Carl Anderson - VP and Treasurer Ivor J. Evans - Chairman and CEO Kevin Nowlan - SVP and CFO.

Brian Johnson - Barclays Capital Robert Kosowsky - Sidoti & Company Neil Frohnapple - Longbow Research Colin Langan - UBS Unidentified Analyst.

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 Meritor, Inc. Earnings Conference Call. My name is Chantelle and I'll be your facilitator for today's call. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (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, Mr. Carl Anderson, Vice President and Treasurer. Please proceed sir..

Thank you, Chantelle. Good morning, everyone and welcome to Meritor's Fourth Quarter and Full Fiscal Year 2014 Earnings Call. On the call today, we have Ike Evans, Meritor's Chairman and Chief Executive Officer and Kevin Nowlan, Senior Vice President and Chief Financial Officer.

The slides accompanying today's call are available at our website, 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 do consider your continued participation to be your consent to our recording. Our discussions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Let me now refer you to Slide two 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 Ike..

Thank you, Carl and good morning everyone. Let’s turn to slide 3, our companywide alignment to achieve our M2016 objectives drove improved financial performance year-over-year. Our results reflect strong execution, driven by a focused effort to convert on the upturn in North America and to effectively manage our operating and product cost.

Although revenue was only slightly up over the prior year, EBITDA margin increased from 7.2% last year to 8.3% this year. Adjusted diluted earnings per share from continuing operations increased to $1.02 from $0.42 per share last year and free cash flow for the year was $138 million, our best cash flow result in several years.

Efforts to improve our balance sheet this year also paid off. Our eight year pursuit of the antitrust settlement with Eaton as well as treasury actions we executed throughout the year resulted in us achieving our M2016 net debt target two years early.

We also extended important long-term supply agreements; one with Volvo our largest global customer and another with Daimler, our largest customer in North America. In June we announced a share repurchase plan of up to $200 million of our equity or equity linked securities that we intend to initiate this year and complete by the end of fiscal 2016.

Let’s turn to slide 4 for an update on our M2016 metrics. Our performance in fiscal 2014 puts us on track to achieve our EBITDA margin target of 10% in fiscal 2016.

Despite headwinds, including the wind down of our defence business, a challenging South American environment, and a loss of earnings from the 2013 sale of our Suspensys joint venture, we improved our margin by 110 basis points.

This was largely due to a concentrated effort by our global team to reduce material costs, better manage labor and burden, and pricing actions. With our strong margin performance in 2014 that exceeded expectations and our outlook for fiscal 2015 we are even less dependent on end markets than our original M2016 planning.

We now believe we can achieve a 10% EBITDA margin at revenue levels as low as $4.2 billion, clearly demonstrating our ability to successfully mitigate micro economic headwinds. On slide 5 you’ll see that we’ve reduced net debt by close to $500 million since 2012 resulting in net debt of $1.439 billion.

This settlement with Eaton, proceeds from the sale of our former joint venture, free cash flow generation, and pension de-risking strategies were important elements of strategy that drove this achievement.

As I mentioned a couple of minutes ago, this change in our debt structure allows us to begin executing our buyback program this year despite a likely increase in pension liabilities due to a new mortality table change. Slide 6 shows the progress we’ve made toward our revenue target of $500 million.

We’ve added $60 million in new business relative to what we reported to you last year. With the $120 million we earned in fiscal 2013, we are now $180 million towards our target. However market deterioration primarily in South America has negatively impacted this figure by approximately $35 million.

So while we won $180 million in new business, we are only score carding ourselves at $145 million to take in account the market softness that we expect to negatively impact revenue. Despite the current volume weakness in global markets, we do have a robust pipeline and are confident in our ability to achieve the $500 million revenue target.

On slide 7, we highlight two major contract renewals we announced this year. The contract with Daimler represents the continuation of an important partnership. With this agreement we retained standard position for air drum brakes and drivelines, and hold optional position for front and rear axles.

With the new Volvo agreement we’ll provide axles for 7 years in Europe and South America, axles and drivelines for 4 years in North America, and axles in Australia for 4 years. We also extended an agreement to supply Hino, our second largest medium duty truck customer with axles and brakes through March of 2017. Please turn to slide 8.

We are designing and manufacturing a broad portfolio of products that meet our customer needs for efficiency, flexibility, reliability, and high value. This is the Meritor value proposition that is allowing us to maintain and grow business with existing long-term customers and win new contracts with OEs around the world.

In September we displayed our global capabilities at the IAA Commercial Vehicle Show in Hanover, Germany that includes the products you see on this slide.

Our global engineering network is enabling us to design products for unique regional needs like the RPL 35 drivelines for North and South America that feature high torque capacity equipped to handle engine downspeeding and heavy service applications.

As you know, downspeeding is a current trend in the industry that employs direct drive transmissions and fast axle gear ratios to maintain vehicle road speed at lower engine RPM which as you know supports the industry demand for fuel economy.

Beginning in early 2015, we will also launch a portfolio of products that offer a 228 ratio on our 14X Tandem for 6x4 long haul applications and 231 ratio on the new FUELite Plus Tandem for the 6x2 market. These fast axle ratios can be integrated with our RPL 35 drivelines.

In Europe we have launched the 17X EVO drive axle that was recently designed for 4x2 applications in that region. This axle is built with advanced technologies for greater durability and substantial reductions in fuel consumptions. It will also be offered in South and North America for the 6x2 segment.

While this product is compact and light weight, it has expanded capacity for 50 ton payloads and superfast ratios to deliver additional fuel economy.

Engineered initially for the light vehicle, commercial vehicle market and segment in India, our 10X axle is built for higher payload capacity, fuel efficiency, and strength to accommodate road conditions for challenging terrains. This fully addressed axle provides our customers with single drive solution for the light duty market.

We plan to also launch this product in South America. As I said, our long-term success is contingent on the products we bring to market. Efficiency gains, adaptive designs, extended life, and customer support are the characteristics that differentiate Meritor products in our global markets. Please turn to slide 9 for a fiscal 2015 market outlook.

As you know, North America is in a strong market upturn right now. Class orders, Class 8 orders for October came in at 46,200 the best month since March of 2006. ACT attributes to the demands in new truck fuel economy and proves that economics and freight sectors, rising freight rates and the fleet profitability.

This recent order activity indicates that this cycle has a longer run giving us confidence in our outlook for fiscal 2015. We anticipate Class 8 buyings for the year to be in the range of 290,000 to 300,000 units and Class 7 volumes to be between 210,000 to 220,000 units for our fiscal year.

We also expect trailer volumes to remain strong, up slightly from what we saw this past year. There are several factors we watch closely in North America like driver availability, the shift of production to Mexico, and hours of service rules that our line of site tells us that 2015 will be another strong year in this cycle.

Europe and South America are a different story. In Europe we are projecting our medium and heavy duty truck production to fall by approximately 3% year-over-year. The economic indicators in Europe are fluctuating making it difficult to closely gauge this next year.

However, some indicators are trending negative and truck registrations had decreased in some countries. South America is the big story right now in terms of economic outlook.

Brazil is technically in the recession, GDP growth is negative, inflation continues to increase, unemployment is showing signs of deterioration, and the currency continues to weaken. Commercial vehicle markets reflect these worsening conditions which is why we expect fiscal 2015 volumes to be lower at 140,000 to 150,000 units.

With the outcome of the election in October, we will be closely watching the region as the incumbent President begins her next term. While bullish on South America, in the longer term we expect markets to remain under pressure for a period of time. With regard to China we expect China will be up slightly this year.

And end of the year market segment is improving following the election earlier this year, driving higher medium and heavy truck volumes. On slide 10, I want to spend a couple of minutes on our performance during the upcycle in North America.

Last February at our Analyst Day event we told you we were prepared for the high volumes we were anticipating in fiscal 2014. Compared with the fourth quarter of 2013, our daily axle production is up 25%.

Throughout this cycle, we will remain focused on achieving our targeted conversion rates while not allowing premium cost to meaningfully impact our bottom line. We have done that through effective management of cost and close collaboration of demand requirements with our customers and suppliers.

While at the same time our delivery performance was 90% on time and our customer PBM was 68. This is the new Meritor. Not only is our execution strong as demonstrated during this cycle of North America and earlier this year in Europe during the pre-buy but our overall financial performance is proving as well.

Our results this year were positively impacted by our performance during this upturn. Now I’ll turn the call over to Kevin for more financial detail.

Kevin?.

Thanks Ike, and good morning. On today’s call I’ll review our fourth quarter and full year financial results. And then I’ll take you through our 2015 guidance.

We achieved solid financial results for the quarter generating $35 million of adjusted incomes from continuing operations and expanding our adjusted EBITDA margin by 50 basis points compared to the same quarter last year. As Ike said, our results reflect excellent execution driven by our commitment to achieve M2016 objectives.

Our team successfully converted on the high volumes in North America and managed our operating and product cost well around the globe. Before we get started in reviewing the financials let me point out that we’ve recast all current and historical results to reflect the Mascot remanufacturing business' discontinued operations.

In August we announced that we would exit this business and in September we signed a definitive sale agreement. On slide 11 you’ll see our fourth quarter income statement for continuing operations compared to the prior year. Sales were $933 million in the quarter up $31 million or 3% year-over-year.

The increase is primarily driven by higher sales in North America as the Class 8 truck market continued to strengthen. This is partially offset by lower commercial truck production in South America and Europe as well as lower revenue from our defence business.

Gross margin was $31 million higher in the fourth quarter of 2014 compared to the same period last year. The improvement includes a $15 million benefit related to the curtailment of our U.S. retiree medical plan. Excluding this benefit gross margin still increased $16 million, which reflects 130 basis points improvement.

The expansion in gross margin was driven by higher revenue and the continued execution of our M2016 initiatives. We continue to have strong net material, labor and burden performance in the business which is a key component of our margin expansion objectives.

Keep in mind that this increase in gross margin was achieved despite the significant year-over-year step down in revenue from defence and South America. I should also note that the margin improvement includes an $8 million benefit relating to the favorable resolution of the warranty contingency that we originally booked in the third quarter of 2013.

We’ve excluded the $8 million benefit from adjusted EBITDA consistent with the charge that we took in 2013. SG&A was $19 million higher in the fourth quarter of 2014 compared to the same period last year. The increase is primarily due to higher as best as related expenses as well as higher variable incentive compensation cost.

Next, the other line item encompasses the remaining items that impact our operating income. The $7 million cost in 2014 relates to the restructuring actions we took in our South American business in response to the difficult market conditions there. This is consistent with what we announced in August.

The prior year expense of $71 million is primarily related to a charge that we took associated with buyouts of term vested participants in our U.S. defined benefit pension plan. Interest expense was $33 million in the fourth quarter of 2014 compared to $27 million in the same period last year.

The increase was driven by the losses on debt extinguishment related to two initiatives implemented in the fourth quarter. First, we executed the repurchase of the remaining $84 million of our 8 and 1/8th notes due in 2015.

Second, we also opportunistically repurchased $38 million of our 4% convertible notes in the open market as we continue to delever the company and improve the balance sheet. You will note that we have included an add back of $10 million in adjusted income from continuing operations associated with the loss on these transactions.

This loss was partially offset by lower cash interest expense we’re now experiencing due to the capital market transactions we executed in the second quarter of this year that reduced our gross debt balances. Moving down the income statement, income tax expense decreased $45 million in the fourth quarter of 2014 compared to the prior year.

Remember, when we sold our stake in Suspensys last year we incurred a $33 million capital gains tax which is included in this line item. That explains the bulk of the year-over-year improvement but in addition to that during 2014 we experienced lower earnings in jurisdictions such as Brazil where we accrue income tax expense.

All of that totals up to adjusted income from continuing operations of $35 million or $0.35 per diluted share compared to adjusted income of $13 million or $0.13 per diluted share in the same period last year. This represents 169% expansion of adjusted earnings per share on slightly higher revenue.

Slide 12 shows fourth quarter sales and segment EBITDA for commercial truck in industrial. Sales in the fourth quarter of 2014 were $729 million up $20 million or 3% from the same period last year. Segment EBITDA was $53 million, a decrease of $1 million year-over-year.

Conversion of higher sales in North America and continued strong material and operational performance were more than offset by higher variable incentive compensation accruals and the unfavorable mix impact associated with lower commercial vehicle demand in South America and lower defence revenue.

Next, on slide 13 we summarized the aftermarket and trailer segment financial results. Sales were $240 million, up $13 million from last year. The increase was primarily due to higher revenue in North America. Segment EBITDA was $34 million in the fourth quarter of 2014, up $7 million compared to last year.

This increase is due to a combination of improved pricing in our North America aftermarket business and a charge related to value added tax that we incurred last year which did not repeat. Now let's move to slide 14 which shows the sequential adjusted EBITDA walk from Q3 to Q4.

Walking from the $82 million of adjusted EBITDA generated in our third quarter, we had an $8 million unfavorable impact due to volume mix and pricing. The favorable impact of slightly higher revenue in our North America truck business was more than offset by lower defence sales and lower sales in Europe resulting from the summer holiday shut down.

Next, we continue to execute on our M2016 objectives of achieving net material, labor, and burden savings. These initiatives provided an incremental $4 million net benefit sequentially from the third quarter. Also as I mentioned earlier we recognized a $15 million onetime benefit associated with the curtailment of our U.S. retiring medical plan.

At the same time we incurred a $20 million charge associated with the remeasurement of our asbestos liability at year end. I will cover both of these items in more detail on the next slide. And finally we had $7 million of favorability due to other year end liability evaluations.

This includes evaluations for such items as workers compensation, long-term disability, and product liability. When you think about the large pluses and minuses coming from the OPEB curtailment gains and the various year-end evaluation adjustments of our accruals they largely net out.

As a result we chose not to adjust any of these items out of our reported adjusted EBITDA. Overall then this was another solid quarter for us. We generated adjusted EBITDA of $80 million and adjusted EBITDA margin of 8.6% which means we were able to successfully manage downside conversion to only 4% in the quarter.

If you adjust for the large pluses and minuses that occurred at year-end, our downside conversion would still have been only 9% which is below the normal expected 15% to 20% we told you to expect with changes in revenue. Now let's turn to slide 15. I want to spend a couple of minutes explaining the two large P&L items that impacted our Q4 results.

First, during the fourth quarter we amended our U.S. retiree medical plan for non-union salaried workers by eliminating certain pre-65 medical coverage and life insurance related benefits. The decision to eliminate these benefits was based on a comparison of our benefit programs and coverage levels to those of other companies.

We recognize that $15 million benefit associated with these changes which as I noted on the prior slide is included in our adjusted EBITDA results. Also during the quarter we received our annual evaluations related to 10 year estimate of asbestos liabilities.

As part of this evaluation we review each significant assumption impacting the projected liability including trends in claim filings and costs associated with defending claims. Each year end we also update our insurance receivables based on changes in the underlying liability forecast and our assessment of recoverability.

These insurance receivables reduced the amount of the net liability that we reflect on the balance sheet and that can mitigate the size of the charge that we recognized when the growth liability increases.

This year's evaluation update resulted in a meaningful increase in our net liability stemming primarily from increasing claim filings, higher projected defence cost, and a write off of a disputed insurance receivable. As a result, we recorded a $20 million charge associated with the year end evaluation of these net asbestos liabilities.

We have included this discharge in our reported adjusted EBITDA. We currently have receivables on the books related to insurance covering 48% of asbestos liabilities.

However, it’s important to note that we have insurance policies with other carriers including Zurich, OneBeacon, and Equita (ph) that we believe provide coverage of asbestos related cost. However, because these carriers are disputing whether or not these policies cover our asbestos cost, we are currently in litigation against them.

Although we don’t have any insurance receivables recorded for these policies that have the potential to provide substantial coverage for both our indemnity plans and defence cost. Of course there are no guarantees in litigation. We continue to aggressively pursue solutions to mitigate the company’s financial exposure in this area.

Taken together the impact of both the curtailment benefit and the asbestos charge is $5 million unfavorable impact on EBITDA during the quarter. Now let’s turn to slide 16. For the fourth quarter, total free cash flow was $74 million.

This positive result was driven by the impact of receiving $209 million in after tax proceeds from the Eaton settlement. Partially offset by the $134 million prefunding of the next three years of mandatory pensions contributions for our U.S. and UK pension plans. Ignoring the impact of these items, free cash flow for the quarter was roughly breakeven.

Slide 17 compares our actual results for fiscal year 2014, to 2013 and the full year guidance we provided during our third quarter earnings call. As you can see, we achieved solid financial performance in 2014. Sales were in line with our most recent guidance and slightly higher than last year.

Our full year adjusted EBITDA margin of 8.3% exceeded the top end of our guidance and was 110 basis points higher than in 2013.

Continued execution on our M2016 initiative has allowed us to generate this strong performance and enabled us to overcome headwinds resulting from lower commercial truck production in South America, lower revenue from our defence business, and the loss of earnings from the Suspensys joint venture.

Diluted adjusted earnings per share of $1.02 exceeded our guidance range of $0.65 to $0.75. This full year result represents 143% increase over the prior year and is due to improvements in adjusted EBITDA as well as lower income tax and cash interest expense.

Our full year cash flow of $138 million reflects strong conversion of earnings to cash flow and represents our best free cash flow performance since 2006. Overall we are pleased with our financial results this year.

Our 8.3% adjusted EBITDA margin performance confirms our belief that we are solidly on track towards achieving our M2016 margin target of 10%. Next I’ll review our fiscal year 2015 outlook on slide 18. Based on the demand assumptions Ike highlighted on slide 9, we expect sales in fiscal year 2015 to be approximately $3.8 billion up slightly from 2014.

Although we are expecting the North American Class 8 truck market to strengthen by 5% and we see encouraging signs of recovery in India, most of our other key end markets are expected to see production declines next year.

Despite the relatively flat revenue outlook, we expect to expand our adjusted EBITDA margin by 50 to 70 basis points to a range of 8.8% to 9%. We are expecting this margin growth despite both a significant decline in South America productions as well as the $50 million decrease in defence revenue as the SMTD program winds down.

We expect to drive this margin growth primarily through continued strong execution of our M2016 initiatives. Adjusted earnings per share from continuing operations is expected to be in the range of $1.20 to $1.30 for fiscal year 2015.

We expect improvements in adjusted EBITDA, combined with lower interest expense and a relatively low effective tax rate to drive an increase year-over-year. We are also providing our planning assumption for the effective tax rate for 2015 to help you walk from EBITDA down to after tax earnings.

As you can see, we expect income tax expense to be approximately 20% of pre-tax income. Remember, in many jurisdictions including the U.S. and most of Western Europe, we previously established evaluation allowances against our net deferred tax assets.

As we generate positive earnings in these jurisdictions we will recognize minimal to no tax expense as long as these evaluation allowances exist. The effective tax rate of 20% is indicative of the fact that we expect to start generating earnings in these jurisdictions. And finally we expect free cash flow to be approximately $100 million for 2015.

Due to combination of a stronger balance sheet and continued margin expansion, we expect the company to begin to generate meaningful cash flow. By achieving our M2016 net debt target two years early and by utilizing the benefit of our deferred tax assets we have reduced the amount of EBITDA required to support our fixed cost structure.

This has positioned us to convert more of our earnings in to free cash flow this year and in future periods. Now I will turn the call back over to Ike to provide closing remarks. .

Thanks Kevin. Please turn to slide 19. This year we took actions to majorly improve our EBITDA margin and cash flow. The settlement of our antitrust lawsuit with Eaton and the treasury actions we took during the year enabled us to achieve our net debt target two years early.

We have worked hard on customer relationships and demonstrated that with major contract extensions. We told you we were going to improve our execution and we did. As I said we intend to return value to shareholders.

In 2015 we will begin our share buyback, this will be the first time since 2008 that we return value directly to shareholders in the form of the dividend or share buyback. Looking ahead our guidance for this fiscal year shows continued measurable improvement in EBITDA margin and our earnings per share. And we are on track to achieve our M2016 metrics.

With that we will take your questions. .

(Operator Instructions). Your first question comes from the line of Brian Johnson with Barclays. Please proceed. .

Yeah, good morning, just wanted a quick housekeeping and operational question and then sort of a balance sheet strategy question. On the quick housekeeping, can you maybe elaborate a bit further on the value added tax accrual.

I think what a number of people are trying to get their heads around is was it a more or less a onetime headwind a year ago that showed up in the fourth quarter and what we have now is a cleaner run rate or conversely is this value added tax going to hit at some point in the year and it is just a question of what quarter it gets accrued at?.

Hi Brian, it is Kevin. Yes, the value added tax accrual that we booked in the fourth quarter of last year was about $5 million and it was really a onetime item for catch up of some prior period issues that we discovered in our aftermarket business. So we don’t expect that to impact our run rate going forward..

Okay, the second thing is if you look at the original M2016 plan, you had higher revenues than you are coming in at, they are into basis points margin performance. It just looks like as you have said, your margin performance is better than it would have been in the past given where the revenues are actually coming in due to macro.

You know what are the two or three big drivers of that and lots of puts and takes around the world, some markets see a word about incremental margins on growth in North America, other managing the detrimental, how is that?.

I mean, the first point as it relates to margins on the businesses that we are seeing incremental revenue, actually we are converting nicely on those. So, we are pretty confident as we see revenue upticks in certain markets that we are able to convert in line with our normal expectations.

In terms of our margin performance and where we are seeing improvements that is going above and beyond what even we were guiding to in the last couple of quarters, it really relates to the execution across the board of various M2016 initiatives. It is material performance outperforming our expectations.

It is labor and burden performance which had a significant out performance this year relative to the expectations. It is pricing and then again it is converting on the incremental revenue we are seeing in markets that are seeing an uptick in revenue. So, it is really across the board.

And as we look into 2015 and our guidance which implies 50 to 70 basis point increase in margin on relatively flat revenue, it is more of the same. .

Okay and then two quick balance sheet questions. First, payment sort of strategy as well, Meritor WABCO JV, that JV seems to be well positioned in some interesting developments with automatic emergency braking, if you have shown up with tuning product where one truck can follow another truck.

Is there any -- look at that business though kind of it is right around 38 million down 4 million year-over-year.

Is that a business that could actually see some technology driven growth over the next several years or is it just going to continue be dominated by truck builds and the brakes needed on trucks?.

No, I think technology is a major play Brian in that regard and so the answer to your question is yes. And I mean we are excited about what we are being able to accomplish with our customers with WABCO. So, no absolutely. .

Okay and then….

It’s a technology play and we’ll see more ..

And is there backlog, when you talk about the new business, would that include new business that Meritor WABCO is getting because that’s not consolidated revenue and so how should we think about that?.

When we look at our pipeline Brian, we look at our pipeline which by the way we feel really, really good about, that level of business with the joint venture as far as WABCO is not in that. .

Okay so that’s over and above?.

The revenues is not consolidated for Meritor or WABCO so it’s not in our revenue guidance. Obviously performance flows through our JV earnings line and I will say some of the Meritor WABCO sales do got through our aftermarket business so to the extent that we are seeing out performance from a top line perspective within that JV.

It does have an impact on our aftermarket business as well but it’s not in a meaningful way from a growth perspective relative to the $500 million revenue growth target..

And then final balance sheet question. Now that you’ve delevered a whole bunch, you are ahead of your net debt targets.

What are the plans vis-à-vis cash to repurchase shares, potential timing and magnitude and I guess a broader question kind of should we start looking at this business on EPS as opposed to EBITDA?.

Brian as it relates to the plans to repurchase obviously we did come in below our net debt target two years early by about $60 million. Now we do have the mortality table adjustments which have gone into effect and we’ll go into effect for us in 2015. So we have to be cognizant of that.

But as we look at that and we look at our expected cash flow generation, we are confident that we are going to start the execution of that buyback program this year in 2015 and complete the execution of that program by the end of fiscal 2016.

As it relates to thinking about us more on an EPS basis, I think we are thinking about that more internally as well and there is a couple of reasons for that. One of the important reasons is because as we buy back shares, you know, we are trying to deliver real value to shareholder that manifest itself in the EPS line item.

Second, I think what you see is we are starting to generate a real benefit on these deferred tax balances that have valuation allowances against them, we’re going to see relatively low effective tax rates for the coming years as you see in our 20% effective tax rate guidance of planning assumption.

And that’s not reflected in EBITDA or adjusted EBITDA margins but obviously that flows through the benefit -- the benefit of that flows through EPS. So as we think about our performance we are spending a lot more time thinking about EPS as well. .

And does your EPS guidance for 2015 include buybacks?.

It does not so that’s potential upside depending on the timing and the magnitude..

Okay, thanks and great progress on -- and we should call it M2014 at this point?.

Thank you Brian..

Your next question comes from the line of Robert Kosowsky of Sidoti & Company. Please proceed..

Hi, good morning.

How are you doing?.

Good morning..

I was wondering if you can give us maybe quantify what the revenue decline was from South America in defence or perhaps the EBITDA decline just to get a better sense of how much mix went against you in commercial?.

On a year-over-year basis full year, I mean the full year basis its almost $140 million of decline between the two businesses. .

40 million in full year, what was that in the fourth quarter?.

$140 million for the full year both South America and defence combined..

Okay and as far as the quarter specifically can we just divide that by 4 for kind of a rough approximation maybe a little bit less than that because of the cadence of the draw down on defense?.

I would tell you it was in the zip code of $35 million to $40 million down sequentially. .

Okay and then –.

For the quarter year-over-year, the one quarter year-over-year..

Yes, in the fourth quarter versus last year?.

Fourth quarter versus last year ballpark is $35 million to $40 million..

Okay and then I know there’s a lot noise in SG&A so should we look at $75 million as a more realistic or reasonable number for what fourth quarter SG&A would have been?.

I think the way what we have seen is pretty consistently the last few quarters running in around 6.5% to 7% more normalized, is what we are seeing..

Okay and then finally one other the question just on the deferred tax assets that you have, how much profitability are you going to be generating in I guess the jurisdictions that you haven’t been paying taxes in previously, is it going to be pretty meaningful and I am wondering how long those deferred tax assets will take to get exhausted over the next forecast that you see in your profitability standpoints? Just trying to get a better sense of what the value is of that asset from where you are right now given the improvement of operations in those jurisdictions?.

You’ll be able to see when you look at our 10-K what those deferred tax assets balances are. In terms of generating real profit in those jurisdictions we expect to start generating profit in the bulk of U.S. and Western Europe in 2015, which is the reason you are seeing an effective rate that’s 20% as opposed to something that looks like a U.S.

statutory rate of 35%. So, as you think about our earnings performance going forward that 20% effective rate is reflective of the fact that we are getting 0% tax rate on those earnings. As we look forward we have a substantial pipeline of these deferred tax assets, hundreds and hundreds of millions of dollars.

So it will take a long-long time to exhaust.

Now what we do have is the potential that if we generate earnings in these jurisdictions for the next two to three years consistently and have a forecast that will continue to generate earnings in those jurisdictions, the potential exist that we would reverse the valuation allowance at some point in the future and put those assets back on the book..

Okay, that’s helpful.

Then I guess is there any way you can guide us as to how much profitability you will be making in those regions or is that detail you don’t want to disclose?.

At this point we are not disclosing that but I think you can get a sense based on the fact that it’s a 20% effective rate and that a normal tax rate probably looks like something closer to 30% or 35%.

Alright, thank you very much, good luck..

Thank you..

Your next question comes from the line of Neil Frohnappple of Longbow Research. Please proceed..

Hi, good morning guys and congrats on a nice quarter. .

Well, thank you. .

Ike, I believe you mentioned last quarter that your capacity is around 300,000 unit North American market, but it looks now based on continued strength in orders that builds could certainly be higher than at level on 2015, I know your guidance I think suggest 290 to 300 so, how should we think about your ability and plans to meet demand if higher than previously expected gross scenario plays out next year?.

You are right. We have stated that our capacity is at around that 300,000 unit level Neil. As discussed the production demand and the capacity levels of our customers, and we do this just on almost a daily basis, we really think the industry is at 290,000 to 300,000 market level.

So the way we would view this is that the backlog which is by the way is increasing each month along with the strong Class 8 orders for October, we really think it bodes well for us in the second half of our fiscal year. .

Okay, so you are not worried about missing out on some upside in demand potentially if the market were to heat up a bit more than expected?.

Not really, we really think the market really is around that 300,000 level..

Alright and then can you remind us of how lower steel prices will impact Meritor, I believe you guys have steel pricing adjustment programs in place of most of your major OEM manufacturers but you just remind us what the lag is and what percent of pass through you are allowed on average?.

We do have pass through mechanisms with the bulk of our OE customers as it relates to steel prices, whether steel prices go up or down we tend to have movements that go along with movements in steel industries. Those tend to lag the actual movements and the changes in our cost by upwards is six to nine months.

Now what I will tell you though is what we see in the last six months or so steel has been relatively flat across the globe particularly if you t North America and Europe. So we haven’t seen material movements in steel or something..

Alright and one last one, I think you mentioned earlier Ike that you guys are still confident you can achieve the 500 million of incremental booked revenue. Could you elaborate on any potential opportunities on the horizon if the target is predicated on you guys, getting a major military contract by JLTB? Thank you..

No, the pipeline is quite robust and we’re very confident that we think we can deliver that number. And as we have said before it’s really not dependent upon any single program to make that happen.

So I mean at this point in time I mean we are still very, very bullish about what our abilities to make that 250 million hidden in 2016 and $500 million run rate. .

Great, thank you very much..

Your next question comes from the line of Colin Langan of UBS. Please proceed..

Oh, great. Thanks for taking my questions. Any color on the aftermarket trailer margin in terms of how sustainable that is. It looks like a record margin.

You kind of indicated that the tax issue is more of a onetime issue last year, how should we think about that going forward?.

Hi Colin, this is Kevin. Keep in mind that the aftermarket in trailer is benefitting now from the fact that we have recast Mascot discontinued operations. So that did help as we recast the earnings for each of the quarters including the fourth quarter this year.

As you look at that 14 plus percent margin in Q4 relative to what you might think of as a run rate, it is probably a little bit high because we have some of those yearend liability valuation adjustments I talked about, product liability workers comp. Those things had a little bit more of an impact on the aftermarket and trailer segment.

So probably upwards of a point that, that 14% might be high relative to what you might think of as a run rate going forward, at the type of revenue level that they generated in the fourth quarter. But still a pretty high margin relative to historic standards as we jump off..

And how much you mentioned Mascot, how much of a drag historically has that been in the business?.

I can tell you in 2014 for instance there was about $29 million of revenue from the business and we generated a loss of about $5 million of operating losses in the business. So that gives you a sense as to what’s been recast out for the full year of the aftermarket in trailer segment..

Okay and any thoughts on, you mentioned pension mortality assumptions, is that impacting you this year or is that an issue for next year?.

It will be an issue this year in 2015. I think a couple of weeks ago or few weeks ago the final rules were handed down and so the expectation is that the actuaries for the plans across North America, the actuaries will be using those new mortality tables with some discretion as they have they update valuations for companies at year end..

And any sense of how big of a factor that or measurements going to be?.

Well we estimated it previously about six months ago as being about $124 million negative impact or increase in the liability for our pension and our OPEB liabilities..

Okay and just one last one, on the buyback I mean what is the authorization, is it still 210 million and how should we think about that over the next two years, if you think about that going equally over that period or will it be lumping or how should we think?.

At this point we are not giving specific guidance or timing on other than to say that we are going to commence the execution of that buyback plan this year, and we’ll complete it by the end of 2016. But we are not going to give any more details of that.

You know, the things we are looking at is where we stand relative to our net debt target adjusted for the mortality tables, where free cash flow is coming in, what our liquidity requirements are of being compliant with compliance with our covenants. But at the end of the day we are going to execute the full 210 within the next two fiscal years.

And that 210 has been approved by the board and we have the flexibility under our revolving credit agreement to be able to execute on that as well. .

Okay, thank you very much and congrats on a good quarter. .

Thank you. .

Your next question comes from the line of David Kanowski (ph) of JP Morgan. Please proceed..

Hey, guys. How are you doing, this is David Kanowski on for Ryan. .

Good morning David..

Good morning guys.

Just a question on your margin guidance, it seems to imply a little bit more of a step up in 2016 and in 2015, can you just talk about what may be drives some of that strength into the out year, is that just some of the headwinds from SMTD still showing up in 2015?.

Well keep in mind as we look ahead to 2016 what we said as we expect to be able to achieve 10% EBITDA margin in 2016 as long as revenue is above $4.2 billion.

And so part of our expectation is we are going to continue to see execution of material performance, labor and burden performance, pricing actions but we also expecting to still see some market improvement and revenue improvement, a piece of which is market and a piece of which is achieving the $250 million of new business wins that will materialize over the course of the next two years.

So we are expecting revenue to be a piece of the equation in converting on that incremental revenue..

Okay and can you just also maybe remind us what your revenue exposure is in China right now and maybe provide a little bit color on the environment and what’s driving some of that uncertainty you mentioned in the slide deck?.

Our revenues in the $150 million range and right now we see the market up slightly which was good. But I mean there is a lot of uncertainty as you know around China but it’s not a large market for us in that sense. So the uncertainty still persists but it’s around $150 million David..

Okay and then just one last question, can you just remind us maybe what you expect to pay in pension contributions that is here for 2015 and 2016, I think this would be your pay as you go plans?.

It will be roughly about $10 million. .

Okay, alright, thanks a lot guys..

Thank you. .

At this time there are no additional questions in the queue and I would like to turn the call back over to Mr. Carl Anderson for closing remarks. Please proceed..

Thank you. We do appreciate your participation in today's call. If you have any further questions, please feel free to contact me directly. This conclude Meritor's fourth quarter and full year 2014 earnings call. Thank you..

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day..