Meritor Management Discusses Q3 2012 Results - Earnings Call Transcript

Meritor (MTOR)

Q3 2012 Earnings Call

August 01, 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

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

Robert A. Kosowsky - Sidoti & Company, LLC

Timothy J. Denoyer - Wolfe Trahan & Co.

Ravi Shanker - Morgan Stanley, Research Division

Colin Langan - UBS Investment Bank, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Meritor Earnings Conference Call. My name is Jeff, 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 conference over to your host for today, Ms. Christy Daehnert, Director, Investor Relations. And you have the floor, ma'am.

Christy Daehnert

Thank you, Jeff. Good morning, everyone, and welcome to Meritor's Third 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 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 a 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's turn to Slide 3 for detail on Meritor's quarter-over-quarter performance. Revenue was $1.1 billion on the third quarter, a 4% decrease from the second quarter of fiscal year 2012. This decline was primarily due to unfavorable currency exchange of approximately $30 million and significant deterioration in China and India, and we'll provide more detail later on the call on that.

Adjusted EBITDA decreased from $95 million to $92 million quarter-over-quarter. EBITDA margin, however, increased from 8.2 % to 8.3% despite the revenue decline. The execution actions we highlighted in prior quarters are providing the sustained financial improvement we anticipated.

Adjusted income from continuing operations increased from $32 million to $37 million, or 16% from the second quarter. Adjusted earnings per share from continuing operations increased $0.05 per share to $0.38, as we continue to experience a more normalized tax rate. Free cash flow increased $115 million in the third quarter from negative $69 million in the second quarter to positive $46 million in the third quarter. This increase resulted primarily from improvements in working capital.

Before we move to an analysis of the global markets, let me highlight that given the current global economic climate and the challenges inherent in projecting industry production volumes, we'll use internal Meritor industry forecast this quarter. These volume assumptions underlie our revenue guidance for fiscal year 2012 that Jay will detail later in the call.

Now let's turn to Slide 4 for a discussion on Meritor's Commercial Truck segment in North and South America and Europe and the industry dynamics that affected the business in the third quarter. The chart at the top of the page reflect our geographic revenue allocation in the first 9 months of both fiscal year 2011 and 2012. We've experienced a considerable mix shift in regional sales between North America, where we've seen good growth, and South America, where we've seen significant contraction in the second and third quarter of the fiscal year.

We've shared with you in the past that South America represents our highest-margin region of the world for the Commercial Truck segment. The long-term improvements we executed this year in the form of pricing and manufacturing footprint rationalization have helped us to offset the impacts of the economic slowdowns in South America and Europe. This regional shift would have been significantly more impactful prior to the implementation of these actions.

The table in the bottom right indicates the status of our forecast for changes in Commercial Truck production volumes. At this time, Commercial Truck volumes in North America and Europe remain in line with our prior guidance. We do see some downside risk in North America, with modest upside potential in Europe. While North America remains stable, lower order intake may affect the remainder of fiscal year 2012 into 2013. We are maintaining our forecast with an increase of approximately 25% in truck volumes in North America and a decrease of 10% for Europe.

Our volume forecast in South America has further declined from our forecast last quarter. We now believe that truck production in South America will decrease more than 20% year-over-year. As I mentioned earlier, the anticipated recovery in Brazil in the second half has not occurred, which drove our forecast for the year down from what we expected last quarter.

Let's turn to Slide 5 to discuss more specifically our industry outlook for North America and Western Europe for fiscal year 2012. We expect Class 8 volumes to be 291,000 units for fiscal year, up nearly 30% year-over-year. However, we continue to closely monitor market conditions. In Class 5-7, we anticipate industry production to be at 172,000 units, up approximately 8% from fiscal year 2011. Longer-term forecast continued to show growth, but at a slightly slower rate. Current data indicate downward pressure on the build rate of Class 5-7.

In Western Europe, we continue to expect the truck market to be down year-over-year due to the ongoing economic conditions in that region. We are forecasting industry truck volumes in Europe at 365,000 units in fiscal year 2012. Truck orders in the region has stabilized and are in line with expectations. Meritor's largest customer has publicly reaffirmed their market outlook on a calendar year, down 5% from 2011. The normal summer shutdown period in this region will drive a weaker fourth fiscal quarter.

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