy.

Got it. Makes sense. And then just wanted to ask you one last one on China. You increased the guidance there and I think a lot have with sort of the fast start to China. Does it also include a thought that the Chinese market is going to slow down in the back half of the year? Or is it because it's less relevant to you because you do more off-highway in China?

I would say it's somewhat less relevant to us because we're more heavily weighted towards the off-highway.

Got it. Thanks very much.

Our next question comes from the line of Brian Johnson of Barclays. Your line is now open.

This is Steven Hempel on for Brian Johnson. Just wanted to drill down a little bit on the long-term comp structure as part of the M2022 plans, longer-term comp plans here. Obviously the 2017 plan was focused really on EBITDA margins, which you guys did a great job of achieving. 2018 plan shifted more towards EPS and then the 2019 plan added an above market growth aspect to it, as well as leverage. Just thinking about kind of where we're at from a cycle perspective and where your margins are at currently, and then obviously the shift to electrified products and eAxles, how we should be thinking about the comp structure at a high level. I understand you can't disclose what they will be, but just strategically as we think about where we're at from a cycle perspective, what additional potential metrics might you be looking at? ROIC, free cash flow, et cetera, above market growth? I'll leave it at that.

Sure. Well, first of all, I think our long-term comp structure is very clear in its alignment to the strategies, as you just articulated. Senior executive management gets compensated on hitting those three financial targets embedded in M2019, as we did on the M2016. As we spoke in the previous quarter, we're in the midst of developing the M2022 strategy and we expect to roll that out at an Analyst Day this December. And we will once again that strategy will result in defined financial metrics that we will set for the Company over that three-year period. And then our long-term incentive plans will then again be locked into those achievement of those metrics. Now, to determine those metrics, we're doing a lot of research. We've done a very detailed shareholder survey over the last few months, both on the buy side and sell side, and we're taking all of that input to develop what those metrics will be, that we're hearing will drive the most significant return on shareholder value. So, we're a little early to talk about specifically what they'll be, but just know that the input you've given is being heard, filtered down, and then we'll develop those metrics.

Good. That's great to hear. I believe that's fairly thorough relative to some other companies in our coverage particularly. But anyhow - so just want to shift gears here over to the PACCAR EV tests here. Obviously good to see some progress there and some announcements on that front. Is PACCAR working with other Tier 1 suppliers for these eAxles and electrified products? Or is Meritor going to be the exclusive supplier there moving forward?

I think like all OEs, they have some projects with different customers. I know they have one particular project, I believe it's with Cummins and their system. I think the announcement we made today is certainly one on the largest block orders, if not the largest. But as you would expect in a rapidly evolving market right now, like I would do if I were running an OE, they are placing their bets with different providers right now. But I think clearly Meritor has established itself as one of the leaders in the future of that technology, which is our goal. And for example, we were asked to present - I was asked to present just Tuesday as the keynote speaker at the ACT Expo. No great complement to my great speaking skills, but more about how Meritor has been recognized as a thought leader in electrification, and they wanted to hear what Meritor's plans are for the future.

Okay. And then just to follow on that, how should we be thinking about the North American and EU European bus market? Obviously you look at China, that's - from an electrified standpoint, that's been the first market to move over to eAxles. Just wondering how quickly we can start seeing some announcements on the North American/European bus market.

As I've stated previously, I think that's one of the markets globally you're going to see move the quickest and most aggressively. There were some very interesting applications out at ACT Expo this week, even on the airport shuttle vans and buses, moving fully electric. I think that the requirements on cities to meet clean-air requirements are going to drive the bus sector much more quickly potentially than any other sector.

Okay, so safe to assume that Meritor is - there's projects and whatnot in the pipeline?

Yes. I feel very pleased with where we are positioned in our pipeline on different bus projects throughout the globe.

Got it. And just really quickly on the ramp up on RD&E here to support new business, particularly around electrification. I believe the expectation for 2018 here was roughly half of the $12 million increase was due to increased R&D, so to speak. How should we be thinking about that ramp into 2019 and beyond?

I think it's premature at the moment to comment on 2019, but I would say as you look first half to second half, there is a little bit of an incremental step up in the electrification investment that's embedded within our guidance.

Got it. And if I could just squeeze in one quick one. AA Gear & Manufacturing acquisition, Cat and CNH, like those two customers, obviously. Were those customers previously for Meritor? And I guess strategically this acquisition kind of, did this get you kind of above market growth, so to speak, more quickly, getting to the extent that Cat and CNH wasn't a customer to Meritor?

Well, I think to answer the second half of your question, yes. We believe so, that this will work towards getting us the above market growth. Caterpillar and CNH were small customers of ours in components, but this significantly expands our penetration. Obviously IVECO is a subsidiary of CNH, and we supply all the single reduction truck axles for them in Europe. But this moves us aggressively into the construction, ag, off-highway space for components.

Got it, great. Thanks for taking my questions.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back over to Carl Anderson for closing remarks.

Thank you, Takeeya. This does conclude our Meritor second-quarter earnings call and we thank you for your participation.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.