Meritor, Inc. (NYSE:MTOR)
Q4 2016 Earnings Conference Call
November 16, 2016 10:00 ET
Carl Anderson - Vice President and Treasurer
Jay Craig - President and Chief Executive Officer
Kevin Nowlan - Senior Vice President and Chief Financial Officer
Faheem Sabeiha - Longbow Research
Ryan Brinkman - JPMorgan
Justin Barell - Citi
Brady Cox - Stifel
Good day, ladies and gentlemen and welcome to the Meritor Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Carl Anderson, Vice President and Treasurer. Sir, you may begin.
Thank you, Crystal. Good morning, everyone and welcome to Meritor’s fourth quarter and full year fiscal 2016 earnings call. On the call today we have Jay Craig, CEO and President and Kevin Nowlan, our Senior Vice President and Chief Financial Officer. The slides accompanying today’s call are available at www.meritor.com. We will 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 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 risk that could affect our results. To the extent we refer to any non-GAAP measures in our call, you will find the reconciliation to GAAP in the slides on our website.
Now, I will turn the call over to Jay.
Thanks, Carl. Good morning, everyone and thanks for joining the call today. Through the efforts of our leadership team and each of our employees, we made tremendous progress over the past 3 years to fundamentally improve the financial results of the company. We believe this progress positions us to grow our top line and further improve our profitability as outlined in the M2019 plan that was introduced to you close to a year ago.
Let’s look at our results for the full year. You can see the highlights on Slide 3. We achieved an adjusted EBITDA margin of 10.2%, adjusted diluted EPS from continuing operations of $1.64 and free cash flow of $111 million. As you know, we have now successfully completed our M2016 plan. Over the past 3 years, we achieved a 300 basis point increase in EBITDA margin, reduced net debt, including retiring liabilities by $459 million, generated new business wins of $486 million and repurchased, in total, 12.8 million common shares representing 13% of total shares outstanding. These financial results speak to the level of transformation we have demonstrated by aligning the organization and staying focused on a clear set of objectives.
You have seen Slide 4 many times, but we wanted to use it again to drive home our actual performance versus targets. Throughout M2016, we emphasized the adjusted EBITDA margin target, because we felt it was the most important. Remember, when we launched our plan in 2013, our margin was in the low 7% range. We knew that a 300 basis point improvement within that timeframe was an aggressive target, but we also believe we could achieve it. As you can see, our margin trajectory has been substantially resulting in us exceeding our target of 10%. This level of margin improvement speaks to the work we did to improve our overall performance even as we experienced the volatile end markets inherent in the heavy duty trucking industry.
Our second M2016 target was to reduce leverage by more than $400 million. We achieved that target earlier than expected by the end of fiscal year 2015 and have stayed at relatively the same level as we directed more of our free cash flow toward capital investments to drive revenue and share repurchases in 2016. As you know, our M2016 revenue target was to increase our booked revenue by $500 million of run-rate. You can see on the chart we achieved $486 million or 97% of our target, with new business in all regions. We are proud of this accomplishment because all $486 million represents business that we earned through an unwavering commitment to building customer relationships, improving our product development process and making sustainable improvements in quality, delivery and cost. This target was also very aggressive when we said it 3 years ago. By accomplishing it, we demonstrated we understand the levers that can drive growth for Meritor.
Slide 5 recaps some of the business we have been awarded over the past 3 years and the very important long-term contract renewals as well. In addition to the wins we have already told you about on this slide, today, we are happy to announce the renewal of our agreement with Volvo in Europe to supply air disc brakes. With this award, we maintained 100% of European and Australian air disc brake share for Volvo renewals heavy truck and bus applications and introduced this proven technology to the Japanese market. Leading up to this renewal, Meritor and Volvo worked closely together to introduce brakes that are best-in-class for rates and performance. This contract was driven by our team in the UK where we have made meaningful investment to ensure our brake engineering, testing and manufacturing capabilities are among the best in the industry. The wins on this slide represents the high demand for Meritor’s market leading products that we continue to improve with investments in talent and technology. As a result, we added close to $500 million of incremental business to our run-rate in just 3 years and we plan to do roughly the same over the next three.
Let’s turn to Slide 6. As we have told you, we believe the pace of new product introduction is a key element to maintaining our strong customer relationships and growing revenue. During M2019, we plan to launch a total of 20 new products in the next 3 years. These include axles and brakes for on and off highway applications globally. From concept to production, we are making smart investments across the company to ensure we are able to offer product solutions that keep pace with the constantly evolving commercial vehicles our customers are designing and manufacturing.
We have recently completed a 70,000 square foot renovation of our global technical center at our headquarters in Troy, Michigan. This – in this center, collaborating with our customers is fundamental to do product development. This renovation is another example of our renewed commitment to market leading product innovation.
With that, I will turn it over to Kevin for more detail on the quarter and our outlook for the 2017 fiscal year.
Thanks, Jay and good morning. On today’s call, I will review our fourth quarter and full year financial results and then I will take you through our 2017 guidance. Overall, the key takeaway from our results is that we delivered on our financial commitment to shareholders and intend to continue to drive this level of performance as we look ahead to M2019.
Let’s turn to Slide 7, where you will see our fourth quarter income statement compared to the prior year. Sales are $728 million in the quarter, down nearly 15% from last year. The lower revenue was primarily driven by weaker production in North America with the Class 8 truck market declined by 35% year-over-year. This revenue decline also drove gross margin lower by $24 million. SG&A was $38 million in the fourth quarter, lower than the $56 million we reported a year ago. This $18 million improvement was primarily driven by various legacy asbestos insurance settlements we executed this quarter. I will discuss these in more detail shortly.
Next, we had higher restructuring costs primarily related to employee severance. Due to the softening of the market in North America, we have undertaken various targeted headcount actions globally to better align our cost structure to the current revenue environment. But at the same time, we have maintained our commitment to investing in resources that directly support our various M2019 revenue growth initiatives. Further beyond the income statement, you will see that we reported significant good news in our income tax line item. This is primarily due to the reversal of $405 million in valuation allowances in the U.S. I will discuss this benefit and the future impact on our tax position on the next slide. When you adjust for this valuation allowance reversal and other items, you will see that our adjusted income from continuing operations was $30 million, down $8 million from last year. That translates to $0.34 per diluted share, down $0.06 from 2015.
On Slide 8, we provided more detail on the valuation allowance reversal. Due to our sustained profitability in the U.S., we determined that we will be able to utilize a substantial portion of our deferred tax assets, including net operating loss carryforwards. As a result, we reversed a portion of the valuation allowance, which resulted in a non-cash income tax benefit of $405 million. We now expect to have a higher book tax rate going forward. That’s because we will now start recording tax expense as we generate earnings in the U.S. While our book tax expense and the corresponding effective tax rate will be higher, we still have more than $500 million in net operating loss carryforwards that will mitigate cash taxes over the coming years.
Overall, nothing has fundamentally changed from a cash tax payment perspective. We have not paid any meaningful amount of U.S. cash taxes for many years now and we do not anticipate paying meaningful amounts through the M2019 planning horizon. That’s the reason we have been adjusting our non-cash tax expense associated with the utilization of our deferred tax assets when reporting adjusted earnings per share. As we utilize these U.S. deferred tax assets to offset our tax expense, our GAAP earnings will decline, but our non-cash tax adjustment will increase by an identical amount to reflect the cash benefit we are realizing. You can see the impact on this slide. Our expectation is that our non-cash tax adjustment will increase from $0.14 per diluted share in 2016 to a range of $0.30 to $0.40 per diluted share in 2017.
On Slide 9, I wanted to provide more details on our legacy asbestos expense and discuss the significant accomplishments we achieved this year. In the fourth quarter, we executed two separate settlement agreements with insurance carriers that we have been in litigation with for more than 10 years. Pursuant to the terms of the first settlement agreement, we received $32 million in cash from an insurer, of which $10 million was recognized as reduction in asbestos expense in the quarter because it represents the recovery of a portion of actual defense and indemnity costs previously incurred. The remaining $22 million was recorded as a liability since it is required to be returned to the carrier if additional future asbestos expense over and above our recorded liability is not ultimately incurred. In the second settlement agreement, we recorded a $12 million receivable to reflect expected reimbursement of defense and indemnity payments over the next 10 years under a coverage in place arrangement with that insurer group.
Separately, we also recorded a $9 million reserve related to a disputed insurance receivable where collection is at risk. We are continuing to pursue litigation against the insurer and hope to eventually drive to a successful resolution as we did with the other insurers this past year. On the right hand side of the slide, you can see a history of our asbestos expense over the last few years. In 2014 and 2015, this expense was $30 million and $19 million, respectively. These latest insurance settlements allowed us to drive good news into our P&L in FY ‘16 and has significantly mitigated the likely impact of asbestos costs as we look ahead. From a cash flow perspective, we generated $52 million from asbestos insurance settlements in 2016, which helped to drive our free cash flow performance in the year. We don’t anticipate similar cash settlements next year, so our overall cash flow will be impacted on a year-over-year basis, but you can see that the expected impact of asbestos on the company’s cash flow should be modest next year.
Slide 10 details fourth quarter sales and EBITDA for both of our reporting segments. In our Commercial Truck & Industrial segment, sales were $541 million, down 17% from the same period last year. The sales decrease was driven by lower production in North America, as Class 8 truck production was down almost 30,000 units or 35%. Our new business wins helped to mitigate the full impact of this market decline. Segment EBITDA was $39 million, a decrease of $6 million compared to the prior year. Segment EBITDA margin was 7.2% in the quarter, up 30 basis points from last year. Our downside decrimentals were only 6%, which reflects our continued strong performance in managing material labor and burden costs as well as the benefit from asbestos insurance settlements, the bulk of which is included in this segment.
In our Aftermarket & Trailer segment, sales were $212 million, down 8% from last year. This decline was primarily driven by softer market conditions in North America. Segment EBITDA was $29 million, down 22% over last year. Segment EBITDA margin was 13.7%, a decrease of 230 basis points from last year. The declines in EBITDA and EBITDA margin were due to lower revenue and unfavorable product mix. However, this 13.7% margin performance is in line with what we have previously told you to expect for this segment.
Let’s move to Slide 11, which compares our actual results for the full year 2016 to 2015. As you can see, we expanded adjusted EBITDA margin by 70 basis points, even as revenue declined by more than $300 million. For the full year, the strong U.S. dollar provided both the revenue and adjusted EBITDA headwind. This impact began to moderate in the second half of the fiscal year. However, it’s still accounted for a $78 million impact of revenue and $39 million impact to EBITDA. You can see the balance of the revenue headwind coming in the line item for volume, mix, performance and other, where revenue was down $228 million. Ordinarily, at 15% to 20% down cycle conversion, you would expect to see a negative impact on adjusted EBITDA of $35 million to $45 million. Instead, in the face of this significant revenue decline, we are showing a positive $2 million of adjusted EBITDA. We achieved this through a combination of lower steel cost and our continued focus on driving material labor and burden performance through our M2016 initiative. And SG&A expense was $30 million lower, driven primarily by the significant benefits we achieved from the asbestos insurance settlements that I discussed earlier.
All of this resulted in adjusted diluted earnings per share of $1.64, up 3% from 2015. In spite of the lower global production environment we experienced this year, we still expanded earnings per share. This was driven by the strong earnings we already discussed as well as our stock buyback program that resulted in 8.7 million common shares being repurchased in 2016. And finally, we had strong free cash flow performance. In 2016, we generated $111 million of free cash flow, up from $18 million in 2015. As I mentioned previously, we did benefit more than $50 million from asbestos insurance settlements that helped drive strong cash flow results. Also, as we compare these results to 2015, remember that we have made $94 million in voluntary contributions to fund annuity purchases that settled certain pension obligations last year. So when you adjust for these pension contributions, you can see that we have effectively driven free cash flow of more than $100 million for two consecutive years.
Next, I will review our fiscal year 2017 market outlook on Slide 12. We continue to believe we are in the midst of an inventory correction in the Class 8 truck market and that it will persist through at least the first half of our 2017 fiscal year. Excess capacity and low used truck prices continue to put downward pressure on orders and bills. As a result, we are projecting North America Class 8 production of 190,000 to 210,000 units in 2017, down 17% to 25% from 2016 levels. In addition, we expect the aftermarket sector in North America to be roughly flat in 2017. Europe should be relatively stable as economic indicators continue to show solid freight fundamentals in Western Europe in 2017. Looking to Asia, we expect our revenue from China to be roughly $100 million again in 2017. And in India, we are seeing some moderate growth, as economic conditions continue to improve in that market. Our outlook for Brazil is that the market will be up slightly. As we have indicated in the last couple of quarters, the market has been relatively stable, albeit at very low volume levels. So if we do see an up-tick in the second half of 2017, this would obviously, be a welcome development.
Based on these demand assumptions, you can see how that translates to our fiscal year 2017 outlook, which is summarized on Slide 13. We expect sales to be between $3.0 billion and $3.1 billion, down 3% to 6% compared to 2016. We anticipate that the production decline in North America will be partially offset by the incremental new business wins that we expect to be in the P&L in 2017. Due to the decreased revenue outlook, we expect our adjusted EBITDA margin to decline slightly and be in the range of 9.6% to 10.0%. We can see with this guidance that we remain focused on preserving the margin we worked so hard to achieve in 2016. This will be our priority as we operate in the challenging market environment in 2017.
Embedded within our full year margin outlook is our expectation that our first quarter EBITDA margin will be in the 8% range due to the quarter having the lowest level of Class 8 production for the year as well as the seasonal impact we typically experienced in this particular quarter with fewer selling days. As a result of the lower revenue and margin outlook for the full year, we expect our adjusted diluted earnings per share to step down to a range of $1.25 to $1.40.
And finally, we anticipate generating free cash flow of approximately $50 million to $70 million. The good news is that we are able to achieve this level of free cash flow even after contemplating another $90 million of capital expenditure in 2017 to support our M2019 growth and operational performance initiatives.
Now, I will turn the call back over to Jay to provide closing remarks.
Thanks, Kevin. Let’s turn to Slide 14. With regard to our M2019 financial targets, we wanted to take the opportunity to review those with you again. On the left side of the slide, you see our objectives. Overall, we plan to grow revenue by more than 20% cumulatively above the market. Relative to that, we have achieved 3.6% growth through the end of fiscal year 2016. We also intend to drive diluted earnings per share increase of $1.25 over this timeframe. This is really the ultimate measure of M2019’s success, delivering bottom line earnings, improvement to our shareholders.
On the right side of the chart, we provide a whack starting from our fiscal year 2017 EPS forecast. Here we have highlighted the main drivers we believe will provide the path to earnings per share of $2.84 in fiscal year 2019. First, our expectations are that the Class 8 truck market in North America will normalize over the next few years. Even though we expect to see volumes hover around 200,000 units in fiscal year 2017, as Kevin said, we believe the market will rebound once an inventory correction occurs and return to levels closer to 250,000 units. At a 15% to 20% conversion, this alone should provide approximately $0.35 to $0.45 per share improvement. And as volumes begin to increase, we will convert on that upturn like we did in 2014 and 2015.
We also plan to outperform the market with new business wins. That’s the focus of M2019, profitable revenue growth. Last December, we told you we had a pipeline of opportunities that totaled around $900 million. We have established a historical precedent for hitting close to a 50% target rate on identified new business. Assuming we achieve 50% like we did in M2016, we can anticipate $450 million in growth. That translates to $0.60 to $0.80 EPS growth. Also remember, this includes approximately $100 million in carryover from the M2016 programs that will begin to hit in 2018, which is highlighted in the blue portion of the bar.
So, where will this new business come from? As we have said, we will be launching new products that our customers need. We will continue to broaden our relationships with strategic customers. We are taking actions to increase our aftermarket share. We will expand our components business and we will enter certain near adjacent markets. We will also continue to aggressively manage product cost and deploy capital. Although we plan to focus more of our resources on growing the business which will account for the majority of our EPS improvement, operational performance will still be a contributor as well capital deployment to reduce debt and equity.
To summarize, we believe that our new business initiatives, a slight market recovery in our major end markets and operational performance as well as efficient deployment of our capital will drive the improvement in EPS we are targeting over this timeframe. Even though we are currently in a trough in both North and South America, we are generally maintaining our EBITDA margin performance in our fiscal 2017 guidance. We are not stepping back. We generated more than $1.20 EPS improvement during the M2016 plan and we will do it again. We have reduced net debt, including retirement liabilities, by more than $400 million in just 3 years. But we are still focused on achieving our ultimate leverage objective of a strong BB credit rating.
In 2013, we identified those areas we most needed to improve upon in order to achieve the financial results we wanted and ultimately to prepare the company for growth. We have then aligned ourselves within those areas and we are able to create significant change in the company. We look forward to doing the same in the next 3 years. I have the same level of confidence in achieving our M2019 objectives that I did for M2016. We have demonstrated our ability to deliver on those commitments. We are a different company today.
Now, let’s take your questions.
Thank you. [Operator Instructions] And our first question comes from Neil Frohnapple from Longbow Research. Your line is open.
Hi, good morning. This is actually Faheem Sabeiha on the line for Neil.
Good morning. So regarding your outlook for FY 2017, can you provide a walk from the nearly $3.2 billion in sales delivered in FY ‘16? I mean, how much of the decline is anticipated to be caused by a lower market? And can you quantify how much from new business wins already announced are expected to contribute to revenue next year?
Yes, this is Kevin. I can take that. I mean, big picture the way to think about it, if you look at our Class 8 market assumptions and remember every 5,000 Class 8 trucks translates to about $20 million of revenues for us. If you look at what’s implied by our range of 190,000 to 210,000 that suggests that revenue should be down about $175 million to $250 million. And so if you take that down and then you add back about $70 million of our M2016 wins that we expect to come into the P&L this year that gets you effectively to the range that we are giving on guidance.
Okay, thanks. And what are some of the cost levers you can pull in the event that North American Class 8 demand is significantly below expectation in FY ‘17? I mean, can you just talk about your confidence and your ability to hit the 9.6% to 10% EBITDA margin target range and weaker than expected end market demand environment?
Yes. I mean, in terms of cost management, I mean, there is already a lot of effort that we put in to delivering cost performance over the past few years. We have taken some headcount restructuring actions that I mentioned in my remarks, which is helping to mitigate the impact of lower revenue next year and we continue to drive performance initiatives as we have successfully done ‘13, ‘14, ‘15 and ‘16. So, we are continuing to drive those in the P&L. If there is further pressure on top line or other things, we always continue to look at our cost structure and ensure we manage accordingly to make sure we are achieving our margin objectives.
Okay, thanks and I will hop back into queue.
Thank you. Our next question comes from Ryan Brinkman from JPMorgan. Your line is open.
Great, thanks for taking my question. In your remarks on the 2017 market outlook, you noted the over-inventory position, pressure on Class 8 builds, etcetera all likely softer than when M2019 was first introduced likely some of the emerging markets are softer to versus when you rolled out the out-year target? So, I mean the question really is what are the implications of the softer maybe top line and earnings in FY ‘17 probably relative to your original plan? I know you didn’t break out progression of the year, so I imagine – what is the implication of that on ability to hit M2019 targets? Are the issues impacting FY ‘17 really all cyclical in nature? And then does that mean that the markets disproportionately bounce back or maybe said differently, are your end market assumptions in M2019 – in fiscal 2019 unchanged?
This is Kevin. I will take that. I mean, ‘17, in and of itself doesn’t have a huge impact on the way we think about ‘19. You think the biggest market that really drives us is the Class 8 truck market and our expectation is that as we look ahead to ‘19 that we will return to a more normalized market, which is what effectively was underlying our M2019 guidance. We don’t have a crystal ball to know with certainty what the market is going to be, but our outlook for that hasn’t changed. And I think our expectation is actually still even below what we see from the external publications for what they are thinking about ‘19. I think the only market that’s probably a little bit softer at this point than what we had hoped or anticipated at this point that could have a carryover effect is the Brazilian market, but that’s – at the end of the day, this market is, I mean, for us has declined to about a little over $100 million, $130 million or so of revenue. So, the lost opportunity upside on that isn’t dramatic as we think about how it impacts M2019.
Okay, great. Thanks. And then if I were to kind of take the midpoints of your FY ‘17 revenue and margin guidances, it seems to imply a roughly 19% decremental, maybe like a $28 million decline in EBITDA and $150 million revenue or something, that’s pretty typical of most of the suppliers I cover, although you guys have been doing a lot better than this on cost saves, if you could kind of strip out all of the various different items that impact the comparability between ‘16 and ‘17, like asbestos or other items, what is the kind of underlying contribution margin on lower revenue from volume?
Yes. You are exactly right. I mean we have managed our decrementals successfully mainly through manual labor and burden performance, among other things. When you think about what’s really underlying this, you are right in terms of the math that you are doing. A couple of things aside from volume that you need to keep in mind, one is we highlighted on one of the chart, asbestos is the headwind of about $14 million year-over-year. So that’s a negative that’s embedded in those decrementals. Second, steel index movements and the give back of pricing to customers will be a headwind of more than $10 million on a year-over-year basis for us. And so, those are two headwinds embedded in those decrementals and those are effectively being offset by continued strong material labor and burden performance, similar to what we have done in the last 4 years.
Okay, that’s helpful. Just last question is if you had any chance to think through the potential implications of the Supreme Court’s M&G Polymers case as it relates to your OPEB obligations and expense, can you kind of walk us through your view of that case, what it could potentially mean for Meritor, I ask because your OPEB liabilities are so material relative to your market capitalization?
Well Ryan, we did, as we had mentioned in one of the road shows we have gone. We had terminated back in July our mediation with the UAW and filed for rehearing with the six circuit of our case. The six circuit agreed to hear our case. We actually had a hearing in October and now we are waiting for a ruling on that, which could take a number of months before we hear back. And of course, it’s litigation, so there is no telling how it can play out.
Okay, I appreciate it. Thank you.
Thank you. Our next question comes from Itay Michaeli from Citi. Your line is open.
Great. This is actually Justin on for Itay. Thank you, guys. And so I just want to drill on to Ryan’s question a bit more. So on the 2017, on the commodity side of the equation, how much is actually coming from steel, do you have – in terms of the year-on-year comp on the margin profile, how much of the headwind actually is coming from index?
Yes. Net and when I give the number, I am giving a number index net of give back to the customers, but net is north of $10 million. I mean I would mention it probably in the $10 million to $15 million range is the right way to think about it on a year-over-year basis. Sequentially, it’s not getting any worse relative to where we are right now. We saw a lot of the bad news already coming in in our Q4 results and it’s not expected to deteriorate from there. But when you look at a pure year-over-year basis, it’s a $10 million to $15 million headwind for us.
Perfect, that’s very helpful. And then – so obviously, in the commercial truck segment, you guys did have a bit of a benefit with respect to the asbestos, when we think about the decremental though, it’s still that 15% of 20%, right, that’s the – I think you mentioned 6%, which had some benefit from the asbestos side of the equation, but when we think about that on a year-on-year comp, the majority of the delta would be coming from that segment and the decrementals roughly range around that 15% to 20%, is that the right way to be thinking about it?
I think that’s exactly right.
Okay, perfect. And then just two more quick questions, I guess the first one on the ‘17 quarterly cadence, is there anything outside and I know you spoke about briefly before, the first two quarters kind of more continued on the softer Class 8, but when we think about the cadence for the rest of the year, is there a typical seasonality, is that the right way to be thinking about it?
I think so. I mean we expect Q1 to have typical seasonality with fewer selling days, combined with the fact that we expect the weakest quarter for the Class 8 truck production to happen in the first quarter. And so we do expect revenue to be pretty soft in the first quarter, which is really what’s weighing on our margin outlook for the first quarter being closer to 8%. Then we expect two things to happen. We get normal seasonality, which drives second and third quarter for us to be our stronger quarters, combined with the fact that in the back half of the year, we expect the Class 8 truck market to begin the recovery. And there has been a little bit in Brazil as well.
Very helpful. Then just one last one on the 2019 – M2019 plan, so you guys identified about $900 million of new business opportunity in that risk adjusted number, I think it was in that $450 million range and I know that’s kind of focused on adjacent opportunities, but I just wanted to check in on the progress on that and see how you guys stand in the confidence that you guys have on those numbers?
Yes. Justin, I would say, this is Jay, the progress we have seen to-date is probably very similar to what we saw in M2016, it’s not our organization is probably stronger around that, because we have three full years of experience on how to grow revenue. And the other piece I would mention is the significant increase in cadence of new product launches. That’s clearly starting to hit right now, which will be, in my opinion, one of the largest drivers in revenue growth. And as I mentioned on the call, also keep in mind, there is $100 million of that number that’s well over – from what we have already booked for M2016.
Perfect. Very helpful. Thank you, guys so much. I will jump back in the queue.
Thank you. [Operator Instructions] And your next question comes from Brady Cox from Stifel. Your line is open.
Hey, good morning. Thanks for taking my questions. I just wanted to ask first maybe about the 20% revenue out-performance target again, can you just give a little bit more detail maybe if some of the new product launches are going to be the biggest driver, is there any more detail you can give there on sort of markets or specific products that might be the biggest drivers or any markets that you are expecting to be able to sell doing larger amounts?
Well, it takes some of the products that we look at, particularly as we are directing more product development into off-highway and component products. It will be significant drivers. Also, with the launch of the 13X, this is really the first time we have had a dedicated axle directed at the medium duty truck market. So we have a high degree of optimism about our ability to win share in that marketplace as well with that product. And also with the launch of the DUALite products in China, we have a really market focused low class axle directed at the Chinese on the highway market that we are very bullish on as well.
Got it, that’s helpful. And then I guess maybe sort of a different question, in sort of large truck production market in North America, you referred at least some initial commentary, about pricing at the OEMs being or becoming more aggressive, are the OEMs pushing any harder on price of components and has your pricing seen any impact from that yet?
Well, I think as you know, our pricing is really locked in as part of our long-term agreements. And so we have been very successful for the last 3 years of negotiating renewed agreements and the new agreements, such as those with PACCAR. So our pricing tends not to fluctuate other than the impact of steel price commodity changes in the short-term in terms of the pass-through mechanisms related to those steel pricing components of our contract.
Got it. And then maybe I will just finish with one more tactical one, in the 2017 guidance, it doesn’t imply any share repurchases, is that intentional and that maybe the focus is on paying down debt next year or just conservatism is baked into the estimate for next year, can you just talk about that?
You are right. We have not baked in any assumption of share repurchases, but if you look at our M2019 capital priorities, remember there are four things we are looking at. There is maintaining strong liquidity, there is driving toward our BB credit metrics, returning 25% of free cash flow to shareholders through the buyback program and supporting our strategic growth initiatives. The first one in terms of bolstering or maintaining strong liquidity, there is nothing else that we think we need to do to support that objective. We already have the liquidity level we are targeting, so it’s really a question of how we support the other three. And as we look ahead to the year, we are going to look at those things opportunistically, whether it’s debt equity or supporting strategic growth. And we would expect as it relates to those capital structure pieces, debt and equity, that we will be exhibiting opportunistically during 2017. So we just don’t know the timing and the magnitude during 2017 to be able to embed it in our guidance yet.
Got it. Thanks a lot.
Thank you. And that does conclude our question-and-answer session for today’s conference. I would now like to turn the conference back over to Carl Anderson for any closing remarks.
Thank you, Crystal. This does conclude our fourth quarter and full year 2016 earnings conference call. We thank you for your participation. And if you have any follow-up questions, feel free to reach out to me directly. Thank you very much.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a wonderful day.
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