Cummins Inc. (CMI) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Meritor Earnings Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference Mr. Carl Anderson, Group Vice President of Finance. You may begin.

Thank you, Catherine. Good morning, everyone, and welcome to Meritor’s fourth quarter and full year 2018 earnings call. On the call today we have Jay Craig, CEO and President; and Kevin Nowlan, Senior Vice President and President, 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 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 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 webcast -- website. Now I’ll turn the call over to Jay.

Thanks, Carl. And good morning everyone. We appreciate you joining us for a look at our fourth quarter and full year 2018 results. Let’s turn to Slide 3. Let me start by saying we had another great quarter delivering on our financial and customer commitments and by all measures we also had an extraordinary year. For this, I want to recognize the Meritor team around the world. Our employees are doing a fantastic job driving excellent results in all areas of the company, particularly as we manage the challenges inherent to supporting strong markets and the volatility of material costs around the globe. The year is notable not only for financial results however, we did much more. We launched six new products for specialty linehaul, bus and coach and off-highway applications. We’ve positioned Meritor to be a leader in electric drivetrains and as part of that strategy we launched our Blue Horizon Advanced Technology brand. We successfully integrated two bolt-on acquisitions, each of which has contributed toward our revenue target for M2019. We’ve managed our business in Brazil through the severe downturn over the past several years and are happy to see volumes up almost 40% this past year as we launched new business with MAN, Mercedes Benz and Iveco. And as we remain focused on returning capital to shareholders, we bought back 4.5 million shares of common stock in fiscal '18 and are pleased to announce today that we plan to repurchase more. In 2015, we have -- since 2015 we have repurchased more than 17 million shares and significantly reduced the amount of convertible debt that was previously dilutive. In addition, we achieved our long-term leverage target of 1.5 times net debt-to-adjusted EBITDA. Overall, these actions reflect the level of performance you've come to expect from Meritor. Turning to our results in the quarter, we generated revenue of almost $1.1 billion, an increase of 17% from last year. In addition to higher production on all our major markets, we continue to grow share and win new business, driving the step-up in revenue. We also expanded adjusted EBITDA margin by 30 basis points and adjusted earnings per share by 32%. In a few minutes, Kevin will walk you through our full year guidance for fiscal 2019. You'll note that we anticipate it to be another strong year for Meritor. A key message you will hear from us going forward is related to the free cash flow generation capability we now have in place due to deleveraging, legacy liability reduction and operating performance. On that note, let's go to Slide 4. Over the past several years, Meritor's financial performance has significantly improved and our balance sheet is now in a great place. In fact, we received a credit upgrade last month from Moody's and have achieved our target leverage one year earlier than planned. We plan to generate strong free cash flow in 2019, and expect it to continue even with normal cyclicality that is characteristic of our industry. As I mentioned a few minutes ago, we completed the execution of our $100 million repurchase program by buying back 4.5 million shares in 2018. With that now complete, we are pleased to announce a new board authorized share repurchase program which is double the size of the prior program. We believe we are now in an excellent position to accelerate aggressive capital return to our shareholders, particularly in the form of increased share buybacks. We intend to share more around our capital allocation plans at our Analyst Day in December. Let's go to Slide 5. We are now less than a year from completing our M2019 plan. As you look at this slide, the left column shows the three financial targets we’ve set for the company. You can see our status for each of the metrics and the contribution made towards each target in fiscal 2018. We realized $325 million of revenue outperformance during the year, driven by new business wins, increased market share and additional revenues from two bolt-on acquisitions. And we are on track to achieve $660 million for M2019 consistent with what we told you at Analyst Day last year. In fiscal 2019, we will continue to evaluate strategic bolt-on acquisition opportunities to further accelerate our revenue growth. Also this year, we generated $474 million of adjusted EBITDA and achieved solid conversion in elevated markets with a challenging industry operating environment. Our M2019 goal was to increase adjusted EPS by a $1.25 which was an 80% improvement from our jump up point in fiscal year 2015. We have achieved our M2019 adjusted EPS target a full year early. With regard to capital allocation, we said we would reduce our leverage to less than 1.5 times net debt-to-adjusted EBITDA. As I just mentioned, we achieved that in fiscal 2018. We also said we would return 25% of free cash flow to shareholders. Since the launch of M2019 we have returned roughly double that amount. Overall, the bottom-line earnings of the company has dramatically improved over the past several years and our ability to generate significant free cash flow has never been stronger. On Slide 6, we wanted to give you a few highlights from 2018 as we noted for revenue gains were driven by higher production in all our major markets. In combination with revenue outperformance through increased market share and new business wins. Top-line increases in South America, China and India as noted here and speak to with the first vacation of our business. You'll see later in the presentation that we expect this trend to continue as production volumes remain robust in these regions. Also on this slide you'll note that we continue to maintain our operational excellence even as daily rear axle production in North America increased 20% during the cycle. With our markets have slightly lower levels in 2018 than during the last peak market in 2015 it is clear that we have driven market share growth over the past few years that is being realized in our bottom line results. In fact, we believe we are now operating at our highest North American axle production level in our history. That level of production requires a tremendous effort across the company but we manage delivery commitments exceptionally well throughout the year. And in order to continue our track record of supporting our customers' needs and delivering in this market environment, we are now making some very modest capacity investments in our supply base. We believe that will allow us to sustain our shares as markets remains strong in 2019. Finally we wanted to highlight just a few of our business wins this year with some of the largest commercial vehicle manufacturers in the world. We have new business in every region across most of our applications with products like our dual light package in China, the hub reduction axle for DAF in Europe. Our new suspension business with Ashok Leyland in India and the optimized air disc brake that is standard on freight liners new Cascadian model and a preview to our new single piston disc brake we plan to launch next year. We have a technology and product portfolio that is consistently evolving to meet the changing needs of our customers. Our aggressive new product lifecycle is the primary reason for our market share gains and we plan to keep the pedal to the metal in this area for the foreseeable future. On Slide 7, you will see some of the investment we made this year to increase our capability and improve our portfolio and our off-highway business, we are winning new business globally. You'll remember when we launched M2019 we talked about growing our off -highway business and we really see that taking shape. As I just mentioned we're excited about the launch of our new single piston air disc brake, disc brake is already in test on several trucks and we believe that it will allow us to grow our position as the market trends towards air disc brakes in North America and other regions. We have talked throughout the year about our position in electrification. We are now involved in 22 different electric programs with many of the world's leading global commercial vehicle manufacturers and expect to have at least 130 fully electric medium and heavy duty commercial trucks on the road by the end of 2020. Also in 2020, we intend to be production ready with Meritor’s 14X e-axle. Electric drive trains are an exciting area that we believe will grow in the short term particularly in bus [indiscernible] and pickup in delivery applications. With our own e-axle and the full systems solutions, we can offer through our strategic investment and transpower. We believe we have already established Maritor, as a leader in this area. That we plan to invest and grow appropriately to remain in that position as market adoption occurs. Now I turn the call over to Kevin for more detail on the financials and then we'll open it up for questions.

Thanks Jay and good morning. On today's call I'll review our full year financial results and then I'll provide you with an overview of our 2019 guidance. Overall we had an outstanding year of financial performance. We drove revenue growth of 25%, expanded adjusted EBITDA margin by 90 basis points, increase adjusted diluted earnings per share from continuing operations by 61% to $3.03 and generated $147 million of free cash flow. Let's turn to Slide 8, we’ll see our full year financial results compared to the prior year. Sales were up $831 million from last year on higher production in all of our major markets and continued revenue outperformance. Starting with end markets, in North America Class 8 truck production was 38,000 units up 30% from the prior year. Sales in Europe were also higher, driven by continued strength in the heavy and medium duty truck market. As Jay highlighted our operations in Brazil, China and India are providing additional tailwind to our sales as those regions made up about $180 million of the year over year sales increase. Revenue outperformance achieved primarily through market share increases in new business wins supplemented our sales growth and accounted for approximately $325 million or nearly 40% of the increase in sales from last year. On the right side of the slide, you can see in the line item volume, mix, performance and other we have $114 million of higher adjusted EBITDA on the $831 million revenue increase. That translates the net underlying conversion of approximately 14% which we view as a good result in market 5Bs but is particularly strong when you consider some of the headwinds we faced in 2018. For example, steel cost were significantly higher during the year much of this increase came from strong market demand and trade tensions. Although increases in steel industries drove our cost sub year-over-year, these costs were up almost completely offset by the recovery mechanisms we have in place resulting in an insignificant to our financials. We also saw higher freight and layer capacity cost in addition to other inefficiencies that are inherent when you operate the market at these levels. We were able to substantially these address these costs through performance and pricing actions. In the end, all of these cost are embedded in the volume mix performance and other line which is why we are pleased with the conversion. Next, you’ll see several items that impacted year-over-year performance which we have previously discussed during the year. These include $27 million in lower equity earnings and affiliates resulting from the sale of our interest in the Meritor WABCO JV at the end of last year. $39 million in lower in lower OPEB expense resulting from the modifications we made to our US retiree healthcare benefits in the prior year. $9 million in environmental reserves related to a legacy site and $10 million from a onetime legal charge for a settlement in 2017. These items provide the walk to our adjusted EBITDA of $474 million and adjusted EBITDA margin of 11.3%. In the table on the left, you can see that our operating performance coupled with reduced interest expense from the debt reduction actions we took earlier this year drilled an increase in adjusted income from continuing operations to $276 million or $3.03 of adjusted diluted earnings per share. Finally, we generated $147 million of free cash flow up from $81 million in the prior year. Higher bottom line earnings combined with lower retiree medical benefit payments and reduce cash interest to drove the increase. These contributors were partially offset by increase investment in working capital needed to support the revenue growth. Slide nine details full year sales and adjusted EBITDA for our reporting segments. In our commercial truck and trailer segment sales increased by 28% from last year to $3.3 billion, driven by higher production in all major markets, market share increases and new business wins. Segment adjusted EBITDA was $345 million up from 47% from last year, segment adjusted EBITDA margin for commercial truck and trailer increase 140 basis points. The increases in both segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by conversion on higher revenue. In our aftermarket and industrial segment, sales were $1 billion up over $100 million from last year driven by higher volumes in our industrial business and revenue from the acquisition we’ve made in the fourth quarter of 2017. Segment adjusted EBITDA was $142 million up $26 million compared to last year, segment adjusted EBITDA margin also increased up 100 basis points compared to last year. The increases in both segment adjusted EBITDA and segment adjusted EBITDA margin were driven primarily by lower retiree medical expense and conversion on higher sales. These increases were partially offset by higher material and freight cost primarily in the aftermarket business. Turning to Slide 10, I want to provide an update on our investors liability. During the fourth quarter, we updated our annual evaluations related to the estimate of pending and future as best as related claims. In prior years, we have used a 10 year horizon for estimating future costs, because neither we nor our valuation advisors believe that future probable expenditures beyond 10 years to be reasonably estimated. As we reassess our valuation this year, we determine that a longer term horizon estimate is now both probable and reasonable, based on our history and experience managing as best as related litigation, diminish volatility and consistency in our observable claims data, and the maturity of as best as litigation overall, among other factors. As a result, working with our specialist, we move to a penultimate horizon for estimating claims, which means that we are now estimating the potential cost of as best as defensive indemnity claims through the year 2059. While they're changing horizon estimate lead to an increase in our as best as related claims liability, we also recognize additional anticipated insurance recoveries that will mitigate a portion of the costs related to those as best as claims. The impact of moving to the longer horizon estimate of the liability, net of insurance coverage receivables was a onetime $56 million non-cash charge. The next bullet on page shows the impact of a new settlement agreement that we reached in Q4, with an insurer to resolve previously disputed coverage of claims. Over the past several years, we've been aggressively pursuing strategy to settle disputed insurance claims and have now settled all of the major outstanding disputes. Pursuant to the terms on this new agreement, we receive $3 million in cash from the ensure and recorded at $28 million receivable that is expected to offset future claims resulting in $31 million of income that helped offset the projected time horizon change. The net impact of these asbestos items was a $25 million charge, which was excluded from our adjusted EBITDA and adjusted diluted earnings per share. The chart on the right hand side of the slide shows the incoming cash impacts from expenses related items. You were called it in 2016, we reached a settlement agreements with several insurance which resulted in meaningful cash and income recognition. As you can see in our forecast for 2019, all of the settlement agreements are expected to mitigate the likely income statement and cash flow impact associated with feature as best as costs. Next I'll review our fiscal year 2019 market outlook on Slide 11. We’ve seen strong net orders for most of 2018 in North America Class A truck, with the backlog to build ratio now at 9 months. We believe elevated build levels will continue through our fiscal year, resulting in production of about 320,000 units. As we look to our other markets, we anticipate that Europe will be relatively stable in 2019 at approximately 485,000 trucks. The economy is forecast to continue to grow and the solid fundamentals support a strong truck production market. Moving to Asia, we expect our sales in China to be down slightly on a year-over-year basis, primarily as a result of the recent appreciation of the U.S. dollar. And the India should produce about 450,000 trucks slightly higher than the record levels we saw in 2018. Finally, we forecast South America production will expand to around 110,000 units. In Brazil, business confidence is improved and we are hopeful the new government will bring stability and continued growth to the economy. On Slide 12, I'll review our financial outlook for fiscal year 2019. Our forecast is for sales to be approximately $4.25 billion up slightly from 2018. The callout box on the right walks to this revenue figure from our 2018 actuals. As you can see our market outlook is up $50 million with North America Class A production providing the largest year-over-year growth. However, we are also seeing headwinds from FX driven by the appreciation of the US dollars against most major currencies which we estimate to be approximately $100 million. Our guidance also includes revenue outperformance of what $120 million to $150 million driven primarily by new business wins ramping up or coming online. As Jay mentioned this puts us on the path to achieving $660 million in revenue outperformance for M2019. Moving back to the table on the left, we also forecasted our adjusted EBITDA margin will increase 20 basis points to approximately 11.5% which is what we guided to when we first launched the M2019 plan and again at our Analyst Day last December. We expect margin expansion from conversion on higher revenue and operational performance initiatives partially offset by modest increases in net deal cost. Building on our strong adjusted diluted earnings per share performance in 2018. We anticipate 2019 to be approximately $3.10. Walking from our 2018 adjusted EPS of $3.03 Increased adjusted EBITDA should yield about $0.15 partially offset by higher adjusted tax expense of $0.11 per share. This reflects an adjusted effective tax rate of around 15% which is up a bit from last year but consistent with the longer term guidance we've previously provided. Finally, we expect to generate $175 million to $185 million of free cash flow. In 2018, we invested a significant amount of cash in working capital to support $131 million in growth we experienced globally. As revenue growth moderates in 2019, that should reduce the amount of incremental working capital investment, which means we should see even stronger cash flow generation in 2019 as reflected in our guidance. From a financial perspective, the bottom line is this. We delivered one of our strongest years on record and we expect even stronger results in 2019as we enter the final year of our M2019 plan. Now I'll turn the call back over to Jay for closing remarks.

Thanks, Kevin. Let's go to Slide 14. On December 6, I hope you can join us in New York for Analyst Day. At that time, we look forward to sharing with you our new M2022 plan. I think you'll find that plan to be as aggressive that to you before and driving shareholders value but no less achievable. Before we go to Q&A, I want to recognize again the Meritor team around the world. Our employees have manage the challenges this year and the unrelenting work schedules its required with great success. This team has a remarkable dedication to meeting our commitments. From our manufacturing plants to our corporate offices we share the desire to be a leader which we demonstrated for many years now. Now let's take your questions.

Thank you. [Operator Instructions] Our first question comes from Joseph Spak with RBC Capital Markets. Your line is open.

I guess I just wanted to start on some of the outperformance stuff you reported and as a sort release of ’19. I think if we go back to analyst day last year you were looking for about $315 million of outperformance. It looks like you did a little bit better with the $325 million and then there was still if I recall correctly, like you had a gross opportunity of $625 million and you were putting in like a risk adjusted number of about $190 million to get to that $660 million. So you know now that we're a year forward I'm assuming that's not necessarily a risk adjusted or unawarded number at this point. Is that correct? like that were you able to actually execute on those opportunities that you saw in the marketplace?

Yes, Joseph you've got some of the numbers right. The $315 million we talked about was business that we had won but was not yet in the P&L and that wasn't an ‘18 number that was an ‘18 and ‘19 number. And if you look at the combination of those two columns from Analyst Day with 315 and a risk adjusted number of 145. So let's combine about another $460 million of revenue outperformance in ‘18 and ‘19. And so what we're saying is we achieved $325 million of that $460 million in ‘18. Frankly a little bit quicker than we were originally anticipating in our guidance at the midpoint suggests we'll get the balance of $135 million in 2019. So right on track for that $660 million in total revenue outperformance.

Okay, of that $315 million I guess you're right which was sort of not in the P&L over and I know presumably most of that was or the line share that was in ‘18 versus ‘19. Is that fair?

It's a mix. I think some of that still coming in ‘19 as we grow some of those new business wins that were we had won but they still might be ramping up in ‘19. So it's a mix. But I'd say the bulk of that column 315 was what we saw in 2018.

And then I guess like you know if we sort of compare and contrast again like you know your outlook for Class 8 in FY ‘19 is now higher than you thought about a year ago. So how do we think about sort of volume adjusting some of those targets.

Yes, I mean when you think of that Class 8 truck market being up. You know if you look at just 2018 what happened to the truck market going from 237,000 Class 8 trucks to 38000 Class 8 trucks. What that effectively means it's about $280 million dollars of incremental revenue from ‘17 to ’18 from the Class 8 truck market. But obviously keep in mind we grew $830 million in the year with a big chunk of that being the revenue outperformance. I think as you look at the outlook we provided at Analyst Day last year, I think the revenue was quite a bit lower than what we're now projecting for 2019. Now we're projecting $4.25 billion. I think we're a little south of $4 billion and a big piece of that is a Class 8 truck market is stronger and that's reflected in our guidance.

Okay, maybe moving to the free cash like, if I look at your guidance for ’19, it looks like a free cash flow conversion is almost 10 percentage points sort of higher than what you realized in ‘18. It sounds like maybe you're going to talk more about sort of free cash flow and the path forward at the Analyst Day but given that you've already sort of given ‘19 guidance here, I was wondering if you could just talk about what are some of the drivers of that improvement and maybe like to have an ultimate goal on sort of conversion?

In terms of what's happening in '19, fundamentally, it's that as revenue levels off, we're making less investment in working capital. So, in 2018, we had $830 million of revenue growth. Our working capital tends to run 8% to 10% or so of revenue. So, we were making those investments in working capital, particularly inventory. But as revenue levels off in '19, we no longer have the overhang of incremental working capital investment which simply means that more of the earnings flow to the bottom-line as free cash flow. And so, that's what's fundamentally happening which is a good level of free cash flow and something, in a stable environment, we'd be able to throw off as we look forward. But you're right. We'll provide more guidance and more thoughts on how we see cash flow progressing and what we do with that cash flow beyond '19 when we get to analyst day in a few weeks.

Okay. And then just real quick, on the buyback -- and it sounded like Jay, in your opening comments, you want to try to attack that fairly aggressively. Although, it doesn't look like in the guidance you're assuming much of anything in terms of excess buybacks. Maybe some to offset regular dilution. So, how should we think about you attacking or executing against that? And is it really just opportunistic? And over what time frame should we think that you execute that entire plan over?

Yes. Good question and observation, Joe. I think you're right. Implied in the guidance is all of the share buybacks we executed in 2018. But we don't have anticipation of those buybacks in our '19 guidance. Please remember that our cash flow tends to be most significant in the middle of our year, so as you get into the end of Q2, Q3, and the beginning of Q4. So, that's when we tend to execute the bulk of our buybacks. So, for the impact on EPS, it tends to be back-end loaded. We obviously view the price at which our shares are trading right now as just a great opportunity if we look at our earnings multiples and the stability of our company based on all the deleveraging we've done. And I think what places us somewhat unique in our space is we have no calls on our cash flow. We're at the debt levels we want to be. Our legacy liabilities are really pretty well taken care of and behind us. So, all this free cash flow generation can be directed toward growth or share buybacks. So, quite frankly, we're very excited with the trading levels of our stock and potentially the opportunity it provides us in the near-term. Q - Unidentified Analyst

Okay. Thanks. Congrats. And look forward to seeing you guys in a couple weeks.

Thank you. Our next question comes from Neil Frohnapple with Buckingham Research. Your line's open.

Hi. This is Joe Nolan on for Neil. Congrats on a great quarter. I know that you guys said that you almost completely offset steel cost in the quarter. But I was just wondering what that headwind was on a year-over-year basis.

Yes. On a full-year basis when we look at '18 versus '17, we almost entirely offset it. When you look Q4 to Q4, we did have a little bit of a headwind. Call it about $2 million or so. And sequentially, even going from Q3 to Q4 because we've seen steel cost ramping up in the back half our fiscal year. We also saw a sequential headwind probably of $4-ish million going from Q3 to Q4. But full-year '18 versus '17, the way steel moved and our recovery mechanisms kicked in, it was a push.

Got it. And then what is embedded in the fiscal year '19 EBITDA guidance for steel cost headwind?

Yes. The assumption is that we're going to be burying the cost of the movements that we saw in steel in the season, the back half of our fiscal year. And as you know, our recovery mechanisms in our OE contracts work on a lag. So, we'll have a little bit of a lag that creates a headwind from a steel perspective. Call it high-single-digit millions of steel cost on a year-over-year basis which is embedded in our guidance that we provided.

Okay. And then can you just talk about the success of the mid-year price increase within the aftermarket business? And did that benefit margins at all in the fiscal year fourth quarter?

Sure. I think we have been successful in executing the price increases we planned for. I think you see that on the fourth quarter results of our aftermarket group. We're achieving the objectives we set out for this year to return that business to more normalized margins. And we're very pleased with the run rate of the profitability of that business going into 2019.

Okay. That's it for me. I'll pass it on. Thank you.

Thank you. Our next question comes from Brian Johnson with Barclays Capital. Your line is open.

Hi, guys. Good morning. This is Jason Stulgrair on for Brian Johnson. I was just hoping to ask about the margins in the quarter. I guess I'll follow up from the previous question. The margins in aftermarket and industrial above 14%. It sounds like that's largely the effect of price increases. And you guys would expect that run rate to continue into 2014. So, just wanted to confirm that wasn't necessarily a one-time timing issue and that was a more structural change in that business.

No, you're correct. If you look at the full year, what we saw in the aftermarket business is we were incurring certain costs, freight costs, steel costs, other costs throughout the entirety of the year. And we didn't execute pricing actions to mitigate the bulk of those cost increases until Q4. So, we generated a Q4 margin in that segment of 14.7% which is obviously higher than what the full-year margin for the segment was. And there is nothing unusual about that. It's the fact that we're now recovering the cost that we were seeing throughout the year. So, as we head into '19, our expectation is we'll see a typical dip in Q1 as we normally do in the segment because that's the seasonal low point for aftermarket with fewer selling days in the quarter. But as we look at the last nine months or the last three quarters of the year, that we're expecting aftermarket industrial margins to be well north of 14% for each of those quarters going forward.

Okay. Yes. Terrific. And then I guess just moving to commercial truck and trailer, margins were a little lower in the quarter on top of strong volume. And I know you guys called out material and freight headwinds in both segments in the press release. And so, obviously, higher material and freight comes with growth. But was there anything that surprised you in the quarter like premium freights or spends of inefficiencies that surprised you for efficiency of growth?

Yes. I guess a couple things. When you look at the truck segment that you're talking about, truck and trailer, if you're looking at Q4 to Q4 as opposed to the full-year which is what our press release was focused on -- but Q4 to Q4, I'd say there are really three things. One is we do have currency impacting the business right now. The US dollar has gotten stronger in the last few months. You can see just on a year-over-year basis versus the Reais. The Reais depreciated almost 25%. The Swedish Krona's depreciated quite a bit. So, Q4 to Q4, we saw headwinds from that. Don't forget we also had the Meritor WABCO business that a year ago, we owned, and we no longer own. That's worth about 90 basis points to that segment in Q4 numbers. And then we did incur some premium costs as we were delivering on the strong markets and the peak markets that we're seeing. And as Jay mentioned in his remarks, we're investing in some supplier capacity, making some modest supplier capacity investments to be able to mitigate the costs as we look ahead.

Yes. Jason, I'd just add to that. One part of your question I think was were we surprised by that. I'd say quite the opposite. What we saw -- and you saw this in us being able to realize many of the M2019 revenue grains earlier than we anticipated -- we saw an opportunity to really lock in those market share and revenue gains. And so, we purposely incurred some premiums, bringing on some new suppliers to bring that volume in. And with the site investments we'll make in those suppliers, we're already seeing those premiums abate. And we should see them virtually disappear by the first calendar quarter or second fiscal quarter. The payback on those investments was a matter of months. And we just felt it was a great opportunity to lock in additional market share and still be able to hit both our near-term and mid-term financial commitments.

Okay. Great. And then just one more if I could. On the 2019 revenue target of $4.25 billion, obviously, it increased from 2018. But as I look at the end markets that you guys are forecasting, the increase in revenue target from where you guys were at investor day which, as you guys alluded to, was just under $4 billion to now is like a 7%-8% increase. But with end-markets like Class 8 trucks and Class 57 trucks in North America increased around the 20% range from investor day, it just seems like some of us might have been expecting a stronger 2019 number given where you guys ended up with your end-markets. So, are there any other puts and takes there? Is that pricing? Is it FX that we should be considering?

Well, I guess a couple things. One is keep in mind the Class 8 truck market going up from where we were in 2017 to even this year is worth $280 million. And we increased our revenue this year $830 million. So, while the truck market is stronger, that wouldn't drive something that's hundreds and hundreds of millions of dollars higher. It's $280 million higher year-over-year. And you're seeing that in our guidance. But we are also seeing then an FX headwind as we head into 2019 of about $100 million. And you can see that with the strengthening US dollar against most of the European currencies, the Chinese currencies, the Brazilian Reais. So, it's really across the board that we're seeing that revenue headwind.

Okay. That's it for me. Congrats on finishing up a great fiscal '18, guys. Thank you.

Thank you. [Operator Instructions]. Our next question comes from Faheem Sabeiha with Longbow Research. Your line is open.

Congrats on a great quarter. I was just sticking to the revenue outlook for next year. Wondering if you can provide a little commentary around your aftermarket industrial business. And it seems like that $50 million sales increase is primarily coming from the Class 8 market. Just wondering if you can provide some thoughts as far as what the guide implies for the aftermarket industrial business.

Effectively, that's right. The bulk of the market increase we're talking about is really Class 8. And if you do the math based on the guidance we've given before, every 5,000 Class 8 trucks translates to about $20 million of revenue. So, it's a little bit more than $40 million associated with the Class 8 truck market. So, it's the bulk of the increase.

Okay. And then your production outlook for North America Class 8 seemed a little conservative given where the industry's backlog sits today. Is your initial production guide based on current delivery schedules that's being communicated by your customers? Do you guys not have much confidence in the order or it's past the first half of calendar '19? Just any thoughts around there would be great.

Yes. I think our outlook is very consistent with the market services of ACT and FCR if you look at those in the first part of our year. I think we have a little uncertainty as compared to them in Q4. And that's not really based on current production outlook from the OE customers. It's really just looking forward. And I think we are a little more conservative in our outlook in our fiscal Q4 just given how long this upturn has lasted so far. So, obviously, we'll see how that Q4 turns out. But that's really the main difference.

Okay. And you guys talked a little about the material cost for next year. I'm just wondering what else is embedded in your incremental margin. It looks like it's gonna be at the high end of your typical range. Just any sort of commentary around freight costs and pricing. That would be great.

Hi. You're right. The implicit guidance we have there is that it's about 20% incremental conversion on a year-over-year basis. I mentioned that steel is a headwind in the single-digit millions of dollars. Remember, in our 2018 results you saw on the walk we did from '17 to '18, we did have a one-time environmental remediation reserve that we booked. So, as you look on a year-over-year basis, that should be a tailwind on the causal going '18 to '19. But when you net all the puts and takes out, it means that we're probably converting on normal incremental revenue growth in that 15% to 20%, probably closer to the 15% range with all the puts and takes.

Okay. And just one last question. Regarding your braking business, as the market shifts to the single-piston air brakes, which, from what I understand, have lower payback periods over the next few years, just wondering if these next-gen disc brakes would be a net neutral or loss from a content standpoint versus the brakes that are --

Well, yes. Good question. The content on single-piston disc brakes is still markedly higher than a drum brake. It's less than our dual-piston brake which is currently being specked. But I think what we're seeing is you can expect configurations on trucks that they most likely will have dual-piston on the front axles and potentially single-piston on the two rear axles. So, overall, compared to the drum brake content, there's significantly increased content in that configuration.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Mr. Carl Anderson for any further remarks.

Thank you, Catherine. We thank you for your participation on today's call. And if you have any further questions, please feel free to reach out to me directly. Thank you.

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