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Meritor (NYSE:MTOR)
Q4 2017 Earnings Conference Call
Nov. 15, 2017 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2017 Meritor, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session and instructions will be given at that time. If anyone should require operator assistance during the conference, please press * and then zero on your telephone keypad.

As a reminder, today's call is being recorded. I would now like to turn the call over to Carl Anderson, Vice President and Treasurer. Sir, you may begin

Carl Anderson -- Vice President and Treasurer

Thank you, Chelsea. Good morning, everyone, and welcome to Meritor's Fourth Quarter and Full Year 2017 Earnings Call. On the call today, we have Jay Craig, CEO and President; and Kevin Nowlan, 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 are recording, is a property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the expressed written consent of Meritor.

We considered 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 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 and our website.

Now I'll turn the call over to Jay.

Jay Craig -- Chief Executive Officer and President

Thanks, Carl, and good morning, everyone. Let's turn to Slide Three for a look at the quarter. Kevin will take you through the full year analysis later in the presentation. Our revenue in the quarter was $922 million, up 27% from the same period last year.

This increase was driven by higher production in all regions and the traction we're getting with new business wins. Adjusted EBITDA for the quarter was $98 million compared to $74 million in the same period last year. Margin in the fourth quarter was 10.6%, an increase of 40 basis points. While we've had good margin performance in past quarters, our margin this quarter reflects the benefit of the higher volumes and our continued excellent operational performance.

The majority of the margin improvement was driven by conversion in our Commercial Truck & Industrial business, where our margin expanded 280 basis points to 10%. We converted around 18% on incremental sales of $187 million in this business with tremendous delivery and quality performance across the board. You may remember that we also demonstrated near-perfect execution in the strong markets of 2015. This speaks to the sustained level of operational excellence that has now become a competitive differentiator for Meritor.

Adjusted income from continuing operations in the quarter was $56 million for the total company or $0.62 of adjusted diluted earnings per share, nearly double from the same period last year. Across the company, we have put a tremendous effort into ensuring that we deliver sustained improvement in our financial results, and we take pride in the fact that we are consistently meeting or exceeding our commitments to shareholders. We intend to continue that trend. Let's go to Slide four for a brief update on progress toward our M2019 objectives.

We will provide more detail at our upcoming analyst event in New York in December. As you know, our three M2019 financial targets are to grow revenue by 20% above the market, increase EPS by $1.25 or 80% to $2.84 and achieve a net debt to adjusted EBITDA ratio of less than 1.5x. As we scorecard ourselves against those targets, here's where we are: keeping in mind that our jumpoff point was the end of fiscal-year 2015, so we are now halfway through the M2019 cycle. We have earned more than 6% toward our revenue target of 20% outperformance.

And if you look at what we've won in total, we are really more than 14% toward our goal, but still have work to do to get all of those wins fully into the P&L. We remained confident in reaching 20% outperformance, and we'll provide more visibility on those opportunities in December. In terms of improving profit, we've earned $0.29 toward our objective of increasing EPS by $1.25 on our path toward $2.84. In addition to our strong performance contributing to this metric, we amended certain retiree medical benefits in the fourth quarter that we expect will reduce this expense by approximately $39 million annually.

That should provide a tailwind to our EPS as we look ahead. For capital allocation, our net debt to adjusted EBITDA ratio was 2.7x. However, on a pro forma basis, for the Meritor WABCO divestiture, we are at 2.1x. With two years left in the plan, we believe we are on track to achieve all three objectives.

In fiscal-year 2017, we took the opportunity to initiate and complete several strategic actions, all of which we believe will contribute to success of M2019. I'll talk more about those in a few moments. Additional highlights from the year that position us as a market leader include receiving Navistar's Diamond Supplier Award, Ashok Leyland's first ever gold delivery award; and Excellent Supplier Recognition from XCMG; and eight quality awards from major customers, six of which were from Daimler. We also developed electric drive axles and suspensions that we believe will position us as a leader in electric solutions for the commercial vehicle market, launched a new value brand called Mach that features all-makes products engineered to industry standards at affordable prices for our aftermarket customers, established the West Coast aftermarket distribution center in California that will enable us to fulfill aftermarket orders to customers in 24 hours or less and achieved a safety rate of 0.48 injuries per 200,000 hours work.

Our target for M2019 is to achieve a rate of less than 0.65, which we beat this year. The safety of Meritor employees is top priority. And even though we believe this incident rate positions us among the best in industrial companies in the world, we will continue to work with our employees toward even further improvement. On Slide 5, you'll see eight products we've launched in fiscal 2017.

This year's launch cycle included axles for truck and trailers, fronts and rear, medium and heavy and on- and off-highway vehicles. We believe this aggressive launch cycle ensures we can offer our customers the broadest and deepest range of products in the industry. Meritor's robust product portfolio is a key element to winning incremental business and growing our top line at the pace we have committed to under M2019. Slide six represents some of the new business we were awarded in fiscal-year 2017 with major truck, trailer, bus and coach, specialty and defense customers in several major regions of the world.

We earned new axle business with Volvo Thailand and Volvo Eicher, as well as a new contract from Tata's ultra trucks. We're now supplying JAC Motors and Ching Ling with our dual light family of products in China. We developed a tandem axle with hub reduction for our major customer outside of North America that will be used on a new series of construction vehicles. We have a new axle contract with Kenworth for our heavy-haul customer in the Middle East and with Navistar Defense for its MaxxPro Recovery Vehicle program as well as a contract to supply transfer cases for the new GM and Navistar Class four and five medium-duty truck.

We also have standard axle position with Heil Trailer on its chemical trailer line. As important as these new business wins are to us, we recognize the importance of maintaining and growing the relationships we have with our long-term strategic customers, all of whom we continued to collaborate with on new opportunities for today and tomorrow. In that regard, we're excited to announce that we have extended our long-term European axle contract with Volvo through 2024. During the term of this contract, we will perform a technical upgrade to our axle offering that incorporates higher efficiency and higher gross combination weight capabilities.

On Slide 7, you'll see more detail on our acquisition of the product portfolio and related technologies of Fabco Holdings and its subsidiaries. With this suite of products, particularly the addition of transfer cases and gearboxes, we now have an expanded portfolio of complementary products for medium, heavy and extra heavy vehicles for on- and off-highway, construction, defense, rail, and other industrial applications for both OE and aftermarket customers. This transaction allows us to offer global customers a wider breadth of capabilities and will help us diversify and expand into the rail and oil and gas industries. We expect this transaction to generate approximately $50 million of incremental revenue in fiscal-year 2019.

Let's turn to Slide 8. Also in fiscal-year 2017, we closed our sale of the interest in Meritor WABCO joint venture for a total purchase price of $250 million and also received the final partner earnings distribution of $8 million just prior to closing. We believe this transaction allows us to further sharpen our focus on the strategic priorities of M2019 and beyond. We will also remain the exclusive distributor of certain WABCO aftermarket products in the United States and Canada and a distributor in Canada and Mexico through an aftermarket distribution agreement.

Either party can terminate these distribution arrangements at certain points during the first 3.5 years at an exercise price between $225 million and $265 million based on the earnings of the business. In the end, we believe this was a good transaction for the company and our shareholders. Now I'll turn the call over to Kevin for more detail on our financials.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Thanks, Jay, and good morning. On today's call, I'll review our full year financial results and then I'll provide you with an initial look at our 2018 guidance. Overall, we had an excellent year of financial performance as we expanded adjusted EPS by 15%, drove revenue growth of approximately 5% and generated $81 million of free cash flow. We also significantly improved the balance sheet as we reduced our total debt and retirement liabilities by more than $600 million.

As a result, we now have a positive book equity for the first time since 2008. With this strong performance and improved capital structure, we are well positioned to deliver on our M2019 financial commitments and to continue driving value for shareholders. Let's turn to Slide 9, where you'll see our full year financial results compared to the prior year. Sales were up $148 million from last year on higher production in Europe, China and South America, but more importantly, we increased revenue from new business wins coming online.

These factors more than offset the 6% decline in Class 8 truck production in North America during the fiscal year. We expanded gross margin by 90 basis points as we converted on incremental revenue while also continuing to achieve strong material labor and burden performance that more than offset the impact of higher net steel costs. You can really see the impact of this performance in the line item volume mix performance and other on the right side of the chart as we have $59 million of higher adjusted EBITDA on $139 million of higher revenue. Embedded within this line item is approximately $26 million of steel headwind, so you can give 90 of the strength of our conversion and operating performance.

As we've discussed during the last couple of quarters, we did have a $16 million unfavorable year-over-year impact from two discrete items. First, we had a one-time unfavorable $10 million settlement with our joint venture partner in Mexico in 2017 related to disputes between the parties. And in 2016, we had a favorable supplier litigation settlement of $6 million that did not repeat. Next, you'll see that foreign exchange was a slight tailwind to revenue in 2017.

The EBITDA impact from foreign exchange was a $12 million benefit on a year-over-year basis. This favorability was primarily driven by hedge mark-to-market gains this year and a corresponding hedge loss a year ago. All of these transactions were executed as part of our hedging program to mitigate the risks from currency fluctuations. Moving down the [inaudible], you can see that SG&A, excluding the various litigation settlements, increased by $35 million this year.

Due to strong financial performance in 2017, our variable compensation expense was $21 million higher than in 2016. In addition, we have $15 million in higher asbestos expense this year. This was driven by the favorable insurance settlements related to asbestos we executed in 2016, which did not repeat. These were the two main drivers of our higher SG&A expense in 2017.

As we look ahead to 2018, we do expect to see more normalized incentive compensation accruals. However, we are starting to strategically add headcount and other investment in support of our M2019 revenue growth initiatives. So while you will see a step-down in SG&A for incentive compensation, it will be partially offset by this increased investment going forward. These items provide the walk from an adjusted EBITDA of $327 million a year ago to $347 million this year, which resulted in our reported adjusted EBITDA margin of 10.4%.

This also allowed us to drive adjusted income from continuing operations of $170 million or $1.88 per share, which is an increase of $0.24 per share from last year. We did see a relatively low effective tax rate of 5% in 2017 due to several favorable tax items in the year. That rate is lower than what you should expect going forward. Slide 10 details full-year sales and adjusted EBITDA for our reporting segments.

In our Commercial Truck & Industrial segment, sales for full-year 2017 were just over $2.6 billion, up 7% from last year, driven by nearly $100 million in new business wins that were in the P&L as well as stronger end markets. Europe and Brazil truck production levels were up approximately 5% and 20%, respectively. While in China, our revenue increased by more than $40 million due to a stronger off-highway market. In India, we expanded revenue by $30 million even as truck production was down 9% in the fiscal year.

During the year, we benefited from one of our largest customers gaining market share, and we increased our share with that customer as well. Finally, in North America, Class 8 production declined 6%, but our revenue was roughly flat due to the impact of our new business wins. Segment adjusted EBITDA was $244 million, up $36 million or 17% from last year. Segment adjusted EBITDA margin for Commercial Truck & Industrial came in at 9.3%, an increase of 80 basis points from a year ago.

The margin improvement was driven by conversion on the higher revenue and continued material labor and burden performance, partially offset by higher net steel cost and higher valuables compensation accruals. In our Aftermarket & Trailer segment, sales were $853 million, down $7 million from last year. Our aftermarket business was up slightly in 2017, however, this was more than offset by lower production in the trailer market. Segment adjusted EBITDA was $106 million, down $9 million compared to last year.

Segment adjusted EBITDA margin decreased to 12.4% compared to 13.4% in the same period a year ago. The decrease in margin was driven by the $6 million prior year supplier litigation recovery I referenced earlier as well as higher variable compensation accruals. Turning to Slide 11, I wanted to provide more detail on a couple important items we announced in the fourth quarter. In September, we received a favorable court ruling that dissolves the 2006 injunction, previously barring the company from making healthcare benefit changes to certain retirees.

As a result, we announced our intention to modify these benefits, which was the primary contributor to the $343 million reduction in our OPEB liability at year-end. We expect our retiree medical expense to improve by $39 million going forward from $24 million of expense to $15 million of income in 2018. Additionally, we expect to see a $13 million reduction in corresponding cash payments in 2018. On the right side of the chart, I wanted to highlight the convertible debt transactions we executed.

We funded the repurchase of $236 million of convertible notes with a new $325 million convertible note issuance and with $93 million of cash on hand. The new security was issued with a 3.25% coupon and a 60% conversion premium, which pegged the conversion price at nearly $40 per share. As a result of these transactions, we were able to lower interest expense by $3 million annually, eliminate more than 5 million shares of dilution at today's stock price and extend the debt maturity profile, such that there are no significant bond maturities until 2024. Next, I'll review our fiscal year 2018 market outlook on Slide 12.

Building on strong fourth quarter production combined with an improving freight environment, we are planning for higher Class 8 truck volumes in 2018. As you know, October can be a bellwether month from truck orders in this year, but orders came in at more than 36,000 trucks. As a result, we are projecting for North America Class 8 production of 260,000 to 280,000 units in 2018, up 10% to 18% from 2017 levels. We also believe the medium-duty market will be between 230,000 to 250,000 units in 2018, similar to last year.

As we look overseas, Europe should be relatively stable in 2018 as economic indicators continue to show solid freight fundamentals. Looking to Asia, we expect the market in China to be roughly flat on a year-over-year basis. And in India, we are seeing some moderate growth in our end markets. Finally, our outlook for Brazil is that the market will be up slightly.

Market optimism appears to be returning and GDP is expected to be positive for the second year in a row. Based on these demand assumptions, you can see how that translate to our fiscal year 2018 outlook, which is summarized on Slide 13. We expect sales to be between $3.6 billion and $3.7 billion, up 8% to 11% compared to 2017. Higher Class 8 truck lines in North America coupled with new business wins are expected to drive a meaningful step-up in revenue for us.

We are forecasting that our adjusted EBITDA margin will expand again in 2018 to a range of 10.8% to 11%. There are several components to drive our margin expectations for next year. On a positive side, we expect margin expansion related to the $39 million improvements in retiree medical expense and from normal conversion on higher revenue. Partially offsetting this are the $27 million of lower earnings resulting from the sale of our interest in the former Meritor WABCO joint venture as well as a planned increase in SG&A and engineering investment to support our M2019 revenue growth initiatives.

We also expect our adjusted diluted earnings per share to increase to a range of $2.20 to $2.40, a meaningful step-up from last year. Included in this guidance is our expectation that we will return to a more normalized effective adjusted tax rate of approximately 15%. In part, that's because we are expecting to generate cash tax expense in certain European jurisdictions, where we have now fully utilized our net operating loss carryforwards. And finally, we anticipate generating free cash flow of approximately $90 million to $100 million.

This is even after investing another $100 million of CapEx in 2018 in support of our M2019 growth and operational performance initiatives and investing in working capital to support the $250 million to $350 million in revenue growth. Overall, you can see that our 2018 guidance suggests continued improvement in the financial performance of the company as we drive toward achievement of our M2019 targets. Now I'll turn the call back over to Jay for closing remarks.

Jay Craig -- Chief Executive Officer and President

Thanks, Kevin. Let's go to Slide 14. On December 7, we'll host an Analyst Day event in New York. At that time, we look forward to more detailed discussions with you about M2019 and our financial outlook.

We hope you'll be able to join us. Also, before I close, I want to take the opportunity to acknowledge the excellent work by our global leadership team and the efforts of every Meritor employee over the past year. The alignment and dedication of our 8,200 employees is reflected in the results we shared with you today and the noteworthy transformation of the company over the past several years. So to our employees and to the investment community, run with the bull.

Now we'll take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press the * and then the no.1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise we ask that you please place your line on mute once your question has been stated. Thank you, and our first question comes from the line of Joseph Spak with RBC Capital Markets. Your line is open.

Joseph Spak -- RBC -- Analyst

Thanks, good morning, everyone.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Morning.

Jay Craig -- Chief Executive Officer and President

Morning.

Joseph Spak -- RBC -- Analyst

First question, I guess, is just on the aftermarket and trailer business. We're trying to -- it now gets a little bit less attention. I know you had a tough comp in the quarter with the insurance settlement last year, but I guess what I want to better understand is sort of really, for the year, what happens. I think earlier in the year, you're talking about sort of a 14% target, it obviously came in below.

And I guess, more importantly, how we should think about that segment heading into '18?

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Good question, Joe. I mean, we continue to expect that this is a business that will operate north of 14% margin. So that's the start point. Obviously, we came in at only 12.4% for the year.

Now one of the big headwinds that the aftermarket business faced is, because of the total company performance for the year, we outperformed relative to our incentive compensation plans. So there is about $7 million, $8 million of allocation of variable compensation accrual to that segment, which drove the margin down about a point versus what we would normally expect. So as we jump into 2018, we would expect with normalized incentive compensation accruals to already be a point higher than that. The rest of the gap between, call it, low to mid-13s and getting north of 14% where we expect really comes from revenue growth.

As part of M2019, we're driving new business wins into that business as well as many other businesses, and we contribute at a pretty healthy rate in aftermarket because it is a scale business. So we would expect the revenue growth that we're anticipating to ultimately drive us to 14% or more where we expect the business to operate.

Joseph Spak -- RBC -- Analyst

Okay. And then sort of moving on to the overall '18 outlook and guidance, appreciate some of the color and to the puts and takes there. I was sort of trying to follow along, so I guess this is somewhat back of the envelope. But it would seem like the SG&A step-up and increase you talked about for investments would either have to be fairly hefty or should the incremental margin on the volume, the assumption there is sort of a little bit below sort of the -- what you realized over the past couple of quarters.

So I'm assuming it's some conservatism built into the latter? Or is there's something that we're not thinking about on the incremental margin, maybe perhaps steel cost, et cetera.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Yes, I'd say it's a couple of things, and you've touched on them and I'll just give a little bit more color. But keep in mind, we are talking about expanding our margins against 40 to 60 basis points year-over-year. So it's a pretty healthy expansion. We -- the 2 things I would guide you on is, one, as you think about revenue growth, we typically convert 15% to 20%, and we've been at the higher end of that range really for the last year.

As the market step up in a pretty aggressive way, particularly here in North America, you can have some inefficiencies in the system that really drive us to the lower end of that range. So as you're modeling the walk from '17 to '18 on revenue, I would model it's closer to the 15% than the 20%. So that's point number one. And then second is as it relates to some of these investments, some come through the SG&A line in the forms of additional headcount and other costs we're adding.

Some come through the growth margin line in the form of engineering-related expense, both of which are intended to support revenue growth, M2019 and beyond M2019. So those are really the key offsets to maybe some of the other math that you're doing. That still gets us though to 50 basis points plus the margin expansion.

Joseph Spak -- RBC -- Analyst

And the higher steel cost or the commodity cost will be embedded in that incremental margin range you talked about?

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Yes, I mean, ultimately, steel is a little bit of a tailwind as we go from '17 to '18 as long as steel costs moderate. The last quarter, they were up modestly. But as long as they hold flat where they are, steel should be a year-over-year tailwind. But we'll see how steel costs play out for the year.

Joseph Spak -- RBC -- Analyst

Okay. Thanks a lot, guys.

Operator

Thank you. And our next question comes from the line of Brett Hoselton with KeyBanc. Your line is open.

Brett Hoselton -- KeyBanc -- Analyst

Good morning.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Good morning, Brett.

Joseph Spak -- RBC -- Analyst

Good morning, Brett.

Brett Hoselton -- KeyBanc -- Analyst

Let's see, a couple of quick questions here. First of all, the -- again, back in the envelope math. If I look at your 2019 targets, it seems like you're going to be able to hit your net leverage ratio of 1.5 just by expanding your EBITDA or increase your EBITDA. And maybe a minimal amount of debt paydown.

So it seems like a large portion of free cash flow go toward share repurchase, am I incorrect in that?

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

I think -- yes, a couple of things. As we sit here today, we think we are on the path to hitting 1.5x net debt to EBITDA with the combination of EBITDA growing as well as our cash flow expectation because that impacts net debt. But where we sit today in terms of driving toward our solid to strong BB credit metrics, we don't think there's any additional gross debt paydown that we need to do to accomplish those objectives, which means any of the incremental capital that we're generating over the next couple of years, we can use to support our M2019 growth initiatives or longer-term growth initiatives as well as opportunistically buying back shares in the market. And so we'll deploy capital in both ways as we look ahead.

Brett Hoselton -- KeyBanc -- Analyst

Yes, as I'm looking at the kind of like the little subtitle here, returning 25% of free cash flow to shareholders. What would the other 75% in your mind go toward?

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Well, the other 75%, that's a measure over the 4-year period from 2016 to '19, and some of it goes for debt reduction that's allowed us to hit our net debt-to-EBITDA target and some of it will continue to be invested in the business to support our new business win objectives. As we look at that 25%, I mean keep in mind, we deployed a lot of capital -- a lot of cash, $93 million in September to execute convertible security repurchases, which eliminated 5 million shares of dilution in the marketplace. So it was actually a contributing factor toward helping us allocate capital toward share buybacks effectively.

Brett Hoselton -- KeyBanc -- Analyst

I'll swing back around and get back in the queue. Thank you.

Operator

Thank you. And our next question comes from the line of Neil Frohnapple with Buckingham Research.

Neil Frohnapple -- Buckingham -- Analyst

Hi, guys, Congrats on a great quarter.

Jay Craig -- Chief Executive Officer and President

Thank you.

Neil Frohnapple -- Buckingham -- Analyst

Maybe a follow-up on the margin question. Is the outlook for the lower variable comp in FY '18 going to fully offset the higher SG&A cost as part of the investment for M2019?

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Not completely in the SG&A line. I think the benefit we'll see from the reduced variable compensation accruals will largely offset the increased investment, which will come through SG&A and the ER&D or engineering line. But it's not a complete offset, but it's a substantial offset.

Neil Frohnapple -- Buckingham -- Analyst

Okay. And then could you provide more granularity on the sales bridge from FY '17 to FY '18, call it, the $300 million increase at the midpoint? Are you able to provide the revenue contribution to the FY '18 revenue guidance from new business wins that will be realized this year? I guess, both carryover from M16 and then for the wins from M19. And then I think you guys called out certainly the higher North America Class 8 production that probably adds over $100 million at the midpoint. But if you could just talk through any other revenue tailwinds and headwinds that underpin the sales guidance, that will be helpful.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Sure. I mean, I think it's -- if you look at, there's really 2 big drivers. The first as you touched on [ NA ] truck, the Class 8 truck market, which if you do the simple math that we guide you to every 5,000 Class 8 trucks being worth $20 million, that suggests in our guidance a step-up in revenue of between $90 million and $170 million given the range that we're giving of 260,000 to 280,000 Class 8 trucks. That's one point.

As it relates to new business wins, including the Fabco revenue coming into the P&L this year and including M2016 carryover that's coming into the P&L still, we expect that to be north of $160 million going from '17 to 2018. And then you get a little bit of a tailwind from our NDA guidance as well, probably another $20 million there. So when you add it all up, that gets you to our range of $36 million to $37 million.

Neil Frohnapple -- Buckingham -- Analyst

Okay, that's helpful. And then just quick follow-up on that, Kevin, what's Fabco implied in that $160 that you called out.

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

It's roughly about $35 million.

Neil Frohnapple -- Buckingham -- Analyst

Okay. Great. I'll pass it on.

Operator

Thank you. And our last question comes from the line of Ryan Brinkman with JPMorgan. Your line is open.

Ryan Brinkman -- JPMorgan Chase -- Analyst

Great. Thanks for taking my question. You know at the North America commercial vehicle show during the quarter, we heard a lot about electrification of commercial vehicles from both suppliers and OEMs. I'm curious if you could highlight what you think is the content per vehicle opportunity for Meritor from this trend.

Jay Craig -- Chief Executive Officer and President

Sure. Yes, thanks, Ryan. This is Jay. I think you had the opportunity to visit our booth and see our product offerings.

We displayed three specific offerings. The most significant of which was the axle. So we believe that the EX+L has adopted. Obviously, the overall content would increase because we're replacing with that single product, the internal combustion engine, the transmission and the existing drivetrain.

So we think there are opportunities for additional content, but our main focus is to, at this point, make certain that we're as represented in the future in the marketplace as we are today in drivetrain. So we'll be talking a lot more about that at our Analyst Day, including all our different strategies around, whichever vehicle architecture is the one that ends up dominating different vehicle segments in the future.

Ryan Brinkman -- JPMorgan Chase -- Analyst

Okay, great. I appreciate that. I think later today, there's going to be -- or should be a Tesla Semi truck unveil. Just curious how you see -- which vehicles do you think are you targeting that there is the most opportunity? Is it more that kind of long-haul Class 8 stuff or Class 8? Or is it -- which types of electric vehicles do you think that there's the most opportunity for you?

Jay Craig -- Chief Executive Officer and President

Well, I think it will be interesting to see Tesla's unveil today. We're excited for them. And certainly, that segment, as I understand what they're addressing, which is the day cap segment. Primarily, [indiscernible] initial launch has a lot of opportunity.

I think we can you can push vehicles upwards of 300-mile range, you can do a lot of day cap delivery. Again, our thesis is, the most aggressive markets near term to grow will be the medium-duty delivery, the transit bus, and refuge sectors. And so when you look at our different product offerings, those are -- the markets there being initially directed toward.

Ryan Brinkman -- JPMorgan Chase -- Analyst

Okay. Very helpful. Thanks for the color and congrats on the quarter.

Jay Craig -- Chief Executive Officer and President

Thank you.

Operator

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Carl Anderson for any closing remarks.

Carl Anderson -- Vice President and Treasurer

Thank you, Chelsea. This does conclude Meritor's fourth-quarter earnings call. If you do have any follow-up questions, please feel free to reach out to me directly. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Duration: 37 minutes

Call Participants:

Carl Anderson -- Vice President and Treasurer

Jay Craig -- Chief Executive Officer and President

Kevin Nowlan -- Chief Financial Officer and Senior Vice President

Joseph Spak -- RBC -- Analyst

Brett Hoselton -- KeyBanc -- Analyst

Neil Frohnapple -- Buckingham -- Analyst

Ryan Brinkman -- JPMorgan Chase -- Analyst

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