Carl D. Anderson - Vice President and Treasurer Jeffrey A. Craig - President & Chief Executive Officer Kevin Nowlan - Chief Financial Officer & Senior Vice President.

Brian A. Johnson - Barclays Capital, Inc. Neil A. Frohnapple - Longbow Research LLC Colin Michael Langan - UBS Securities LLC Irina Hodakovsky - KeyBanc Capital Markets, Inc. Patrick Archambault - Goldman Sachs & Co..

Good day, ladies and gentlemen, and welcome to the Quarter One 2016 Meritor, Incorporated Earnings Conference Call. My name is Tatyana and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. 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, Tatyana. Good morning, everyone, and welcome to Meritor's first quarter 2016 earnings call. On the call today, we have Jay Craig, CEO and President; and Kevin Nowlan, Chief Financial Officer. The slides accompanying today's call are available at meritor.com. We will refer to the slides in our discussion this morning.

The content of this conference call, which we are 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 discussions 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 will find a reconciliation to GAAP in the slides on our website. Now, I will turn the call over to Jay..

Thanks, Carl, and good morning. We appreciate you joining us today. It was great seeing you at our Analyst Day back in December. Let's turn to slide 3 and talk about the highlights from our first fiscal quarter of 2016. We had another strong financial quarter overall.

Our adjusted EBITDA margin of 9.4% reflects a 40 basis point improvement year-over-year, which further demonstrates the sustainability of the performance we have shown over the past 12 quarters. Also, at the end of the last calendar year, we are very pleased to announce an additional piece of business in our growing relationship with PACCAR.

Starting on January 1 of this year, Meritor is now in standard position for rear axles on all linehaul Peterbilt and Kenworth trucks with our 14X product, as well as drivelines. Just 18 months ago, we were at approximately 12% penetration with this customer. As of December, we were over 50%.

It has been a significant and successful ramp-up that we expect to continue to drive increased penetrations throughout this year. As we told you at Analyst Day, we have now achieved $435 million toward our M2016 goal of $500 million in new business. This puts us close to 90% of the way toward achieving our revenue target.

We are proud of this accomplishment because it validates the success of our strategy to increase customer focus and execute a more aggressive product development and introduction cadence. From a balance sheet perspective, in the first quarter, we repurchased $42 million of common stock, bringing us to a total of $116 million.

Since the start of the program, we have repurchased 8.1 million common shares and we remain committed to finishing the entire $210 million program this year. We also remain confident in our ability to achieve our three main financial targets under our M2016 program.

Now, let's talk about the global markets, starting with a closer look at North America on slide 4. In December, we told you we expected Class 8 volumes to be in the range of 275,000 units to 290,000 units for fiscal 2016. Based on current market conditions and discussions with our customers, we've reduced our outlook to approximately 265,000 units.

As you can see from this chart, this fiscal year production translates to a calendar year of 250,000 units. In our first fiscal quarter, production was approximately 72,000 units or 14,000 units higher than the current outlook for the fourth calendar quarter.

This is an important data point to be aware of when comparing our projections for 2016, as compared to others in the industry.

With the changes in order levels over the past couple of months, and concerns regarding inventory levels in the North American Class 8 trucking market, we have seen significant volatility in the equity values and companies in our sector.

Our belief is that based upon the fundamental improvements we've made to the company over the past few years, we will continue to generate meaningful earnings and cash flow, even at volume levels lower than where we are today.

As a result, we wanted to provide you with a data point that may help you model how volume changes in North America impact us. For every 5,000 unit change in Class 8 production, the revenue impact to us is approximately $20 million.

We also expect to continue to manage our incremental and decremental earnings conversion on revenue at our normal historical levels of 15% to 20%. You can use this as a guide as you think about the impact of different Class 8 market assumptions on our earnings and cash flow.

In addition to significantly increasing the profitability of Meritor through the execution of our M2016 strategy, we have also substantially reduced the breakeven points of the company. This has been accomplished through a reduction in debt and pension liabilities over the last three years.

All of these changes make us confident in our ability to achieve both our short and long-term objectives, even in this current market environment. Let's go to slide 5. With the exception of North America, our outlook for the remaining global markets is unchanged from our previous guidance.

We expect Western Europe to remain stable with moderate growth of 3% to 5% this year. As we've said, the average age of the truck fleet is about 7.5 years, which should help drive new truck production. Freight tonnage movement in the region also continues to gradually improve as well. India is showing signs of strengthening.

Strong GDP growth is driving growth in truck production, and we expect that to continue this year. We are developing and introducing many new products specifically designed for this region so that we have a portfolio that continues to meet the unique needs of our growing customer base.

South America continues in a deep recession, with no significant change expected in the near-term. We anticipate volumes to decline year-over-year by 10% to 20%, resulting in total production of 70,000 to 80,000 medium and heavy units in fiscal 2016.

China also remains a difficult market, but we anticipate stabilization in bus and coach, and off-highway markets in fiscal 2016. On slide 6, we wanted to reiterate our commitment to increased results-oriented product development.

The financial improvements that we've made at the company have enabled us to generate strong, sustainable levels of cash flow. This allows us to maintain our commitment to investing in a robust product portfolio that is market-directed toward specific customer applications.

This is a high priority for us as we strive to meet the needs of our customers around the world and capitalize on the future recovery in the markets. In the past, we'd launched approximately three products annually. Over the past two years and going forward, we plan to launch six to seven every year.

Here, you see the major product launches we have planned for 2016. This development and launch plan includes products for heavy and medium duty, as well as vocational and trailer products.

Our product development focus is on advanced gear manufacturing and efficiency, which is reflected in many of these products and will continue to generate even more advancements down the road. This is the new Meritor, where you can expect this rate of development to continue. We will work with our customers to introduce products that meet their needs.

As I said, we view this as a critical success factor to our future growth strategy. Now, I'll turn it over to Kevin for a closer look at the quarter and our outlook for the fiscal year..

Thanks, Jay, and good morning. On today's call, I'll review our first quarter financial results, and then I'll take you through our updated 2016 guidance. Overall, we had another quarter of strong performance. While we face challenging global markets, we continue to execute and deliver on our M2016 strategies.

The result is that we're driving margin performance, which is overcoming these macroeconomic headwinds, leading to a sustained trend of positive bottom-line earnings and strong EBITDA margins. Let's walk through the details by first turning to slide 7, where you'll see our first quarter financial results compared to the prior year.

Sales were $809 million in the quarter, down 8% from last year. The lower revenue was primarily driven by weaker currencies in Europe and Brazil relative to the U.S. dollar, and lower commercial truck production in Brazil. That drove gross margin to $104 million or 12.9% of sales.

SG&A was $9 million lower in the first quarter of 2016 compared to the same period a year ago. This quarter, we received $17 million of settlement proceeds related to certain asbestos insurance claims that were previously in dispute. Of this $17 million, we were able to recognize $5 million as income in the current period.

This insurance settlement is another step forward in our strategy to mitigate the cost of our legacy liabilities, like asbestos. Excluding these insurance proceeds, SG&A was still lower by $4 million relative to last year, as we continue to maintain discipline in managing our cost structure.

Interest expense was $22 million in the quarter compared to $19 million a year ago. You may recall that in the first quarter of last year, we had a $2 million one-time favorable impact from interest income in Brazil relating to a refund of a judicial deposit.

Income tax expense was $7 million in the first quarter of 2016, which translates to an effective tax rate of approximately 19%. This relatively low effective tax rate is a reflection of the fact that we are starting to generate earnings in jurisdictions like the U.S. where we continue to maintain valuation allowances against our deferred tax assets.

Because of this, we are currently booking no tax expense against such earnings. In addition, it's important to note that $2 million of the reported $7 million in book tax expense is non-cash, and relates to the use of deferred tax assets in jurisdictions like Sweden, Italy, and Mexico, where we have reversed our valuation allowances.

As we discussed at our Analyst Day in December, our adjusted diluted EPS now excludes such non-cash tax expense associated with the use of deferred tax assets in jurisdictions with NOLs.

This $2 million of non-cash tax expense is included as an add-back in the adjustment line that walks to our adjusted income from continuing operations for the quarter.

Bottom-line, then, we generated $28 million of income from continuing operations attributable to Meritor, and adjusted income from continuing operations of $31 million or $0.33 per diluted share. Let's move to slide 8, which compares our sales and EBITDA for the first quarter of fiscal year 2016 to 2015.

You can really see the impact foreign currency had on our financial results year-over-year, a $51 million impact on revenue and a $12 million impact on EBITDA. But with the good news we generated in SG&A, and with continued reductions in material, labor and burden costs, we largely offset the EBITDA impact of foreign exchange.

As a result, our adjusted EBITDA margin was 9.4%, up 40 basis points over last year. Slide 9 details first quarter sales and EBITDA for each of our reporting segments. In our Commercial Truck & Industrial segment, sales were $633 million, down $70 million or 10% from the same period last year.

The revenue decline was driven by the currency translation and lower production in Brazil that I discussed previously. Segment EBITDA was $52 million, down $4 million from last year. With EBITDA dollars down only modestly, that drove an increase in EBITDA margin for the segment to 8.2%, up 20 basis points from last year.

This increase was driven by lower material, labor and burden costs, which more than offset the margin impact of lower revenue. In our Aftermarket & Trailer segment, sales were $203 million, down 2% from last year. This decline was driven by currency headwinds in our European aftermarket business.

Segment EBITDA was $20 million, down $5 million compared to last year. The decrease was driven by currency impacts and one-time launch costs discrete to the quarter, associated with a new warehouse management system.

As we told you in the past, the first quarter is normally our weakest in this segment, as there are fewer selling days and certain seasonal trends that impact this business. As we head through the balance of the year, we do expect to see our margins in Aftermarket & Trailer segment return to the levels you've seen in recent quarters.

So, we remain bullish in our ability to sustain those types of margins in the business as we look forward. Now, let's turn to slide 10. For the first quarter, total free cash flow was negative $27 million compared to negative $21 million in the prior year.

As you know, our first quarter is typically the weakest from a free cash flow perspective due to fewer selling days as a result of the holiday season, which drives lower revenue; working capital trends as we build inventories in anticipation of the aftermarket spring selling season; and the payment of annual incentive compensation for our employees.

With those things considered, this first quarter played out pretty much in line with our expectations, with two exceptions. First, our inventory levels are slightly elevated this quarter as we work to manage the supply chain with North American volumes coming in lower than we were anticipating.

We do expect to drive these inventory levels down over the balance of the year as we adjust our purchasing activity and inventory banks to reflect the more normalized Class 8 truck volumes that we are now expecting. Second, as I mentioned earlier, we also received $17 million in asbestos insurance proceeds in the quarter.

While $5 million was recognized as income, the remaining $12 million is a positive cash flow item that didn't flow through the P&L. You can see that highlighted separately on the cash flow statement. With this first quarter in hand, we remain confident that we are on track to generate more than $100 million in free cash flow for the full year.

In fact, that means we anticipate we'll generate more than $130 million in free cash flow over the last nine months of the fiscal year, which is implied in our full year free cash flow guidance. Now, let's turn to slide 11, which provides an update on our equity and equity-linked repurchase program.

During the first quarter, we repurchased $42 million of common equity totaling 3.9 million common shares. With more than $130 million of free cash flow generation to come over the balance of 2016, we remain on track to complete the remainder of the buyback program $94 million before the end of the fiscal year.

You should expect us to be opportunistic in executing the remaining buybacks under this program, particularly in light of where current market prices are for our equity and equity-linked securities. Next, I'll review our updated fiscal year 2016 outlook on slide 12.

Based on the demand assumptions Jay highlighted earlier, we have lowered our fiscal year 2016 sales guidance to the bottom end of the range that we previously provided. We're now expecting approximately $3.4 billion of revenue. The driver of this downward revision is our expectation of lower production levels in the North America Class 8 market.

Despite the decreased revenue outlook, we remain on track to achieve our adjusted EBITDA margin target of 10%. We will continue to drive margin performance in the face of challenging end markets, just like we've consistently done over the last three years.

And we'll do this through continued strong execution of our M2016 initiatives, particularly material, labor and burden performance. That said, 10% margin on $50 million of lower revenue relative to the midpoint of our prior guidance suggests that earnings will be lower by about $5 million.

That's why we are reducing our adjusted diluted earnings per share from continuing operations guidance to a new range of $1.65 to $1.75 per share for fiscal 2016, down $0.05 from our previous guidance. Similarly, we expect free cash flow to be down slightly as well, but still at a strong level of $110 million for the full fiscal year.

Through M2016, we fundamentally changed our earnings profile and cash-generating ability such that, even in this revenue environment, we are still on pace to achieve more than $150 million in adjusted net income from continuing operations and more than $100 million in free cash flow.

We successfully managed the North American truck upturn profitably and with strong cash flow generation, and we are doing the same as our largest market returns to more normalized levels. Now, I'll turn the call back over to Jay to provide some closing remarks..

Thanks, Kevin. Let's turn to slide 13. First and foremost, I'll reiterate that we are on track to meet all three financial targets we established for M2016.

As we've continued to demonstrate strong results driven by the improvements we've made across the company, we've remained confident in our ability to achieve our margin, net debt, and new business win metrics this year, and to successfully launch our M2019 growth focus plan.

With the capabilities we have demonstrated since launching M2016, we have strong momentum in the commercial vehicle marketplace. We've executed on a clear set of strategic priorities that were designed and developed to increase shareholder value.

We've proven our ability to execute despite the unfavorable market dynamics that have been ongoing since we launched the M2016 program. Instead of using the markets as an excuse for not achieving our objectives, we use them as a challenge to demonstrate our operating excellence, and we will continue to do so.

We have growing customer relationships and a strong brand, both of which are helping us win meaningful business within important global manufacturers. We continue to add to our robust product line that is further strengthening our global market leadership positions, and we have the leadership talent to take us where we want to go.

Now, let's take your questions..

And your first question on the line comes from Brian Johnson with Barclays Capital. Please proceed, sir..

Good morning. Just want to kind of drill in on a couple of items. You've been assuming $175 million of new business wins in fiscal 2016 coming out of the Analyst Day.

Is that still intact? Does the incremental weakness in Class 8 affect that? What could move this number up or down? And I guess – I don't know if you count as new business or just ongoing business – where did market share in Class 8 kind of shake out in the quarter, and what do you expect for the rest of the year?.

Thanks, Brian. This is Jay. Thanks for the question. Yes, in (22:25) comments I made today about the $435 million of being on track new businesses, our confidence in achieving that $175 million, we do market-adjust that number for all the wins globally. So, in North America, as I mentioned, we are seeing the aggressive ramp-up of PACCAR.

But please remember, we also had a pretty significant win with Scania in Europe on the braking side. We've had a good hub reduction win with Daimler in India and several other wins throughout the world, in addition to seeing our emerging market axle in China starting to get a great reception with the bus and coach manufacturers.

So, there's gives and takes on the market's impact on that, but overall, we remain very confident in the number..

Second question is just around share repurchase. I mean, you must have thought the stock was cheap at $11 when you bought it back. It's now lower.

But just given concerns over the cycle, how are you thinking about your kind of balance sheet downside liquidity versus share repurchases in light of – and just all how that whole – remind us how that whole European customer receivables factoring kind of fits in your thinking on that..

Hi, Brian. This is Kevin. I'll take that. Yeah, I mean, from a downside liquidity planning, we update that model pretty regularly, as we talked about at Analyst Day, in terms of how we establish how much liquidity we need to manage through the cycles, especially a down cycle that could last upward of three years.

And we normally think we drive toward having liquidity in the zip code of about 20% of annualized revenue.

As we look at where we sit today, and with our expectation that we are on pace to generate $130 million of free cash flow over the last nine months of the year, we feel confident about our ability to execute the balance of the program which is $94 million between now and the end of the fiscal year.

We will look at the market, we'll look at the opportunities that are out there across both equity and equity-linked securities and – but we are confident we can – we have the liquidity to manage to be able to support that program..

And in terms of factoring, any change there?.

No, no change in factoring. We will continue to utilize those programs as operating – as part of our operating cash flow in that business..

And is that due – at least historically, I remember, is due to some – one very large customer being a rather late-by-world-standards payer?.

Well, I think this is traditionally part of our working capital arrangement with our European customer base and so....

Right..

... it's just part of the agreements that we have in place with those customers..

Okay.

And final question, did you contemplate the insurance recovery when you did your free cash flow guide?.

The original free cash flow guide?.

Yes.....

There were elements of certain things we were assuming in recoveries in terms of insurance, but I won't get into the specifics how much it was in terms of our expectations. But in terms of the first quarter, I don't think we were anticipating that we were going to see that flow through our results this quarter..

Okay, thanks..

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

Hi. Good morning, guys..

Good morning..

So just a quick follow-up on the share repo. Kevin, I think in prior quarters, you provided what you guys have repurchased since quarter end.

Did you guys repurchase anything since quarter end?.

Since quarter end, we have been in blackout. So we haven't been in the market in terms of open market repurchases..

Got it. And then just a question on the revenue guidance. So, in order to achieve the revenue guidance of $3.4 billion for the full year certainly implies a meaningful step-up in revenue from first quarter levels. Clearly, there is less working days or there were less working days and some OEM production shutdowns during the December quarter.

We understand Aftermarket & Trailer, it's typically the low watermark for the year in Q1.

But just in light of North American production coming down, I mean, is there anything else that we should be thinking of to boost revenue such as revenue from new business wins materializing more throughout the remainder of the year to get us comfortable with the $3.4 billion in revenue?.

Sure, Neil. This is Jay. I think you've listed off a few of them, actually. Our business, if you recall, at normalized stable market levels is highly seasonal with the first quarter and fourth quarter being our lowest revenue quarters, and the second quarter and third quarter being the strongest. There are several reasons for that.

As you mentioned, the holiday shutdowns in North America and Europe in the first quarter and fourth quarter around production, and also the aftermarket business and brake replacement season is highly seasonal. And as you mentioned, we are seeing the ramp-up of our new business wins, as I mentioned on the call.

My comments were above 50% penetration with PACCAR. We expect that to continue to increase throughout the year. And if you look at our estimate of the North American Class 8 market, you certainly can see we're not counting on that to be stronger in the back half of the year, certainly, than what we saw in Q1. So, I think those are the main reasons.

And we do feel confident in that guidance..

Great. That's very helpful. Thanks, Jay. And then, just one final one. Kevin, you alluded to the fact that you expect Aftermarket & Trailer segment margins to pick up for the remainder of the year. I mean, I think last quarter, you talked to 14% to 15% for the full year.

Just to clarify, is that outlook still intact?.

Yeah, I think it's fair to say. As we look at the last nine months of the year, we would expect to see the margins in that segment return to more normalized levels, or what we've been experiencing in the back half of last year. And it's really driven by a couple things.

One is revenue picking up, because Q1 is always the low watermark for that business; and second, it's the continued execution of material labor and burden performance initiatives as those continue to come on over the course of the year..

Great. Thanks very much, guys..

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

Thanks for taking my question. Just a follow-up on the aftermarket margin question. In the commentary, it notes that there is a new warehouse cost. The decrementals seem extremely high on the sales decline.

Can you maybe quantify the warehouse costs, so we can kind of get a better sense of the underlying decremental ones?.

Yeah, I mean – and I'd say a couple things. I mean, the headwinds we saw in Q1 on a year-over-year basis, obviously, we had a little bit of a revenue impact, but there's overall FX impacts that we saw, translation and transaction related.

As it relates to the warehouse issue, if you look at our North American aftermarket business, the labor and burden year-over-year was about $2 million worth, primarily driven by the discrete issue in the quarter related to the implementation of the new warehouse system.

We had an old legacy system, no longer supported, and the new system that we put in place helps us improve throughput and fill rate. So, we're happy with the new system. We had some inefficiencies as we went through the execution of launching that back in November, but that was discrete to the first quarter.

So, we should be back on track as we go into the back half of the year..

How should we think about the sales trajectory for aftermarket with some of the weakness in the new vehicle market? I mean, does that actually help the demand in that business as we go through the year?.

Well, traditionally, aftermarket has been somewhat countercyclical. And so, again, as I stated earlier, it is also highly seasonal with a fairly dependable brake replacement season here in Q2, Q3. So, I think we should expect to see some pretty healthy revenue growth sequentially from Q1 to Q2..

And in terms of the insurance recovery within the quarter, you said you recognized $5 million of the $12 million, I believe or $17 million, sorry..

That's right..

How do we think about it? Are you going to recognize more of it in this year? Or is that just a one quarter benefit?.

It depends. I mean, as we receive the $17 million of proceeds, we determine how much is earned and it's linked to our estimate of what the probable liability is on our asbestos exposures in the Maremont entity going forward.

So, if our outlook for those liabilities were to increase over time, the potential exists that we would recognize more of that – the remaining $12 million into income.

If those liabilities decreased over time from our current expectations, the potential exists that we would return some of those monies back to the insurance company, which is why it's sitting on the balance sheet at the moment as opposed to being booked as income..

Why the logic of keeping it as a – not treating it as a special item?.

Well, I mean, because it's really offsetting our ongoing asbestos costs each quarter. I mean, every quarter we have millions of dollars' worth of costs that are embedded within our cost structure, and this is simply a recovery related to those costs that we have..

Okay. All right. Thank you very much..

And your next question comes from the line of Irina Hodakovsky with KeyBanc. Please proceed..

Good morning, everyone. Thank you for taking the questions..

Good morning..

I have a question for you on the revenue revisions. There is – on slide 4, there is a sensitivity that you provided for us to understand how the changes in the North American Class 8 production outlook would impact your revenue and your EBITDA margin.

Looking at that at midpoint, provisions from prior outlook appear to be somewhere around a $70 million impact to the prior midpoint of revenue assumptions, but your revisions were about $50 million from prior midpoint.

So, wondering what's driving the offset to that North American production decline outlook? And then your EBITDA margin was maintained at 10%.

Are you finding incremental opportunities to – for cost savings, or is that something else?.

Hi, Irina, It's Kevin. I'll take that. You have to keep in mind, when we're talking about the guidance that we provided before, we're talking in ranges and approximations. And our prior revenue guidance was a $100 million range between $3.4 billion and $3.5 billion. So, we were operating somewhere along that range.

And as we looked at the changes that we expected to occur based on the North American truck market coming down, we felt that with that, plus any other of the small puts and takes we see, the appropriate guidance would be around $3.4 billion; again, an approximation. We could be a little bit above that level. We could be a little bit below that level.

But we think the balanced look at this at this point is $3.4 billion. As you think about the margin, keep in mind this is at the bottom end of the prior guidance. In the prior guidance, we thought we would still be on track to achieve 10% with some of the programs we had out there, even if we trended down to $3.4 billion.

And we continue to believe that's the case based on what we're looking at..

Thank you.

And just as a follow-up to that, what are – what FX assumptions is your guidance currently reflecting?.

It's pretty much comparable to what we provided last time. I mean, it's about $1.10 to the euro, and I think about BRL3.90 or so to U.S. dollar..

All right. Thank you very much. Appreciate it..

And the final question comes from the line of Pat Archambault with Goldman Sachs. Please proceed..

Okay. Yeah. Thanks very much for squeezing me in. Yeah, just a couple. I wanted to follow up – I think it was Colin Langan that was asking about the $5 million. So it is included in the EBITDA – adjusted EBITDA that you report, but it's fairly substantial, right? It feels like it would be like worth kind of 50 basis points, 60 basis points.

So, is that – I mean, in that quarter, was there a kind of big disbursement that sort of offset it and the net was a wash, or is there some lumpiness to this thing?.

Well, I mean, you're right. The $5 million was discrete to the quarter, a one-time item. But we have lots of pluses and minuses that hit our results, just like we had the Aftermarket & Trailer discrete item in the quarter going a little bit the other way.

I think, as you've seen over time, we've been trying not to adjust out any items plus or minus as a company, and really manage through those and drive to bottom-line performance in terms of margin and bottom-line earnings. And that's what we're doing right now. So we manage all those puts and takes, and we drove to this level of margin..

And I'm sorry to get into this, I know you said it, but the warehouse piece was just how much on a net basis?.

Well, again, we had negative year-over-year labor and burden in that – in the aftermarket North American business of $2 million, and it was primarily related to this particular issue..

Got it, okay. And just – I mean, look, you've gone over a number of these factors but – right, if I think of the net of those two things, I mean, you were up 40 basis points – including them, excluding them, you were probably up a little bit less to get to up 50 basis points, which is implied in your guidance.

It would require a back-half step-up in performance. If I just kind of try and summarize the things you've talked about, I mean you did talk about a seasonality issue, although, that year-on-year shouldn't matter too much. But you have – I guess the aftermarket growth that you referred to, you have the net new business launches.

Is there any sort of other items that I'm not including here as we think of the drivers of that improvement?.

It's continued in performance and executing on continued performance initiatives throughout the year. I mean, remember, our Q1 is normally our softest quarter and look back to last year even, we were 9.0% Q1, but we ended the full year at 9.5%. That's a type of performance we're expecting this year.

Again, coming out of the gate, with a weaker first quarter, because it's our low revenue watermark, 9.4%, but expecting the same type of performance in the back half to drive the same type of improvement year in the full year that we saw relative to Q1 last year..

Yeah. No, I get that.

I was just trying to keep it in terms of basis points of margin improvement, right, which seems to be back-end loaded as well?.

That's correct. And a big piece driven by revenue and continued execution of the performance initiatives. That's really the story of what drives the back half for the last nine months..

Got it, okay. The other question I had just is on the – and thank you for the detail on the production assumptions for Class 8. I mean, I just – this is more just an industry question. It feels like – I think that's down 15% your calendar year, let's call it, calendar year Q1.

You know that is less than – done less than orders and so I just wanted to see – I mean that, to us, would be kind of a positive number, just better than what we had modeled, quite frankly.

So, is – how much of that is based on kind of a real tangible order book that's flowing through right now? And how much of that could be variable, if you will?.

Well, Patrick, I think, obviously, we've completed one fiscal quarter. So, we have three to go, and we're sitting almost the full month into the second quarter and our production outlook is pretty accurate for the remainder of this quarter.

So you can think for six months of the year we have a pretty high degree of certainty and then we are continuing to evaluate the orders, but the backlog to build ratio remains fairly strong. We just had our Fleet Advisory Council and national meeting at most of major fleets.

A week or so ago, those fleets are continuing to say business is strong and so the fundamentals still look very stable. So, although it is a pretty big step-down from last year, we think it's a fairly reasonable assumption based on what we're seeing..

Got it. Okay. Appreciate the color, guys. Thanks a lot..

Yeah, thank you..

Thanks for everyone joining the call today. And if you have any further questions, just give Carl a call..

Ladies and gentlemen, thank you for your questions. I'd like to redirect the call back to Mr. Carl Anderson for closing remarks..

Thank you, Tanisha (39:22). As Jay alluded to, if there is any follow-up questions, please feel free to reach out to me directly. Thank you..

Ladies and gentlemen, that conclude today's conference. Thank you for your participation. You may now disconnect and have a great day..