Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2020 Meritor, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Todd Chirillo, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Jewel. Good morning, everyone, and welcome to Meritor's Fourth Quarter and Full Fiscal Year 2020 Earnings Call. On the call today, we have Jay Craig, CEO and President; Carl Anderson, Senior Vice President and Chief Financial Officer; and Chris Villavarayan, Executive Vice President and Chief Operating Officer, all of whom will be available for questions following the call. 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. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor. We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private 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, everyone. Before we review our results, I would like to take a moment to address the leadership transition plan we announced last week. After nearly 6 years as CEO, I will transition to the role of Executive Chairman of the Board on February 28. At that time, Chris Villavarayan, our Chief Operating Officer, has been selected to succeed me as Meritor's next CEO and President. Additionally, Bill Newlin, our current Chairman, will become the lead Director of the Board. Since I assumed the CEO position, we have made great strides through execution of our M2016, M2019 and now our M2022 plans. We have advanced our innovation and product portfolio, strengthened our financial foundation and created a collaborative and diverse organization that fosters growth. M2022 is well underway and we are seeing signs of recovery in our business and industry since the onset of COVID-19, which I'll touch upon more later. That said, we believe now is the ideal time to set in motion our long-term succession plan. Many of you know Chris, who has been lit Meritor for more than 2 decades and is an integral member of our leadership team. He has had a significant impact on our company during his tenure, and this transition represents a natural next step. On a personal note, Chris has been a true partner to me, helping to execute our successful and plans. In the months ahead, I will continue to lead Meritor and work closely with Chris as we prepare for a smooth transition. Now let's turn to our results on Slide 3. Obviously, our fourth quarter and full year results were unfavorably impacted by lower volumes due to the pandemic. However, we were able to partly offset the impact on our margin for the quarter and…

Thanks, Jay, and good morning. On today's call, I will review our fourth quarter and full year financial results, provide fiscal year 2021 outlook and provide an update on our M2022 financial goals. Now let's walk through our financial results compared to the prior year on Slide 8. First, I will review our segment results for the fourth quarter compared to the same period last year. Sales in commercial truck decreased by just over $200 million year-over-year. The decrease in revenue was driven primarily by lower volumes in most markets due to COVID-19. While volumes were down year-over-year, we did see production increase throughout the quarter as we began to recover from the shutdowns earlier in the year. Segment adjusted EBITDA for commercial truck was $24 million, down $48 million from last year. Segment adjusted EBITDA margin came in at 4.3%, down 500 basis points from a year ago. The decrease in segment adjusted EBITDA and segment adjusted EBITDA margin was driven primarily by lower market volumes. In addition, we increased our electrification spend by $6 million compared to last year. This was partially offset by cost-reduction actions primarily executed in the second half of the year, lower incentive compensation and operational performance. Aftermarket industrial sales were $226 million in the fourth quarter of fiscal year 2020, down 22% compared to the prior year. The decrease in sales was primarily driven by lower volumes in our North America aftermarket specialty and defense businesses. Aftermarket sales were also negatively impacted by $36 million due to the termination of the distribution arrangement with WABCO, which occurred in the second quarter of fiscal year 2020. While revenues were lower, segment adjusted EBITDA margin increased to 15% from 14.2% in the prior year. The margin increase was driven by cost-reduction actions, lower incentive compensation…

Thanks, Carl. Now let's turn to Slide 14. As you heard today, we have maintained a strong balance sheet and exceptional execution. We earned new business, manage costs aggressively and extended relationships with important customers. And we are now preparing to begin the next step in our transition from prototype to production of the next-generation powertrain. We look forward to our continued journey in fiscal 2021. Now we'll take your questions.

[Operator Instructions] Our first question comes from James Picariello with KeyBanc Capital.

Jay, congrats on the decision. And Chris, of course, congrats to you as well.

Thanks a lot, Jim.

Just on the key bridge items to FY '21 EBITDA, what are the incremental permanent savings you expect to achieve this upcoming year? And to what extent does the unwind of this past year's temporary cost actions present a headwind or an offset?

Yes. James, it's Carl. On the run rate savings we expect to achieve from the reductions we executed last year, it's about $30 million. And if you look at the impact that we had in 2020, we had about $20 million to $23 million associated with just kind of the temporary salary reductions. And we also had a benefit from some of the headcount actions that we took in the last quarter of the year. So run rate, $30 million as we go forward. In addition, this year, we also have some other more temporary discretion cost reductions that we are planning for as well, which is about $10 million.

Okay. And that last part, is that tied to the aftermarket industrial restructuring that you announced this morning? Or is that something separate?

No, that would be separate. So -- and then if you think about that as far as, as Jay alluded to, we do expect to have run rate savings, which really will begin in 2022. But for this year, in '21, it's a little bit of a headwind because we do have some expense that we will incur as a result of those actions.

Got it. Okay. That's helpful. And on the new business wins, encouraging to see the raised target, right, to greater than $450 million versus the original $300 million. I know AxleTech probably takes care of most of that original $300 million. And did I hear correctly you expect to realize $100 million in new business wins this year in FY '21 as incremental to the P&L?

That is correct on the last point, yes.

Okay. So the pipeline, the EV pipeline, I think last quarter, the pipeline was maybe $500 million and you had in backlog bookings $200 million. Are those the right numbers? And have they changed at all?

I think that's still directionally the right numbers as you think about what we have for electrification at this point.

And I think, James, we're estimating for 2022, we should have approximately $100 million of incremental revenue for electrification.

Right. Okay. So maybe the $200 million is more like $300 million? Or we could...

No, of that pipeline, what will be realized in 2022 will be about $100 million.

Understood. Understood. Got it. Last one for me. The fact that receivable I think you might have $75 million left to recover, correct me if I'm wrong. And just from an industry volume standpoint in Europe, what would be needed to fully recover that amount? I mean is it a 450,000 unit number? How should we think about that?

It's a good question. I think in order to pull a recovery, it would be probably closer to the 400,000 type of production range.

Next question comes from Brian Johnson with Barclays.

Yes. Congratulations again. Carl, I want to first talk about the air disc brake business. What part of the commercial truck business is breaks? Is that relevant going forward for electric trucks, what are the puts and takes with regen brakes? And are you active to regen index? And then kind of finally, now that WABCO is integrated into ZF, does that change the competitive landscape at all?

Brian, this is Chris Villavarayan. I'll take that question. So in terms of our portfolio, somewhere about 1/3 to 40% of our business is our brake business. And it is integral. And if you think about it, obviously, even with electrification, air disc brakes are needed, and so it is an integral portion of our business. So the win is very significant as we see it. Going forward, you will always need disc brakes even with regen braking, you do need a secondary form of protection, and that's what the disc brakes provide.

Okay. And in terms of the competitive landscape, does it change at all with WABCO? Because I remember in the distant past, I think you had the Roadranger JV together. Just maybe update us on how that changes anything in terms of your competitive position in brakes?

No, it doesn't change any of the competitive position. And in terms of this specific win, it's specific to the North American market. And so we don't see that as having any impact.

Okay. And in terms of the new revenue target, it's a bit higher than in M22, okay AxleTech comes in, but also, I think your original targeted same 250,000 Class 8 market. So where should we think about starting -- should we start at $4.1 billion and work our way up and down based on end markets? Or are there other kind of revenue puts and takes we should be thinking about?

Yes. Brian, it's a good question. Yes, I think relative to what we originally laid out in our Analyst Day back in 2018, we had about $3.95 billion of revenue. We are coming out ahead on the new business wins, as we outlined. But relative to that, we do have some FX headwinds associated with that about $100 million, and we also have some lower market assumptions, if you think, especially in India as well as in China. So I think the revenue line item, all in is still around what we originally planned for, which is around that $3.9 billion, $3.95 billion range.

Okay. And then final question, great slide on Daimler. But just light vehicles were all obsessed with the potential for OEMs to in-source e-driveline activities. Can you just recap -- Daimler is one of the more integrated Class 8 players on the -- with Detroit diesel, for example. Do you expect this to be a very long-term contract? Or do you expect to somehow transition this technology to more of a component supply and have them manufacture it?

So Brian, let me take that question again. It's Chris Villavarayan. I think when you think about it, we've had a very long relationship with Daimler. And if you think through the strategy that both companies have had over the past 10 years, that strategy has existed and we've worked well through that. And through the market cycles up and down, we've managed to maintain or even with that growth share. And so I don't see this dynamic changing. If anything, I think this agreement brings us both together and closer. And so we do see it as a great win capping on what Jay talked about with respect to how we have done on the quality and the delivery standpoint over the last 2 years. And we can build off that through 2027.

Okay. And congratulations again.

Our next question comes from Joseph Spak with RBC Capital.

I'll extend my congrats again as well. Carl, maybe just a first question, and thanks for all the color. I'm trying to sort of follow along at home here. It seems like with all the different puts and takes you mentioned in terms of incremental restructuring and costs coming back and the step-up in electrification investment that underlying incrementals on just the volume portion is still in that 15% to 20%. Is that roughly correct?

I think, Joe, it's probably closer to the upper end of that range, but that is directionally correct. And then obviously, from that point, if you layer in the cost savings that are now more permanent,as well as the footprint optimization, that's what drives the incremental conversions north of 20% as we go forward.

Okay. On the '21 guide, just on the industry outlook, I think you're below some recent third-party forecasts that were just revised higher. Is that just some typical Meritor management prudence or is there something you're seeing...

No. I think, Joe, those estimates by the industry analytic firms have been extremely volatile. You've seen people changing them almost on a weekly basis. And as you would expect, that wide range of guidance is how we're running the company internally, and we want to be prepared, as Carl said, if there's uptick in the pandemic and unfortunately, required shutdowns, particularly in Europe or North America, we could see those volumes come down from the higher end in towards the midpoint of the lower end. And we want to make sure the company is prepared to operate successfully at that light end to that range. As I told our Board last week, this is probably the most uncertain time in terms of market estimates I've ever seen in my tenure with the company. So we're just trying to make sure we keep all the optionality open for running the company.

Okay. On the new business target, $150 million higher. Can you tell us how much of that incremental $150 million has already been achieved? And how much more is to go? How much of that $150 million is electrification? And also, does it include the additional ePowertrain awards you indicated you expect on Slide 6?

Yes. I think, Joe, as we signaled on the -- just in my prepared remarks, if you think about '21, we are anticipating to have a little bit north of $100 million of new wins coming into P&L that wasn't in last year. If I kind of look at where we ended up last year, we ended up just on total net basis, a little bit less than $100 million. So it really kind of implies we have north of $200 million that will come into '22 in order for us to achieve those targets that we laid out. This is all inclusive of even -- at least to date, some of the electrification awards, obviously, if we're successful in the near future with adding some others that will be incremental.

And then one last...

And a good way to think about that last part, Joe, is that the electrification portion, as Jay pointed out, would be about $100 million in 2022.

Okay. Last one for me, just on the '22 margin bridge. You still say, a portion of that's from normalized global markets. And Jay, I appreciate your comment that it seems more uncertain than ever. But it seems like at least North America, even what you're talking for '21 is pretty close to $250 million, which I think is really normalized. So is it fair to say that, that margin bridge unless North America goes in excess of normalized is really dependent on international markets?

I think it's -- Joe, yes, I mean, if you look at what we're expecting, we are looking for increases in Brazil, India. We also are planning for the additional new business wins as well as what we're -- in Europe as well. So it is really outside of North America that we expect to really generate the incremental revenue in '22.

Our next question comes from Ryan Brinkman with JPMorgan.

Just relative to the $6 million headwind to commercial truck EBITDA in 3Q from electrification initiatives, are you able to quantify the extent to which those costs -- what costs either on an absolute level or a year-over-year basis are maybe factored into the '21 guide? And then just taking a step back from that, too. I recall you in the past saying that ultimately, you expect electrification to be accretive to margin, including I imagine because you're providing more value-add technology, et cetera. Should we think about the incrementals for electrification associated revenue tracking above the sort of more normal-ish 20% conversion? And then as you get those higher incrementals and they compare to the investments, at what point in time and what year do you think is it 2022, et cetera, after the ePowertrain launches, et cetera, that ultimately, the electrification business does become accretive to the overall all-in margin?

Ryan, thanks for the questions. As it relates to just on the cost actions, if you think about it, it's probably best to think about it on a year-over-year basis. We did have about $30 million of cost actions that affected and came into the P&L in fiscal '20. I would say 2/3 of that was really along temporary cost actions and salary reductions, with 1/3 of that being more permanent in the actions we executed back in the late third quarter for us. As a result, if you kind of flip into '21, on a run rate basis, we do expect about $30 million of cost savings from all of those headcount reduction actions we executed. In addition, we are also planning for about $10 million of, I would say, other cost items as well for next year. And then on your electrification question, I think we're still kind of in the ramp-up mode. As Jay articulated, we are beginning production this in '21, a little bit later in a couple of months. And then obviously, we're going to be ramping up through '22 and then beyond. So I think our expectation is this will be accretive at some point, but I would say, over the next couple of years, we're still going to be kind of in ramp-up mode and will be a little bit of a headwind for us.

Okay. That's very helpful. And then just relative to capital allocation, I think I heard you say, is that right that you'd be starting to repay debt in the back half of next year? And also just comments on capital expenditure outlook? Is it a little bit less than in recent years? And how should we think about that trending in light of electrification investments impacting EBITDA, too? And then how do you weigh the debt paydown versus you've been buying back shares in recent years in terms of priority, et cetera?

Yes. As it relates to capital allocation, we are committed to ensure we maintain our strong BB credit metrics. And as you think about -- as we think about the current leverage, it's obviously inflated this year just due to the absolute drop in EBITDA dollars. As that kind of comes back, we anticipate to grow back into the balance sheet and be able to have those type of BB credit metrics as we go forward. We are planning, though, in the second half of the year to repay some debt in order to ensure we accelerate that path. And then as we kind of get into '22, we will be looking at again as far as allocating capital to share buybacks. We'll be assessing that at that point. And then on your capital expenditures questions, it's about $85 million, very similar to what we did last year. That's something that as the year goes on, we'll continue to take a look at. But we tend to, as you know, have CapEx as a percent of revenue, somewhere between the 2.7% to 3% range, and we're very comfortable in that.

Our next question comes from Itay Michaeli with Citi.

Jay, Chris, congrats to you both. Carl, just to follow-on the prior question, just to clarify, with the fiscal '22 free cash conversion outlook today, does that still translate just to over the original kind of $200 million plus you guided to originally in 2018?

It's pretty close to that, Itay. When you do the quick math on that, I think it points to about $190 million, but yes, it's right around that range.

Great. And then as we think about just the new business progress and kind of how we think about maybe margins beyond markets normalizing. What's a good way to think about incremental margins, specifically on new business going forward?

I think it depends, Itay, on which segment it comes through. Certainly, as we see new business coming in through the AxleTech acquisition or in our specialty and off-highway, that would be at the higher end of the margin profile relative to that segment that it resides in with aftermarket. As far as the other truck revenue, new business, we're always striving to have the incremental new business to be at or above what the current business is. And I think you've seen over the last 6 years or so that, that track record has been pretty strong. So it really depends on the mix of that business. And we do have quite a few wins that are in the specialty and off-highway areas. So we could see that segment get a disproportionate share of the new business wins.

That's very helpful. And maybe just lastly, back to the balance sheet, and I apologize if I missed this. Carl, as you kind of -- I think you mentioned earlier, maybe it was Jay that you want to run with a little bit higher cash balances now just given the crisis. Any thoughts that we could think about in terms of how the company wants to run with minimum liquidity or even a leverage target in the next sort of 12 to 18 months?

I think I'll start off and ask Carl to fill in. Carl did just mention it on a previous question. But remember, our first priority in capital allocation is to maintain our strong BB credit metrics. We believe that has served us and investors extremely well over the last 6 to 9 months as we've been through this crisis. And it has validated our belief that, that's a critical benchmark for us to maintain. So that will be the first and foremost goal in the capital allocation and then as you've seen historically with us, we do not let cash sit idly on our balance sheet, but we'll deploy any excess cash beyond that in shareholder-friendly ways.

I'm not showing any further questions at this time. I would now like to turn the call back over to Todd Chirillo for closing remarks.

Thank you for joining our call today. If you have any questions, please feel free to reach out to me directly. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.