Meritor, Inc. (MTOR)

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Meritor (MTOR)

Q4 2012 Earnings Call

November 14, 2012 9:00 am ET

Executives

Christy Daehnert - Director of Investor Relations

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

Jeffrey A. Craig - Chief Financial Officer and Senior Vice President

Analysts

Steven Hempel - Barclays Capital, Research Division

Graham Mattison - Lazard Capital Markets LLC, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Timothy J. Denoyer - Wolfe Trahan & Co.

Robert A. Kosowsky - Sidoti & Company, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Meritor Earnings Conference Call. My name is Tahesha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Christy Daehnert, Director of Investor Relations. Please proceed.

Christy Daehnert

Thank you, Tahesha. Good morning, everyone, and welcome to Meritor's Fourth Quarter Fiscal Year 2012 Earnings Call. On the call today we have Chip McClure, our Chairman, CEO and President; and Jay Craig, our 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 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 Chip.

Charles G. McClure

Thank you, Christy, and good morning, everyone. Let me begin by saying fiscal year 2012 was a challenging year, as we faced weakened markets throughout the second half due to global economic slowdown in our sector. This softening was driven by escalating recessionary forces in Western Europe, flat and slowing truck production volumes in North America and reduced national infrastructure investment in China. In Brazil, impacts of Euro 3 inventories and sluggish Euro 5 acceptance drove a decline in truck production since January of 2012. All that said, Meritor's management team faced these challenges aggressively. Together with a strong and realistic focus on cost controls and incremental cost containment, we mitigated the impact of declining sales volumes, all while still making strategic investments to improve manufacturing processes to meet or exceed our customers' expectations.

I want to emphasize that despite the global sales challenges, our EBITDA margins increased year-over-year due to the achievement of the 6 execution actions we committed to during the fourth quarter of 2011. While global market forces are beyond our control, our management team’s focus on the drivers of profitability demonstrates our collective strength and commitment to skillfully manage turbulent global markets for the benefit of our shareholders, our customers, our employees and our communities.

Let's turn to Slide 3 for more detail on our fourth quarter and full year results. Sales for the fourth quarter 2012 were $986 million, a decline of $127 million or 11% versus the third quarter. This decrease in revenue was driven primarily by weaker end markets. Adjusted EBITDA was $79 million, down from $92 million in the prior quarter. We were able to generate our EBITDA margin of 8% despite the significant revenue headwinds we faced during the quarter. This is a testament to the hard work of all our teams around the world to carefully manage costs as volumes contracted in the second half of fiscal year 2012.

Adjusted income from continuing operations was $31 million, a $6 million decrease from third quarter. Adjusted earnings per share from continuing operations in the fourth quarter were $0.32, down from $0.38 in the prior quarter. Free cash flow from continuing operations before restructuring was $37 million, a decrease of $19 million from the third quarter. However, fourth quarter cash flow included the impact of an additional $25 million voluntary pension contribution. Jay had mentioned on our prior earnings calls that if we were able to generate sufficient positive cash flow this quarter, we'll reduce the opportunity to prefund some of our pension obligations for 2013.

For fiscal year 2012, sales ended at $4.4 billion with adjusted EBITDA of $345 million and margin of 7.8%, a measurable improvement over our 2011 margin despite declining revenue in many of our global markets. Adjusted income from continuing operations was $111 million and adjusted earnings per share from continuing operations were $1.14. Free cash flow from continuing operations before restructuring was $22 million in 2012 and included total pension contributions of $102 million. Overall, I'm pleased with the strong execution that led to increased EBITDA margins, strong free cash flow generation and increased income year-over-year in the face of global recessionary forces.

Let's turn to Slide 4. Among the highlights of our business accomplishments in the first quarter, first in India, we received a multiyear award from Daimler Commercial Vehicles for Meritor hub reduction axles. Beginning in fiscal year 2014, the axles will be produced for heavy-duty dump trucks, known as the tippers, over the next 8 years. The hub reduction axle for Daimler has been adapted for conditions in India, with 18-ton cast housings for heavy-duty mining applications.

Second, in our Trailer business, Wabash National, one of the leading producers of trailers in North America, selected Meritor trailer axles to be standard equipment on all trailers it produces. Third, in our defense business, 2 of 3 OEMs selected by the Department of Defense for the final Engineering and Manufacturing Development Phase of the JLTV program contain Meritor content. Specifically, our ProTec High Mobility Independent Suspension will be integrated into Lockheed Martin's vehicle. Meritor's wheel-end and brake components will be included in Oshkosh trucks offering. Both will advance to the next round of the Army and Marine Corps JLTV development program, which we anticipate will be concluded over the next 27 months. And finally in September, we introduced our latest and most technically advanced generation of drive axles and brakes during the commercial vehicle show in Hannover, Germany.

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