Good day and thank you for standing by. Welcome to the Q1, 2022 Meritor Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Todd Chirillo, Senior Director of Investor Relations. Please go ahead. Thank you. Good morning, everyone, and welcome to Meritor’s First Quarter 2022 Earnings Call. On the call today, we have Chris Villavarayan, 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. 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 Chris.

Good morning. Carl and I look forward to walking you through an excellent first quarter. Before I begin, I want to thank the exceptional Meritor team for their hard work and dedication to our customers. Overall, we are pleased with our financial performance and are off to a good start for the year. We demonstrated our ability to manage the business well through a challenging set of factors on higher sales driven by stronger demand in most of our global markets. Adjusted EBITDA margin in the quarter was 11.5% and adjusted earnings per share was $0.80, an increase of more than 35% year-over-year. We are working closely with our customers and suppliers to offset historically high freight and material costs while managing supply chain constraints and a prolonged labor shortage. We navigate these headwinds and are confident in our full-year outlook that we’re reaffirming today. In December, we introduced aggressive M2025 targets that include growing $500 million in revenue above market, with one half coming from electrification and expanding margins to 13% while generating $600 million in free cash flow. M2025 represents Meritor's fourth M plan; our execution of these plans has transformed the company since the introduction of M2016. We have increased adjusted earnings per share by more than $2 through fiscal 2021 and expect to further increase EPS by almost an additional dollar this fiscal year. We have also expanded adjusted EBITDA margin by 350 basis points. We had a very successful first quarter in terms of finalizing New Business Awards, some of which we announced at Investor Day. We have an exclusive agreement with Thomas Built Bus for Meritor’s electric powertrain with SOP planned for 2024. With the electric school bus market expected to be one of the fastest adopting segments largely due to the infrastructure bill, this agreement represents a meaningful near-term opportunity to accelerate our electrification journey and expand our long-term relationship with Daimler Trucks, North America. We extended our multiyear agreement with PACCAR to supply electric powertrain and full electric solutions for Kenworth and Peterbilt tractors and refuse trucks. We also added three new prototype collaborations in the quarter with two different customers, two hydrogen fuel cell applications for Hexagon and a road sweeper platform for Electra. This marks the fifth quarter in a row that we have announced new electrification wins. In our core business, we are excited to significantly increase our on-highway presence in China. With this five-year agreement, we will supply Daimler with rear axles for the Actros. We also have a new business win with one of our largest trailer customers. This is our first five-year agreement with Wabash and is valued at more than $150 million. You can see on slide 4 that Meritor is differentiating itself in the industry. We believe our growing number of electrification awards is the true measure of the value our customers place on our integration capabilities and electric powertrain. In fact, our electrification revenue forecast for fiscal 2022 has increased by more than 30% since December. I want to make three important points with this slide. First, half of our production programs are in the medium-duty segment with an accelerated adoption rate expected in this segment, we anticipate that volumes on these programs will grow faster than in the heavy-duty segment, representing growth for us. Second, we are either in exclusive or standard positions on all these programs. Lastly, we have eight production contracts, three with large OEMs and the remainder with promising startups. We look forward to helping more customers drive towards a cleaner world. On slide 6, I want to emphasize the importance of the work we’re doing at our innovation complex in Escondido, California. With the technical expertise inherent in this operation, we can offer a complete turnkey vehicle electric vehicle solution. In addition to the electric powertrain, Meritor can provide the PCAS or power controls and accessory subsystem. Our acquisition of TransPower has given us a wealth of experience in vehicle controls that we have strengthened since taking ownership in 2020. We are proud to be production-ready for our electric powertrain and the full electric system. We’re confident in our capabilities and in the important role Meritor will play as commercial vehicles transform over the next decade. This is an incredibly exciting time for us. Now, I’ll turn it over to Carl.

Thanks, Chris, and good morning. On today’s call, I’ll review our first quarter financial results and outlook for fiscal year 2022. Overall, we delivered excellent financial performance to begin the final year of our M2022 plan. Adjusted EBITDA margin was 11.5%, and adjusted earnings per share was $0.80. Now let’s review the details of our financial results on slide 7. Overall, revenue came in at $984 million, up 11% from the prior year. The increase was driven by higher truck production in most markets as orders remain elevated around the globe. Net income from continuing operations was $54 million compared to $32 million last year. Higher net income was driven by increased sales volumes and lower interest expense, partially offset by net fuel costs. We also benefited from a $6 million settlement with an insurance carrier related to our asbestos liability this quarter. On a comparative basis, you will recall last year we recognized a $6 million one-time gain from our joint venture in Brazil, relating to a value-added tax credit. Adjusted EBITDA was $113 million, an increase of $11 million from last year, primarily driven by higher sales volumes, partially offset by net steel costs. Adjusted diluted earnings per share was $0.80, up $0.21 from last year. Free cash flow for the quarter was a use of $39 million compared to $34 million of cash generated last year. The decrease was in line with our expectations as we built higher inventory levels to support an anticipated strong production environment throughout the year. Additionally, incentive compensation payments were higher this year. Now I will discuss our segment results for the first quarter compared to the same period last year. Sales in commercial truck were $785 million, up nearly 14% year-over-year, driven by higher truck production in most global markets. Segment adjusted EBITDA for commercial truck was $69 million, up $6 million from last year. Segment adjusted EBITDA margin was 8.8%, a slight decrease of 30 basis points from a year ago. Higher sales, partially offset by net fuel costs, drove an increase in adjusted EBITDA. However, adjusted EBITDA margin was lower as net steel costs impacted sales conversion. Aftermarket industrial sales were $241 million in the first quarter of fiscal year 2022, an increase of $7 million compared to the prior year. Pricing actions executed over the last year in the segment were the primary driver of the improvement in revenue. Segment adjusted EBITDA increased $3 million to $38 million, and EBITDA margin was up 80 basis points to 15.8%. The expansion in segment adjusted EBITDA margin was driven primarily by footprint optimization initiatives implemented after the first quarter last year. Now let’s review our global production outlook on slide 8. Demand remained strong across our markets. In the North American Class 8 market, the backlog is estimated at approximately 260,000 trucks, representing nearly a full year of industry production. While we are closely monitoring constraints in the global supply chain, we are beginning to see some signs of stabilization. We expect supply chains to continue to improve as we progress throughout the year. As a result, we are not seeing a significant change from our November view. Therefore, we are maintaining our global production forecast for all markets. Let’s turn to slide 9 for an update to our fiscal year 2022 outlook. Based on first quarter results and our expectations for the rest of the year, we are reaffirming our fiscal year 2022 guidance across all of our metrics. We expect revenue to be in a range of $4.1 billion to $4.3 billion based on our unchanged global market assumptions. Additionally, our expectations for adjusted EBITDA margin remain between 11.5% and 12.5%. We continue to plan for pricing actions to help mitigate steel, freight, and labor cost pressures, with the expectation that these recoveries will be more fully realized as we progress through the year. Adjusted diluted earnings per share from continuing operations remain in a range of $3.25 to $3.75. Finally, our free cash flow guidance is also unchanged with a projected range of $175 million to $200 million. Our first quarter results provide a great foundation for a successful final year of M2022. We remain focused on executing this plan while simultaneously gearing up for M2025. As we approach the start of this new plan, we are forging a path with the coming electrification of the commercial vehicle industry. The road ahead is promising.

So first off, congratulations on a great quarter. On the commercial truck margins, the first quarter saw some headwinds from steel. Looking at similar incremental data suggests deals around the $10 million to $11 million headwind to EBITDA. Is that correct? And how would you see the cadence of those headwinds playing out quarter to quarter throughout the year?

Yes, thanks, Sherif. Yes, for the entire quarter, steel was about a $24 million net headwind for us, with the vast majority of that—close to $20 million—really affecting the commercial truck segment. Looking forward, we think steel will continue to be a headwind for the rest of this year. The next significant impact is expected in the second quarter. Then for the second half, based on the trend line we see in steel prices, we believe that the impact will start to decline as we approach the second half.

Makes sense. Last quarter, you mentioned it was a very difficult quarter with the sporadic shutdowns from semis and limited visibility. Have you seen a normalization of those lingering shortages, and do you have better visibility based on OEM setting their line rates?

Yes, Sherif, I’ll take that one. Based on where we’re seeing demand, the supply chain has improved from Q4 to Q1, but that’s not entirely resolved. Certainly, from Q1 to Q2, we see more stabilization. It’s probably too early to declare a victory, but we do see improvements, both from a supply chain standpoint and from our customers. Customers are becoming far more comfortable with their ability to get chips and also are capable of better forecasting. The PACCAR announcement illustrates that they’re bringing more chips into the system, showing improvements, but again, it may be too early to declare complete victory.

One final one regarding the PACCAR partnership expansion you announced last evening. How long is that multiyear agreement? Are you disclosing how long that relationship lasts? And regarding the integration and software aspect of that relationship, how sticky do you see that being longer-term as EV adoption expands and the partnership evolves?

Well, Sherif, thanks. That’s a great question. The relationship we announced is through 2025. To put it in perspective, across the two platforms on the day cab and the waste trucks, we’re releasing six platforms, totaling between 1,500 to 1,800 components across the power electronics. So the PCAS, the battery management system, and the ePowertrain—all combined, we’ve brought 10,000 parts to production within 18 to 24 months. PACCAR saw how complex that process was and worked closely with us. This integration ties software between the PCAS, the battery system, the powertrain, and their trucks, which underwent extensive validation, all set into production in December. They’ve seen the value we provide to the marketplace, and it validates the Meritor proposition. We’re very proud of it.

Thanks. My first question revolves around the bigger picture. During your Capital Markets Day, you highlighted additional system design on electrification, including enhanced software features. I’m curious about how much you’ll need to spend to hire the right talent and your ability to attract those individuals. There is a limited talent pool, and you’re competing against customers as well as other industries.

To start, on slide 5, we have eight production contracts: half in medium-duty and half in heavy-duty segments. This indicates customers believe we have the right building blocks in place. Regarding the full system, as discussed at the Capital Markets Day, we’ve invested in TransPower, allowing us to test our products and collaborate with customers like PACCAR to drive them to production. We’ve successfully hired many people in Escondido and Detroit and are continuing to expand in this area. So far, we haven't struggled with finding talent.

In building those frameworks, is it proving costly? How do you see those costs evolving over the coming years, especially regarding software?

From an R&D perspective, we are looking to increase our budget by close to 30% from our current run rate. We’ll also pivot some of our expenses and costs from our traditional business to electrification. You’ll see that cost increase as we focus on our electrification efforts, but we plan to reduce some costs in our traditional products.

Thanks, Carl. Can you update us on steel costs and recoveries for the balance of the year? We’ve seen some declines from the highs, but there are lags affecting outflows.

From a forecast perspective, we initially planned for steel prices to decline throughout the year. Current spot prices are slightly lower than our original estimates. However, steel remains a significant headwind this quarter and will likely impact the second quarter as well. We expect normalization to occur as we move into the latter half of our fiscal year.

Good morning and congrats on the results. I am curious about the order cancellations you previously mentioned. Can you elaborate on what kinds of deposits or penalties there are for cancellations? What’s the risk of cancellations to earnings and margins in the context of your M2025 plan?

There was a spike in cancellations to 6% on Class 8. However, the demand is incredibly strong right now, with a backlog of 260,000 trucks. The overall market has experienced many challenges, but we see robust demand moving forward. The elements of cancellations mainly stem from OEMs adjusting their order boards due to supply chain constraints. Regarding EV revenue backlog, we mentioned a backlog of around $500 million during Capital Markets Day. It’s now trending significantly higher. We switched to discussing defined revenue within the years. Our fiscal 2022 revenue is expected to be up 30%, with a target of $280 million for 2025. We’re confidently paving a path to exceed those targets.

Can you provide an estimate of the win rates on the 14Xe axle? Additionally, where are various OEMs in sourcing, especially considering the trend of engine and axle integration?

For the 14Xe, all announcements on slide 5 relate to it—except for the MAN announcement with Volkswagen. Customers from new entrants and traditional OEMs are opting for the 14Xe. In terms of vertical integration, there’s a growing opportunity, although competition will increase. In North America, Daimler still sources 50% of their Class 8 axles from us despite their vertical integration, indicating there’s growth potential.

Hello, good morning. My question involves incremental margins. You mentioned offsetting commodity pressures through pricing. Given recent wage inflation, I wonder if you foresee any changes in your outlook for incremental margins. How will you manage that in the future?

Yes, we are experiencing wage inflation, primarily in the U.S. It’s integrated into our current forecast. We’re managing it through our internal efficiencies and pricing discussions with customers. Our plan involves automation and additional offsets to maintain margins.

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

This concludes today’s conference call. Thank you for participating. You may now disconnect.