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Meritor (NYSE:MTOR)
Q3 2019 Earnings Call
Jul 31, 2019, 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 Q3 2019 Meritor, Inc. earnings conference call. [Operator instructions] As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Mr.

Todd Chirillo, senior director, investor relations. You may begin.

Todd Chirillo -- Senior Director, Investor Relations

Thank you, Brian. Good morning, everyone, and welcome to Meritor's third-quarter 2019 earnings call. On the call today, we have Jay Craig, CEO and president; and Carl Anderson, senior vice president and chief financial officer. The slides accompanying today's call are available at meritor.com.

We'll refer to the slides in our discussion this morning. The content of this conference call, which we're recording, is the property of Meritor, Inc. It's protected by U.S. and international copyright law and may not be rebroadcast without the express written consent of Meritor.

We consider your continued participation to be your consent to our recording. Our discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Let me now refer you to Slide 2 for a more complete disclosure of the risks that could affect our results. To the extent we refer to any non-GAAP measures in our call, you'll find the reconciliation to GAAP in the slides on our website.

Now I'll turn the call over to Jay.

Jay Craig -- Chief Executive Officer and President

Thanks, Todd, and good morning, everyone. We appreciate you joining our call today. On Slide 3, you'll see our exceptional results for the quarter. Year-over-year revenue was up slightly, mostly due to Class 8 volumes in North America, partially offset by negative foreign exchange.

Adjusted EBITDA margin was 12.5%. Our EBITDA conversion year-over-year was close to 30% and adjusted diluted earnings per share were $1.20. On the strengths of higher operating earnings and working capital management, we generated $124 million of free cash flow in the quarter. Later in the presentation, Carl will provide additional details, but this quarter is another great example of our team's ability to execute well in changing global markets.

With three quarters behind us for the year, we are raising our full-year outlook for adjusted EBITDA margin and adjusted diluted EPS, as you'll see later in this discussion. Our results so far this year and the full-year outlook provide us with an excellent foundation heading into our M2022 plan that we believe will lead to a significant shareholder value creation. On Slide 4, we want to give you an update of our share repurchase program. Last November, we announced a $200 million share repurchase program based on the strong earnings and cash flow we anticipated.

Year-to-date, we have opportunistically repurchased four million shares, including one million in the third quarter alone, allowing us to return $70 million of value directly to shareholders. Today, based on our continued strong outlook for the generation of significant unencumbered future free cash flow, we are announcing a new Board authorized $250 million share repurchase program that supersedes the previous program. As we look ahead at the level of cash flow we believe we will generate, this new program provides us with additional flexibility for execution of our capital allocation strategies. As we have shown over the past several years, with the significant improvement in profitability coupled with the material strengthening of our balance sheet, we are taking the opportunity to consistently return value to shareholders.

This has been demonstrated by the repurchases we have made this fiscal year and the new $250 million program we are announcing today. We believe this approach to capital allocation is creating tremendous value for Meritor shareholders. On Slide 5, we are excited to tell you about a new business award with the major trailer customer in Europe. Schmitz Cargobull is a manufacturer of trailers and truck bodies for temperature-controlled freight, general cargo and bulk goods.

With this award, we will supply one of the industry's lightest, single piston air disc brakes to this OEM beginning in 2021. This solution is designed to meet trailer fleet expectations for efficiency, safety and cost. And we see additional opportunities in this market as we launch this advanced brake offering. On the truck side, we announced last year at the IAA show in Germany that we would be launching a new single piston air-disc brake in 2019.

We will display that brake at the North American Commercial Vehicle show coming up in October. With this launch, Meritor will have the most complete brake portfolio in the industry offering drum, dual and single piston disc brake alternatives for our customers. This all new offering features a single piston design and utilizes Meritor's proven air-disc brake architecture. It also provides significant cost to weight savings, while maintaining the performance our customers expect.

The trailer break for Schmitz Cargobull is similar to our new truck brake but modified to meet the specific demands of the global trailer market. On Slide 6, we want to share with you a new electrification program in Europe for the Alstom Aptis, an electric urban bus. Production for this manufacturer's first orders of the all-electric Aptis bus begins this fall for cities including Paris and Strasbourg, among many others in France. We developed a unique track train solution for this program in less than one year.

Meritor front and rear drive steer axles, air-disc brakes and a critical gearbox will integrate directly into the differential to deliver power to the wheel ends from Alstom's electric engine. This is a tightly coordinated effort between four Meritor facilities in Europe. The axles have left Cast Housings from our foundry in France, brakes from our plants in the U.K., gearboxes from Austria and assembly in Italy. Deliveries are expected to start at the end of the year.

This program is an excellent example of the value that is transpiring from this strategic transactions we have completed over the last several years. In 2017, we acquired the product portfolio in technologies of Fabco. We said at the time that this acquisition would give us access to markets that will complement our strategic growth initiatives. Our facility in Austria, which was part of that acquisition, engineers that manufacturers highly customized gearboxes that we are integrating into electric drive systems, allowing us to capitalize on opportunities like this one.

This is consistent with the message we delivered at our Analyst Day regarding the breadth of opportunities for Meritor as adoption of electrified vehicles increases. We believe the acquisition of AxleTech, that we shared earlier -- that we closed earlier this week, will provide similar opportunities as you see on Slide 7. This acquisition, like the one I just mentioned, furthers our strategic initiatives to expand into adjacent markets, specifically in defense and off-highway around the globe. Keep in mind, that more than half of AxleTech's 2018 revenues came from defense programs and another 33% was from off-highway.

This diversification will offset some of the cyclicality we see with the linehaul markets. It also brings us a complementary global product portfolio that allows us to offer our customers an even more robust drivetrain portfolio for their unique requirements. We remain highly confident in the more than $15 million of annual cost synergies we identified when we announced the deal in May. We believe this was an excellent addition to us and we want to extend a warm welcome to our AxleTech employees that are back to the Meritor family and look forward to optimizing the combined benefits for our shareholders, customers and employees.

On Slide 8, we are proud to share recent accolades from our global customers for excellence in quality, delivery, innovation and business alignment. Being the preferred partner to our customers is very important to us. We take great pride in the relationships we have established with OEMs around the globe. As the industry evolves indeed of our customers that their customers' change, close collaboration is the number one priority for us in addition to maintaining the highest levels of quality and delivery in the industry.

We have said before that our goal is to provide preferred product solutions that have the right formula of technology and functionality combined with the very best service and support. This is the main element of our M2019 plan and will remain equally important as we begin M2022. At this time, I'll turn the call over to Carl for a more detailed view of the quarter's financials and then we will take your questions.

Carl Anderson -- Senior Vice President and Chief Financial Officer

Thanks, Jay, and good morning. On today's call, I will review our third quarter financial results and updated 2019 guidance. Overall, we had another excellent quarter of financial performance. Adjusted EBITDA margin improved by 50 basis points to 12.5%.

Adjusted diluted earnings per share increased 35% to $1.20, and we generated $124 million of free cash flow. Let's walk through the details by turning to Slide 9, where you'll see our third quarter financial results compared to the prior year. Sales were $1.166 billion in the quarter, up 3% from a year ago, driven primarily by higher truck production in North America. As you can see from the chart in the right, higher revenue was partially offset by foreign exchange headwinds as the U.S.

dollar continues to strengthen against most major currencies. This impacted sales by $25 million and adjusted EBITDA by $6 million compared to the prior year. Overall, revenue was up $37 million, which helped to generate adjusted EBITDA of $146 million, an increase of $11 million compared to last year. On the left-hand side of the chart, you'll see that we're reporting $85 million of GAAP net income from continuing operations, an increase of $19 million from last year.

Adjusted income from continuing operations was $103 million, resulting in $1.20 per adjusted diluted share. In addition to the higher overall adjusted EBITDA generated in the quarter, we also benefited from lower tax expense. This was primarily driven by higher percentage of earnings coming from jurisdictions, which have net operating losses or tax credits to offset taxable income. In our adjusted income, we continue to back out the noncash tax expense associated with the utilization of these deferred tax assets.

For the first nine months of the year, we generated $3 per adjusted diluted share and have already exceeded our full-year M2019 target of $2.84. And finally, free cash flow is $124 million compared to $102 million in the third quarter of last year, an increase of $22 million. In addition to higher operating earnings, we also benefited from improved working capital driven primarily by lower inventory levels. Let's move to Slide 10, which details our third-quarter sales and adjusted EBITDA for both of our reporting segments.

In our Commercial Truck segment, sales increased by 2% to $869 million. The increase in revenue was primarily driven by higher truck production in North America, partially offset by unfavorable foreign exchange. Segment adjusted EBITDA was $93 million, down $7 million from last year. Segment adjusted EBITDA margin for Commercial Truck came in at 10.7%, down 100 basis points compared to last year.

The decrease in adjusted EBITDA and EBITDA margin was driven primarily by higher material costs. These costs were partially offset by conversion on higher revenue and continued operating performance. Last quarter, we stated that higher costs associated with record markets in North America would begin to abate later in the fiscal year, and this quarter's results are showing this trend. Segment adjusted EBITDA margins improved sequentially in the Commercial Truck segment by 70 basis points from the prior quarter.

As we move into the fourth quarter, we anticipate continued improvement in North America cost performance. During the fourth quarter, we typically see a sequential step down in margins for our Commercial Truck segment given the seasonal European shutdowns. And even though we anticipate this typical margin step down in the fourth quarter, we do expect to see further benefits as our cost initiatives continue to materialize. In our Aftermarket, Industrial and Trailer segment, sales were $340 million, up 7% from last year.

The higher revenue was driven by increased industrial volumes and pricing actions we enacted earlier this year in our aftermarket business. Segment adjusted EBITDA was $54 million, an increase of over 40% compared to last year. Segment adjusted EBITDA margin grew 400 basis points to 15.9%. This growth was driven primarily by the positive impacts of pricing actions I just referenced and continuing operational performance.

Next, I'll review our fiscal year 2019 global market outlook on Slide 11. While we are closely monitoring the Class 8 North America market, we have a clear line of sight for the remainder of our fiscal year for continued strong production levels. We are, therefore, maintaining our production estimate of approximately 350,000 units. We are revising our revenue forecast for China to approximately $160 million, down $30 million to $40 million from our prior review.

As you know, we primarily support the off-highway market in China, we are seeing a deceleration of order activity, inventory reductions as well as continued uncertainty surrounding global trading conditions, which is impacting our outlook for the rest of our fiscal year. In India, we are beginning to see an impact of the transition to BS6, a new emission standard based on Euro 6. Starting in April 2020, all vehicles registered must comply with this new regulation and market participants want to ensure that current inventory can be sold prior to the adoption of this standard. This is causing us to adjust our market outlook to approximately 435,000 units, down from our previous outlook of 450,000, which, however, overall is still a very strong market for India.

Overall, we continue to see solid to strong global end markets supporting our positive outlook for the remainder of our fiscal year. Now let's turn to Slide 12 and review our updated guidance for fiscal year 2019. As we have just announced our acquisition of AxleTech, guidance assumptions now include the consolidation of results for two months in our financial statements. We expect revenue from AxleTech to be approximately $30 million to $40 million.

Additionally, we have just initiated a restructuring plan for AxleTech to start driving the synergies we expect from this transaction. Overall, we are maintaining our revenue outlook at approximately $4.4 billion as the expected step down in both China and India will be mostly offset by the incremental revenue from AxleTech. Building on the results in the third quarter, combined with continued strong performance expectations, we are raising our outlook for adjusted EBITDA margin to approximately 11.8%, up 10 basis points from our prior guidance. As a result, we expect to generate higher adjusted income from continuing operations.

Adjusted diluted earnings per share is expected to be approximately $3.70, an increase of $0.20 from our prior guidance. Our free cash flow guidance of $130 million to $140 million has been updated to reflect the approximate $48 million cash contribution we made in July for the newly formed asbestos trust as part of the bankruptcy reorganization for the nonoperating entity, Maremont. This transaction permanently derisk a portion of our balance sheet by eliminating approximately 70% of our net asbestos liabilities as measured at the end of our prior fiscal year. This transaction is just one way we have deployed the robust cash flow we are generating.

As Jay discussed earlier in the call, year-to-date, we repurchased three million shares and have just announced a new $250 million share repurchase program as we prepared to pivot to our M2022 plan. These transactions demonstrate our approach to capital allocation, which we believe is creating tremendous value for our shareholders. We are very pleased with our performance so far this year as M2019 finishes strong and we shift our focus to delivering on M2022. Now we'll take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question will come from the line of Colin Langan with UBS. Your line is now open.

Colin Langan -- UBS -- Analyst

Great. Thanks for taking my question. Any color on the aftermarket margin? It seems quite high. I mean, is this sustainable? Or is this more of a peak-type margin that we should be thinking about?

Carl Anderson -- Senior Vice President and Chief Financial Officer

Thanks, Colin. Tt's Carl. Yes, just to answer that, as far as we did reflect in what we saw was additional pricing that we enacted really over the last nine months within that business. Keep in mind that third quarter is one of our stronger performing quarters as we think about that business.

And so if you look at in past years, aftermarket tends to -- revenue begins to kind of step down a little bit in our fourth fiscal quarter as well as in our first fiscal quarter as well. So overall, obviously, we're very pleased with the results in the segment in total for the first nine months of the year, which is running about 15%. And I think as we kind of look forward that's plus or minus kind of the right area to think about for that segment.

Colin Langan -- UBS -- Analyst

Got it. And can you just think this as a follow-up, remind us of your commodity exposure. I think it was noted as the headwind in commercial vehicles. Is that -- given the significant drop off in Q2, I mean is that starting to become a tailwind? Or that...

Carl Anderson -- Senior Vice President and Chief Financial Officer

Yes. I would say if -- yes, if we think about steel in the quarter, there's a slight headwind that we saw that for the third quarter. But you're exactly right, as we look at the steel industries in North America as well as in Europe, prices have declined, and we do expect that to be a tailwind as we get into the fourth quarter.

Colin Langan -- UBS -- Analyst

Got it. Thanks for taking my question.

Operator

Thank you. And our next question will come from the line of Neil Frohnapple with Buckingham Research. Your line is now open.

Neil Frohnapple -- Buckingham Research -- Analyst

Hi. Good morning. Congrats on a great quarter. Just a quick follow-up on that last question.

So assuming that steel costs remain relatively constant between now and fiscal year-end, are you able to say what the steel cost tailwind could potentially be for FY '20 as you recover, again, I think high single-digit million headwind from this past year?

Carl Anderson -- Senior Vice President and Chief Financial Officer

Yes. I think as far as 2020, it's probably a little premature to kind of discuss what we anticipate for what we're seeing with steel. But overall, as we discussed, we are expecting that steel to be a tailwind as we think about the fourth quarter. And especially, the one thing that you're seeing from us as far as on how we're managing our inventory and working capital as that begins to come more in line, we do expect steel to, again, be a tailwind in the fourth quarter in 2020.

I think at this point, we would expect to probably give you a better update on that here in November.

Neil Frohnapple -- Buckingham Research -- Analyst

OK. And just, I believe the implied Q4 revenue and EBITDA guidance implies the decremental margin of only about 7% for the quarter, which is considerably better than the 15% to 20% flow-through range as you've historically experienced on revenue changes. And again, I realized you won't provide FY '20 guidance until November, but again, is it is reasonable to conclude that the decremental margin in FY '20 could be potentially lower than the historical range, again, excluding AxleTech as you should have less inefficiencies stemming from the peak-end market, steel recovery, et cetera, just any thoughts there even directionally at this point? And again, I understand if you want to wait until November, but just wanted to try there.

Jay Craig -- Chief Executive Officer and President

Yes, I can. This is Jay, Neil. I think it's a bit premature. We'll be giving our guidance on the next call for the 2020 fiscal year.

However, we have had several quarters where we've had detrimental margins in the single-digit range, particularly as we take layered capacity costs and other costs out of the system aggressively like we are right now. We tend to see very strong negative conversion performance. So it's not unexpected on our end seeing that, that coming through this fourth quarter.

Neil Frohnapple -- Buckingham Research -- Analyst

OK. Great. Thanks. I'll pass it on.

Operator

Thank you. And our next question will come from the line of James Picariello with KeyBanc Capital Markets. Your line is now open.

James Picariello -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys. Apologies if I missed this, but just on the updated guidance for the year, maintaining revenue, obviously you had the two months' contribution from AxleTech. Is that just the offset there, the function of lower India and China revenue?

Carl Anderson -- Senior Vice President and Chief Financial Officer

Yes. James, it's Carl. Yes, that is correct.

James Picariello -- KeyBanc Capital Markets -- Analyst

OK. And then now that you have AxleTech closed, is the expectation for that business just still have, as an initial run rate EBITDA profitability in line with consolidated -- which you consolidated?

Jay Craig -- Chief Executive Officer and President

Yes. Our expectations haven't changed. So long term, within the 2022 planning period, we expect our margins of that business to be consistent with which the segment its contained, so the Aftermarket and Industrial segment, which as Carl mentioned, we expect on average to be above 15%. Those synergies ramp up as we go through the next 12 to 24 months.

But as we have stated earlier and we are reconfirming today, we expect that business to be accretive to Meritor in our 2020 year. And I think what you're seeing even for the guidance in these two months, there's some negligible impact even in the first couple of months of bringing that business on board. And we are seeing the benefit of the diversified revenue of that business offsetting some of the weakness that Carl articulated in China and India. So overall, we're just thrilled with how the acquisitions are already playing out as we get into the business more deeply.

James Picariello -- KeyBanc Capital Markets -- Analyst

Got it. And then just at a higher level, obviously, within your M2022 strategy, this upcoming downturn in the North America market, you've got confidence in your Meritor's ability to expand margins. As we approach this next quarter and the cycle is about turn potentially here, just at a high level, what actions do you have in place or do you have in the near term to really get the cost control momentum starting up as the cycle does turn?

Jay Craig -- Chief Executive Officer and President

We can point to a couple of things you're already seeing. What you saw in this past quarter, if I take from a cash flow perspective, we improved our inventory turn, it's almost a full turn this past quarter. So I think the team has really shown their ability to manage working capital at a very to high degree of excellence. So you're already seeing that performance.

Also in the guidance, as it was mentioned on a previous question, the single-digit negative conversion is just another indication of how we're executing plans to deal with the impact of potentially reducing end-to-end markets. So it's the typical things that we, at Meritor, have shown excellence in managing before. We manage our fixed costs aggressively during downturns, and we also go after variable costs through material costs reduction and labor reduction as well. So we feel highly confident in our '22 targets.

And I think you're already starting to see the seeds of those performance results coming through.

James Picariello -- KeyBanc Capital Markets -- Analyst

Yes. Sure. Thanks.

Operator

Thank you. And our next question will come from the line of Alex Potter with Piper Jaffray. Your line is now open.

Alex Potter -- Piper Jaffray -- Analyst

Yes. Thanks, guys. I had a question on aftermarkets that also related to, I suppose, the Class 8 cycle rolling over. If we have utilization in the Class 8 truck fleet start to decline as would normally happen at this point in the cycle, is there the possibility that you could have a quarter or two where the aftermarket channel destock, then you end up getting sort of a onetime sales and margin impact as a result of that?

Jay Craig -- Chief Executive Officer and President

That's a very good question, Alex. We certainly saw that during the '08, '09 downturn. That was so severe. We saw trucks parked and people cannibalizing from those parked vehicles to service operating vehicles.

I think at a normal downturn, that usually doesn't happen because of the incremental cost of having to strip the vehicle and then refit the vehicle. So we may see a slight step down just because of miles run, but I don't think we expect to see that almost one-term anomaly in '08, '09. Obviously, the AxleTech acquisition and the off-highway and defense diversification, we think we'll provide a strong offset to that in our aftermarket business as well as the OE. So it's one of the reasons we are so focused on acquiring AxleTech and excited to have them in the family.

Alex Potter -- Piper Jaffray -- Analyst

OK. That's helpful. And I guess, the other question is the capital allocation question. Good to see the doubling down on the buyback there.

Should we, I guess, interpret that to mean that you're going to hit the pause button on the M&A side now that you got AxleTech, you're going to focus on integration there? Or do you see other holes in the portfolio or uses of cash in an M&A context that are still sort of high and parity with?

Jay Craig -- Chief Executive Officer and President

Yes. I think we feel satisfied with what our business portfolio makeup is right now. As we mentioned, AxleTech was on our radar for a number of years. And that was really the large acquisition for us we were focused on.

And we feel satisfied with the diversification that's provided. And we'd really like to focus over the next couple of years on just realizing all the benefits we can achieve out of that acquisition. There maybe some minor changes in investments in businesses that we already have investments in, such as TransPower and others, as we provide capital to them to continue to grow, but nothing that should prevent us from executing our capital allocation strategy we've laid out.

Alex Potter -- Piper Jaffray -- Analyst

OK. Thanks. Good quarter.

Operator

Thank you. And our next question will come from the line of Joe Spak with RBC Capital. Your line is now open.

Joe Spak -- RBC Capital Markets -- Analyst

Thanks very much. You guys used to have a rule of thumb that should every 5,000 Class 8, which was about $20 million in revenue to Meritor. And if you look at sort of what happened this quarter would have suggested revenue would be about $60 million higher year-over-year in that segment and it was obviously lower. I know you started talking about some offsets from FX or maybe some other regions, but the discrepancy still seems large.

So I'm wondering if I'm missing something else or maybe that sensitivity doesn't work anymore. Any color there?

Jay Craig -- Chief Executive Officer and President

Yes. It's good observation. There is obviously the FX impact primarily coming out of Europe, which was quite significant. The euro obviously depreciated against the dollar markedly this past quarter, so that had a big impact.

There was some small step back in share in North America, which we anticipated. As we've talked about throughout this year, we felt some pretty large voids in the marketplace with our capacity. We believe that has led to a step function increase in market share, but we always anticipated it would step back a little bit from the peaks, and that was the understanding with our customers as we took that on. But we still think we've gained more long-term market share through any future downturn in North America.

So just a small step back. But as you look at the puts and takes, it was the FX and a little bit of step down in North America, but we're still well above the 70% market share penetration. That is a record for Meritor historically.

Carl Anderson -- Senior Vice President and Chief Financial Officer

And Joe, just to add on, I think in the other market that we did see some weakness in as well. So it was China and that's obviously reflected within the guide for the year as well.

Joe Spak -- RBC Capital Markets -- Analyst

Yes. OK. That's helpful. And then secondly, just on the, I guess, the CT margins, I was just wondering if you could provide a little bit more color or breakout on sort of material costs because you didn't say conversion was a little bit of an offset, but within that you still have some the higher inefficiencies, the layered capacity from being at such a high level.

So I guess, what I'm trying to understand is some of those factors underneath just so it's earlier question as we sort of think about a potential rollover, like, I guess -- I know you guys haven't explicitly said this, but it seems like your margins are being held back just by the sort of strong level of demand, and what I'm trying to understand -- better understand, I guess, is where margins could end up as sort of the volume comes back down?

Jay Craig -- Chief Executive Officer and President

That's a good question. Obviously, again, we're not providing guidance for next year. But as we mentioned on last quarter's call, we expected to step down at layered capacity and expedited freight to occur in the fourth fiscal quarter of this year for the truck segment. We are pleased that actually that step down started to occur in the third quarter, and we still see additional benefit in the fourth fiscal quarter, but it happened several months earlier than we originally anticipated.

Teams did a great job of working our global network a bit more efficiently, more rapidly than we expected.

Joe Spak -- RBC Capital Markets -- Analyst

And just procedurally like with the layered capacity when you sort of need to flex down, like how quickly can that happen, like, are there some costs associated with even sort of taking down that layered capacity?

Jay Craig -- Chief Executive Officer and President

The costs are really pushing really back in my career in accounting as should that is as some of these costs are in inventory. So as we're running our inventory banks out, we are matching that higher inventory cost basis against some revenue. And that's why we're so confident we see the step down because the new purchase -- materials going inventory, we see that step down compared to the historical parts in there. So that's why we feel that, that step down in cost will step up more aggressively in Q4.

Joe Spak -- RBC Capital Markets -- Analyst

OK. Thank you very much.

Operator

Thank you. And our next question will come from the line of Brian Johnson with Barclays. Your line is now open.

Brian Johnson -- Barclays -- Analyst

Good morning. All right. I want to understand a bit better about AxleTech. We see -- we heard the numbers from the call and I see what their end markets look like in the diversification that provides, but what really are they bringing in terms of potential product? A few questions, how would you characterize their core product line? Second, are there any product lines that would get wound down that came in that $250 million of revenue? And then on the other side, are there any strategic technologies, not just end markets, that AxleTech is bringing to the table?

Jay Craig -- Chief Executive Officer and President

Sure. Yes. Good question, Brian. First, we don't see significant cannibalization between our two portfolios.

That was one of the most attractive things about the company. There's not a lot of overlap. And what they bring to the table, firstly, it's their significant concentration in the defense industry, particularly in Europe, which has been a tough market for us to penetrate organically. They've developed a very good drivetrain -- independent drivetrain solution that's interchangeable with a lot of nation's vehicle designs.

And so that has been engineered to a lot of different countries' military vehicles. And it was tough for us to break that right now. We also purchased the electronic vehicle intellectual property for off-highway and defense. And that will eliminate some additional spending we're potentially having to incur there as we pushed our electric drivetrains across the portfolio.

And then lastly, one of the great engineering synergies, which will come in the latter part of the integration as the carrier included in the housing can be use our common architecture. For example, in many applications we can use the largest produced carrier, our 14X, and use it in their applications, which will generate performance improvement of the product, but just as importantly, some pretty significant cost reduction. So again, that's why we're so excited about the acquisition that just fits in very well with us and the synergies are very clarifying to us.

Brian Johnson -- Barclays -- Analyst

And -- but the synergies you're talking about more till 2022, which are cost synergies, is there some concerns there?

Jay Craig -- Chief Executive Officer and President

No, there's a lot. We actually have already executed on some already when we took control of the business on Monday. So as I have mentioned their corporate headquarters is down the street from ours, about a mile away. Our plan is to merger their -- that employee base into our corporate office and garner those synergies very, very quickly.

And then we'll be looking at the others over the next couple of years.

Brian Johnson -- Barclays -- Analyst

OK. Thank you.

Operator

Thank you. [Operator instructions] Our next question will come from the line of Ryan Brinkman with JP Morgan. Your line is open.

Ryan Brinkman -- J.P. Morgan -- Analyst

Hi. Thanks for taking my question. As you are reiterating the FY '19 North America having medium-duty commercial truck end market expectations as expected. I think, toward the start of the year, you had anticipated some softening in the final fiscal quarter, but then saw some greater resilience. Do you have any look ahead to the beginning of FY '20 at least whether the strength that has continued in F 4Q could last somewhat longer?

Jay Craig -- Chief Executive Officer and President

Again, we're not providing guidance, but there are some -- quite frankly, not saying anything people don't know, some concerning signs in the order activity. Order activity, we're seeing some step up in cancellations. So we're looking at plans to deal with that market if it begins to soften in our 2020 fiscal year. And we'll be prepared to incorporate those plans into the guidance we'll provide in November.

But we're watching it very, very closely.

Ryan Brinkman -- J.P. Morgan -- Analyst

OK. And I appreciate the AxleTech synergies are 6% of the revenue, which is solid. Can you comment on how the existing margin profile of AxleTech compares to your base business? And then also on AxleTech, relative to their defense business, clearly this does reduce the cyclicality for the whole business relative to linehaul. Sometimes defense can be lumpy too though like we saw with MRAP, so can you talk about which defense programs that AxleTech is on and when those programs come up for bid again?

Jay Craig -- Chief Executive Officer and President

Well, I'm not able to get into the details of the specific programs. In terms of the margin, again, our target is to have the margin be equivalent to the aftermarket and specialty segment when these synergies are executed. So we expect it to be a margin left overall to Meritor in total. As far as the defense programs, you're right, the U.S.

defense programs are very binary and extremely large in volume. What's great about AxleTech, as I mentioned earlier, is a lot of their defense programs are across Europe and other regions of the world that tend to be smaller individually, and so that we think the revenue base could be more stable than what we're seeing out of U.S. programs.

Ryan Brinkman -- J.P. Morgan -- Analyst

I see. Very helpful. Thank you.

Jay Craig -- Chief Executive Officer and President

Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session for today. So now it is my pleasure to hand the conference back over to Mr. Todd Chirillo, senior director, investor relations, for any closing comments or remarks.

Todd Chirillo -- Senior Director, Investor Relations

Thank you, Brian. This concludes Meritor's third-quarter 2019 earnings call. If you have any questions, please feel free to reach out to me directly. Thank you.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Todd Chirillo -- Senior Director, Investor Relations

Jay Craig -- Chief Executive Officer and President

Carl Anderson -- Senior Vice President and Chief Financial Officer

Colin Langan -- UBS -- Analyst

Neil Frohnapple -- Buckingham Research -- Analyst

James Picariello -- KeyBanc Capital Markets -- Analyst

Alex Potter -- Piper Jaffray -- Analyst

Joe Spak -- RBC Capital Markets -- Analyst

Brian Johnson -- Barclays -- Analyst

Ryan Brinkman -- J.P. Morgan -- Analyst

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