Meritor, Inc. (MTOR)

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Meritor (MTOR)

Q2 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Christy Daehnert - Director of Investor Relations

Charles G. McClure - Chairman, Chief Executive Officer and President

Kevin Nowlan - Chief Financial Officer, Principal Accounting Officer, Vice President and Controller

Analysts

Brian Arthur Johnson - Barclays Capital, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Itay Michaeli - Citigroup Inc, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Robert A. Kosowsky - Sidoti & Company, LLC

Colin Langan - UBS Investment Bank, Research Division

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Kirk Ludtke - CRT Capital Group LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Meritor, Inc. Earnings Conference Call. My name is Catena, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Christy Daehnert, Director of Investor Relations. Please proceed.

Christy Daehnert

Thank you, Catena. Good morning, everyone, and welcome to Meritor's Second Quarter Fiscal Year 2013 Earnings Call. On the call today, we have Chip McClure, our Chairman, CEO and President; and Kevin Nowlan, Senior Vice President and CFO. The slides accompanying today's call are available at www.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. And 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 Chip.

Charles G. McClure

Thank you, Christy, and good morning. Let's turn to Slide 3. I'm proud of our team's performance this quarter. On a sequential basis, we delivered improved financial performance in the second quarter of fiscal 2013. Quarter-over-quarter, we expanded our adjusted EBITDA margin by 120 basis points. We delivered $12 million in incremental EBITDA in the second quarter, an increased revenue of $17 million, a 71% conversion as compared to our more normal conversion of 15% to 20%. This result was primarily due to higher volumes in South America resulting in a positive margin mix, net material performance improvements, seasonal aftermarket pricing actions, benefits of structural cost reductions and improving some labor and burden. This quarter, we have new business wins to tell you about in North and South America, Europe and India. Each of these are significant for us as we grow relationships with existing customers and develop relationships with new ones.

Also this quarter, we completed the consolidation of our North American remanufacturing business announced in November 2012. This consolidation involved transferring operations from a facility in Canada that remanufactured commercial component to our North American center of excellence in Plainfield, Indiana. And in China, we initiated actions this quarter to move our on-highway business from its current location in Wuxi, China to our off-highway joint venture facility in Xuzhou. By consolidating these 2 operations in the same location, we're confident we can improve efficiency, preserve revenue growth potential and reduce overhead costs by leveraging existing footprint and overhead structure in Xuzhou. Additional actions in China include plans to streamline our corporate office in Shanghai and sublease the facility in Nanjing, previously intended to be used for our on-highway business. We realize the impact these decisions have on our employees and in each situation take appropriate actions to offer support throughout the process.

Transitioning to market activity this quarter, we're pleased to see momentum in Brazil as well as higher order intake in North America and Europe, which is supporting a step-up in production for commercial trucks. Off-highway production in China and on-highway in India continue to be weak. We expect this trend to continue in the second half of fiscal year 2013.

Moving to the balance sheet. Yesterday, we executed a purchase and sale agreement to sell our ownership interest in the Suspensys joint venture to our joint venture partner, the Randon group in South America. The purchase price for Meritor's 50% ownership interest was $195 million in cash and other consideration, subject to regulatory approvals. We expect to complete this sale in the fourth fiscal quarter. Meritor remains committed to its trailer business in North America and expects to continue supplying its customers in the region with a series of high-quality trailer products. Kevin will give you more detail later in the presentation on the Suspensys transaction.

If I draw your attention to the lower-right quadrant on this slide, I'd like to introduce you to M2016. M2016 is a detailed 3-year plan that includes our commitment to achieve a 10% EBITDA margin for fiscal year 2016, which we told you about in February, in addition to a debt reduction objective and an incremental revenue target driven by organic growth. M2016 clearly defines our path to achieve these objectives. The plan is prioritized in 4 main areas: operational excellence, customer value, product costs and high-performing team. With the strong team we have in place around the world and the product, customer and cost initiatives underway, we are confident in the success of M2016. We'll provide more detail later.

Let's look at Slide 4. In South America, I'm pleased to announce that we've secured an agreement with a new customer for Meritor's air disc brake systems and rear axles. Start-up production is planned for May 2014.

In Europe, we launched our 17X Quiet Ride axle with a cast housing for Irisbus coach applications. Production is scheduled to begin this month. Meritor's ELSA 225H brake will also be introduced as part of the Euro 6 transition.

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