Good day ladies and gentlemen, and welcome to the fourth quarter 2019 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. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Mr. Todd Chirillo, Senior Director of Investor Relations. You may begin, sir.

Thank you Catherine. Good morning everyone and welcome to Meritor’s fourth quarter and full year 2019 earnings call. On the call today, we have Jay Craig, CEO and President, and Carl Anderson, Senior Vice President and Chief Financial Officer. The slides accompanying today’s call are available at meritor.com. We’ll refer to the slides in our discussion this morning. The content of this conference call, which we’re recording, is the property of Meritor Inc., is protected by U.S. and international copyright law, and may not be rebroadcast without the express written consent of Meritor. We consider your continued participation to be your consent to our recording. Our 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 Todd and good morning. We appreciate you joining us today for a look at our fourth quarter and full year 2019 results. Let’s go to Slide 3. Our performance this year was excellent. You can see we have consistently delivered meaningful improvement over the past three years. Since launching M2019, revenue was up 25%, adjusted EBITDA margin has expanded by 25% or 240 basis points, and adjusted diluted EPS from continuing operations is up 140%. In a moment, I want to highlight some of our achievements during M2019, but first let me make a few comments about this past year. We saw commercial vehicle volumes at peak levels, closing out the year at 359.000 units, up 17% year-over-year, the highest market in 13 years. Production at that level requires nothing short of highly orchestrated cross-functional and regional coordination to ensure customer requirements are fulfilled. I am proud to say that despite the stress this level of production puts on the entire supply chain, our delivery performance was greater than 99% for the total company and our quality score was 108 parts per million. If we excluded an issue that arose in one facility this year, our quality would have been an impressive 24 parts per million. I am pleased to tell you that we achieved an overall total recordable safety case rate of 0.59 injuries per 200,000 hours worked. This safety rate required significant diligence by all of our employees during this time frame. In addition to the great effort required to manage the peak efficiently and convert on the increased revenue, we also completed the acquisition of AxleTech, made incredible progress in our electrified drive train offerings, and launched several new products in core and adjacent markets. We also recently announced that Steve Beringhause, CTO of Sensata Technologies,…

Thanks Jay, and good morning. On today’s call, I’ll review our 2019 financial performance along with our fourth quarter segment results. I will then provide you with an overview of our fiscal year 2020 guidance. Overall, we had another outstanding year of financial performance and we successfully completed our M2019 plan that we committed to almost four years ago. In the last year of the plan, we expanded adjusted EBITDA margin by 60 basis points, increased adjusted diluted earnings per share from continuing operations to $3.82, generated $153 million of free cash flow, and deployed over 60% of our free cash flow to repurchase $95 million of common stock. Let’s turn to Slide 10, where you’ll see our full year financial results compared to the prior year. Sales were up $210 million from last year driven by higher North American truck production, increased aftermarket industrial and trailer volumes across North America, and continued revenue outperformance. From a segment perspective, we saw the largest increase in revenue from our aftermarket, industrial and trailer segment, which was up $137 million from the prior year. We benefited from a strong all-wheel drive market, the launch of the first ever gear driven transfer case for Navistar, and a 7% increase in trailer production. The commercial truck segment was up $80 million in revenue. In North America, Class 8 truck production was up 17% from the prior year. We also saw strong demand in medium duty, increasing almost 10% to 288,000 units driven by demand for last mile deliveries. In fact, our revenue since 2017 in North America truck has grown by over 50% compared to growth of 35% for the combined heavy and medium duty market. We were however negatively impacted by lower sales in both India and China. In India, the pending implementation…

Thanks Carl. Let’s look at Slide 14. On the left side of the slide, we highlight the competencies we have demonstrated during M2019 from strategic transactions, product launches and new business awards to our exceptional operational management through the peak Class 8 cycle and global market upturn. These competencies have positioned us well for M2022. We have shown that we have the ability to flex the organization up or down as needed to adjust for major fluctuations in production. We have diversified outside of the Class 8 line haul market in North America by growing our business in adjacent markets. We have improved our balance sheet and set in motion a capital allocation plan that is returning value directly to our shareholders. The transformation we have undertaken since we launched M2016 has been dramatic and will allow us to effectively manage even the most negative economic environments profitably. For example, our modeling indicates that even if the North America Class 8 market were to decline to a level of 215,000 units and Europe to 400,000 units, we would expect to generate $3.5 billion in sales and maintain a 10.5% EBITDA margin. We also would expect to generate $120 million of free cash flow in this type of environment while maintaining our investments in increased productivity and new advanced product capabilities. Therefore, we fully anticipate that our earnings and cash flow will ensure our ability to take advantage of future capital allocation opportunities that we have established under our M2022 plan. Let’s go to Slide 15. As Carl indicated, our adjusted EBITDA margin guidance for fiscal year 2020 is in the range of 11% to 11.2%. Our M2022 target is 12.5%. We have demonstrated our ability to improve adjusted EBITDA margin during each of the last two plans. Through continued focus…

[Operator instructions] Our first question comes from James Picariello with Keybanc Capital Markets. Your line is open.

Hey, good morning guys.

Morning James.

Just digging in on commercial truck and the expectations around the decremental margins for the year, this fourth quarter decrementals came in as promised - you know, solidly at 10%. It does sound like you plan to almost double your electrification spend. Just wondering the cadence of the year and maybe just the timing on the electrification spend, if there is any lumpiness there.

Yes James, it’s Carl. Good morning. I think as it relates to electrification, I think as you look at the planned spending on that, it’s relatively ratable each quarter as we go forward in 2020. Then in the commercial truck segment, if you look at where the margin performance and some of the tailwinds we had in the fourth quarter as it related to lower steel costs as well as freight cost and layer capacity costs, that will be offset by obviously just the lower revenue volumes as well as we go forward.

Got it. Then thinking about your other segment, the decrementals in this fourth quarter were pretty elevated. Just wondering what might be one-time related or what’s the favorable offset into next year related to the AxleTech synergy pull-through, and just your thoughts again on decrementals for that segment as we think about next year.

Yes James, if you look at the performance and margin, actually it’s all really attributable to AxleTech, so if you were to strip out the AxleTech revenue, margin performance would have been very similar on a year-over-year basis within the quarter. As we said in the prepared remarks, we think AxleTech, we’re right in the process of continuing to execute on the various synergies that we outlined previously, and we fully expect as we get out of the first quarter that that will be more in line with our expectations as we get into Q2 and beyond.

What was the AxleTech contribution, revenue contribution in the quarter?

It was right around $30 million.

Okay, thanks guys.

Thanks James.

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

Hi, this is Jason Stuhldreher on for Brian. Going to the guidance quickly, if I look at the revenue guidance, end markets are guided for a little more conservative potentially than third party estimates, which I think is fine. I guess I was looking at any potential for revenue outperformance in 2020, and I know the key tenets of the M2022 plan was some pretty significant, at least $300 million or so of revenue outperformance driven by new wins. Just wondering if we’re seeing any of that in that global markets bucket, or if the cadence of that outperformance is maybe a little more back end weighted.

Thanks for the question, Jason. This is Jay. I think first of all, we’re seeing the full year benefit of AxleTech revenue, which again we included in our new revenue targets, so you’re seeing that benefit flow through. I think we are expecting some significant downturns around the globe, and I know that’s difficult at times for people analyzing us from outside the company because of how global we are. We’re also looking to hold the vast majority of our North American Class 8 penetration increase at or above 7 out of 10 trucks now running on our axles in the Class 8 market, so we’re continuing to see revenue outperformance but these step-downs in some of our markets, particularly in China off-highway, some of our contractual return obligations for declining steel prices and productivity, tamped down that a bit, but we’re still continuing to bring on new business that’s increasing penetration as well.

Okay, that’s helpful. Then just secondly, as we think about steel costs next year, which I know was guided to be a tailwind and is sort of within that first bucket you mentioned, offset by lower layer capacity costs, steel costs, just wondering if you can help us--you know, if we assume the indices and the prices stay flat from here, I was wondering if you could help us with maybe the cadence of the steel tailwinds next year, because I know it’s a little complicated with any sort of escalation clauses and pass-through clauses you have with customers. So, should we assume tailwinds are sort of evenly spread throughout the quarters next year, or is there any strange cadence we should be aware of?

I think on steel, most of it will be in the first half as we expect kind of the tailwinds from that. As we’ve assessed it, it’s probably high-single-digit millions is what our expectations is for the tailwind in 2020 as you compare to ’19.

Okay, understood. Thanks a lot.

[Operator Instructions]. One moment while questions queue up. I’m showing no further questions at this time. I’d like to turn the call back to Mr. Todd Chirillo for any closing remarks.

Thank you. This concludes our fourth quarter call. Please reach out to me directly if you have any questions. Thank you very much for joining.

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.