Feb 1, 2017
Executives
Carl Anderson - Vice President and Treasurer Jay Craig - President and Chief Executive Officer Kevin Nowlan - Senior Vice President and Chief Financial Officer
Analysts
Brian Johnson - Barclays Capital Brett Hoselton - KeyBanc Capital Markets Ryan Brinkman - JPMorgan Mike Baudendistel - Stifel Nicolaus & Company Colin Langan - UBS Neil Frohnapple - Longbow Research
Operator
Good day, ladies and gentlemen. And welcome to the Meritor First Quarter 2017 Earnings Conference Call.
At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call may be recorded.
I would now like to introduce your host for today’s conference, Mr. Carl Anderson, Vice President and Treasurer.
Please go ahead, sir.
Carl Anderson
Thank you, Christy. Good morning, everyone and welcome to Meritor’s first quarter 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 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.
Jay Craig
Thanks Carl and good morning, everyone. As you probably seen in our press release, we started out the new fiscal year with another strong quarter of financial performance.
I am pleased with the sustained high level of operational excellence our team has demonstrated. Let's take a look at the highlights on Slide 3.
Revenue came in at $699 million, down 14% from last year. While revenue was negatively impacted by lower Class 8 truck production, we still were able to generate and adjusted EBITDA margin of 9.2% and adjusted diluted EPS of $0.25 in our fiscal quarter.
Our continued operational performance helped to offset the decrease in sales. As we look at the full fiscal year, we believe the financial outlook we gave you in November on our fourth quarter earnings call remains intact.
Kevin will walk you through the numbers again in a few minutes, but I want to reiterate that based on our first quarter results we are off to a good start. We are now fully entrenched in delivering on the targets associated with M2019.
We are pleased with the success we have throughout M2016 and are committed to driving the same alignment and commitment across the company to our current three year plan. We've demonstrated over many quarters that we can maintain solid operational performance in both up and down market.
At the same time, we are continuing to invest in new products and technologies that we believe will drive the top line growth that is the key element of M2019. We told you that we plan to launch 20 new products in the next three years across our product lines for both on and off- highway applications globally.
We've also talked about our commitment to market leading product innovation. Slide 4 demonstrates this commitment by illustrating the evolution of our heavy duty linehaul axle.
In 2011, we launched the 14X as the lightest tandem drive axle in its class with the fastest and widest range of axle ratios available. This month we are excited to announce the launch of our 14X High Efficiency axle, the next evolution in axle technology.
This axle takes the proven 14X to a new level. Available to customers from February, we will showcase this product at the TMC Truck Show in Nashville in a few weeks.
Looking down the road, we strongly believe the future will include electric drivetrain for both medium and heavy duty truck and bus applications. Our intent is to be market leader in electric drivetrain solutions just as we have been with mechanical drivetrain since 1909.
We've been developing e-mobility solutions for almost 20 years; beginning 1998 we developed electric drive axles for hybrid and battery electric buses. A few years later we developed an electric trailing arm, independent suspension for medium duty pickup and delivery vehicles.
And in 2012, we designed and developed a dual mode hybrid system for a Class 8 linehaul demo in collaboration with Walmart and Navistar. Our expertise in mechanical drivetrain combined with the work we've done on electric solution places us in a solid position to deliver leading technology and electrification solution for axles, brakes, transfer cases and suspensions.
We are also working with Nikola Motors on its electric semi truck that was unveiled in December. You may have seen the recent news coverage on the Nikola 1 which incorporates Meritor's custom designed architecture for an electrically driven independent suspension that you see picture on slide 5.
This is yet another very recent example of Meritor being selected as a technology parter due its deep expertise in military vehicle suspension and long history in bringing to market advanced drivetrain solutions for linehaul applications. As our customers to continue to explore electric drivetrain opportunities for the truck and bus application, we want to make sure that Meritor will be their preferred partner.
Turning now to Slide 6. You will see the anticipated volume underlying our fiscal year 2017 market outlook have not changed from last quarter.
While we are not revising our volumes for the year, we do believe there are signs that improvement in some end markets could be on the horizon. In North America, inventory levels appeared to be coming down slightly, although there is probably more reduction needed before we see a rebound in production.
And in China, we have had a bit of good news as we've seen some slight growth recently in the construction market. As you know, that market has been quite depressed since its peak about five years ago.
While our markets in North America, China and Brazil currently remain in a trough, we continue to execute and believe we are in great shape to grow earnings as these markets begins to recover. Now I'll turn the call over to Kevin.
Kevin Nowlan
Thanks, Jay and good morning. On today’s call, I will review our first quarter financial results and our 2017 guidance.
Overall, we had another quarter of strong execution. Building on our M2016 success, we were able to drive solid financial results despite trough market in North America, Brazil and China.
This performance gives us further confidence that we will be able to really accelerate our earnings growth as these markets begin to recover. Let's walk through the detail by first turning to Slide 7, where you will see our first quarter financial results compared to the prior year.
Sales were $699 million in the quarter, the decline in revenue was primarily driven by lower commercial truck production in North America and lower volumes in our aftermarket and trailer segment. To put the Class 8 truck market in perspective, this quarter had the lowest level of industry production that we've seen in six years.
Although revenue was down, we were able to maintain gross margin as a percentage of sales reflecting our capabilities to drive lower material, labor and burden costs. We are very encouraged that we were able to sustain margins in the current global market environment.
SG&A was $3 million lower in the first quarter of 2017 compared to the same period a year ago. We continue to maintain a disciplined approach and managing our cost structure and this quarter provides another example of our focus in that regard.
Income tax expense was $6 million in the first quarter of 2017, which translates to an effective book tax rate of 27%. As we look forward, you should continue to expect our book tax rate to be in the 30% to 40% range for the full year.
But remember, this does not reflect the actual cash tax that we pay. That's why from an adjusted income perspective, we continue to back out the non-cash tax expense associated with the utilization of our deferred tax assets.
The impact of this for the first quarter was $5 million, which means that after this adjustment, our effective tax rate was in the single digit far below the 27% effective book tax rate. In total, we generated adjusted income from continuing operations of $22 million, or $0.25 per share.
Let's move to Slide 8, which compares our sales and EBITDA for the first quarter of fiscal year 2017 to 2016. From a top line perspective, we saw lower revenue in both of our operating segments.
But we continue to effectively manage the earnings impact coming from lower revenue. Due to our strong operational performance we mitigated the downside conversion to only 11% which is better than our planned 15% to 20% contribution margin.
Overall, we generated adjusted EBITDA of $64 million which resulted in 9.2% adjusted EBITDA margin, down just slightly from last year. Slide 9 tells first quarter sales and EBITDA for each of our reporting segments.
In our Commercial Truck and Industrial segment, sales were $539 million, down $94 million or 15% from the same period last year. This revenue decline was driven by the 34% step down in Class 8 truck production in North America.
Production volumes were just over 47,000 units this quarter compared to over 72,000 units a year ago. Segment EBITDA was $42 million, down $10 million from last year.
EBITDA margin for Commercial Truck and Industrial came in at 7.8%, down from 8.2% a year ago. The decrease in segment EBITDA margin was driven primarily by lower truck volumes in North America partially offset by strong operational performance.
In our Aftermarket and Trailer segment, sales were $184 million, down 9% from last year. This decline was driven by lower volumes across the segment.
Segment EBITDA was $22 million, up $2 million compared to last year. The increase was driven by strong material, labor and burden performance.
In addition, last year we incurred cost associated with the launch of a new warehouse system that did not repeat this year. Turning to Slide 10, total free cash flow was negative $31 million, very similar to what we experience last year.
As you know, our first quarter is typically the weakest from our free cash flow perspective, as it tends to be the quarter in which we have the lowest revenue due to seasonality and it's the quarter in which make our annual incentive compensation payments related to prior year performance. With these factors in mind, our free cash flow in Q1 was consistent with our expectation which keeps us on track to deliver our full year guidance.
Next, I'll review our fiscal year 2017 outlook on Slide 11. As Jay referenced earlier, we are reaffirming our fiscal year 2017 guidance.
We continue to expect revenue to be in the range of $3 billion to $3.1 billion based on our current global market assumptions. We also expect our adjusted EBITDA margin to be in a range of 9.6% to 10%.
And our adjusted diluted earnings per share from continuing operations to be between $1.25 and $1.40. And finally, our free cash flow guidance is also unchanged with the projected range of $50 million to $70 million.
Now I'll turn the call back over to Jay to provide closing remarks.
Jay Craig
Thanks Kevin. The roadmap we've established for the next three years supports our M2019 financial target as shown on Slide 12.
We are more dedicated than ever before to grow our revenue and we have many teams working on various projects design to increase our top line. You remember on our fourth quarter 2016 call, we provided you with the lock from our fiscal year 2017 forecast to our earnings per share target of $2.84 in fiscal 2019.
We remain committed to driving this increase and diluted earnings per share over the next three years. We continue to expect that we'll achieve this earnings growth through a combination of new business wins, continued management our product cost and a more normalized Class 8 truck market.
I told you last November that I have the same level of confidence in achieving our M2019 objective that I did for M2016. Coming out of our first quarter for 2017, I continue to have a high level of confidence.
The transpiration we began several years ago is continuing throughout the company with the same momentum. We are positioned for the growth targets we've established and are working towards those with a high degree of focus.
At the same time, our strong operational performance sets up well for future earnings expansion. With that we look forward to taking your questions.
Operator
[Operator Instructions] Our first question is from the line of Brian Johnson of Barclays. Your line is open.
Brian Johnson
Yes, two questions. One semi-housekeeping and the other more strategic.
First, can you give us a more color on the new business revenue bridge to 2019? You are guiding to some 20% above market growth in 2016 to 2019.
Do you expect acceleration? It looks to be about 5% to 6% annually in 2017-2019 early on.
Do you expect acceleration in 2018-2019?
Jay Craig
Brian, this is Jay. Yes, the short answer is to your question is yes.
And if you recall back in our Analyst Day description of the strategy, we set a gross target of about $900 million of revenue with the 50% haircut on that which is very similar to the target and execution performance we achieved in M2016. And I think we are pleased with the progress to date.
We've made significant investments as you are aware of in product and continue to do make significant investment in new teams targeting specific customers and end market. And then obviously we have the carryover revenue from M2016 as well.
Brian Johnson
Okay. Second question is more strategic around your latest thoughts on M&A.
We've seen in the space both the vertical integration over American Axle and BG as well as some small scale acquisitions mainly in off -- well in off-highway and emerging market over a Dana Corp. Three questions.
One, can you just remind us of -- since you are saying you do have some capital for target acquisitions what types of opportunities you would be looking for? Two, is there any impact in terms of your access to forging and casting from MPG going into another axle maker medley one more light vehicle.
And third, do you looking particular at some of the more bottom of the cycle off-highway and commercial vehicle off-highway market in particular from where you might want to be making acquisitions?
Jay Craig
Sure. Great question.
With regard to American Axle acquisition, we have fairly broader business relationship with American Axle today where we supply each other certain components. And certainly we would expect that to continue.
So I don't think we see any issues with the access to casting because of that acquisition. And then in terms of what our view, what are the right potential acquisitions for Meritor is, we've said it before, we are looking for the smaller bolt-on type acquisition that help us accelerate the growth particularly in some of the new markets we hope to enter in the components area of high-way area or certain geographies where we want increased market presence and penetration.
Brian Johnson
Okay. And were you a customer of MPG for castings?
Jay Craig
We were to a small degree, it's not significant or major supplier but we have seen and don't anticipate any negative consequences to that. And as I've said we have a customer and supplier relationship with both American Axle and Dana, it is just part how the industry functions.
And we've never had any interruptions because of that.
Operator
Thank you. Our next question is from Brett Hoselton of KeyBanc.
Your line is open.
Brett Hoselton
Good morning, gentlemen. Can you bring us up to date as to what you are hearing from customers particularly in Class 8 side of thing?
Generally speaking on the investment community side was hoping to see some sort of recovery in the back half of 2017? Maybe the first part of 2018 but what are you seeing currently in terms of your customer base?
Jay Craig
I think implied in our guidance is some recovery in the back half of 2017 and that still our belief. We see inventory coming down, right now it appears that the Class 8 inventory is just slightly above two months of historical demand.
So if we see retail sales continue to trend up, we should -- I would think fairly quickly start to see production follow that trend right behind because inventories are starting to get to more normalized level with probably just small decrease still yet required. We are also finally starting to see used truck prices stabilize and increase slightly.
So I think there are some good signs out there and if the economy stays strong, we should start to see demand pickup in the back half.
Brett Hoselton
And then the second question is a lot of discussion around NAFTA and the agreement there. Can you talk about what you see as far as that's concerned; I mean the potential impact of border tariffs and so forth on your business?
Jay Craig
Well, the thing to remember about us Brett, I know we've spent time together in the past and I think you understand us pretty well. We manufacture locally for local markets and that's true in Mexico as well to a large degree where a lot of our manufacturing supports our customers that have assembly operations in Mexico.
We do import some parts from Mexico but we've a large manufacturing presence in the United States. And it is yet to see what the ultimate impact is.
And obviously on a macro basis you would think if some of the tariff of the size and scale that have been discussed are put in place so there would probably some impact on the peso which may partially offset some of the cost increase that could come. So you know yet to come.
We are studying it very closely and continue to monitor it. But so far analysis says it shouldn't have significant impact on us.
Brett Hoselton
And then the final question here on the flight path for M2019. Can you talk a little bit about the new business and your anticipated margins on the new business?
Obviously, you are investing a lot in R&D and so forth. Would you expect the margins to be above or better than your current corporate average margins?
Jay Craig
Brett, obviously our goal -- we've put in a enormous amount of work through the M2016 program to expand our margin and in no way do we or our Board of Directors would allow us to see that margins slip. So as we look at business we are extremely disciplined about retaining that margin performance.
So we see no reason that in our model we should expect contribution margins not to continue to be in that incremental band of 15% to 20%. Now some of our products that are higher content like the new 14X High Efficiency, we have some higher content there, it's a higher value product so we may see margins to be slightly above that for some of the more technically advanced product.
But by in large our plan is to maintain the same contribution margins.
Operator
Thank you. Our next question is from Ryan Brinkman of JPMorgan.
Your line is open.
Ryan Brinkman
Great. Thanks for taking my question.
First one, is there any update you can provide regarding the under funded status of your OPEB liabilities, maybe firstly with regard to the pretty big increase in interest and so I imagine discount rates since your last fiscal year end and the numbers in your 10-K? And then just secondly with regard to the case that you have before the Sixth Circuit Court, have there been any developments there on your case or maybe others like it that could impact your liabilities?
Kevin Nowlan
Okay. Ryan, its Kevin.
And I'll take that. With respect to the OPEB liability, we only perform the valuation once per year at the end of the fiscal year.
So you won't see a change in that reported liability from a valuation perspective until we get to the end of the year. Obviously, as interest rates are higher, which they are currently but if they are higher by the time we get to the end of the year than where we were at the end of the past year, then they has a potential to lower the reported liability on our balance sheet.
But we'll see how that plays out at the end of the year. As it relates to the litigation, there is really no update to provide.
As you know, we did ask the Six Circuit back in July to refer the case, we did have a hearing in October in front of the Six Circuit and we are awaiting a ruling which we would expect to be forthcoming in the coming months.
Ryan Brinkman
Okay, great. And then just are you hearing anything from your customers about the potential for stronger end markets in North America maybe later in the calendar year or into next year as a result of pro-growth fiscal policies or potentially higher infrastructure spending?
Jay Craig
I think we haven't heard anything directly as I mentioned earlier. I think we are just seeing the natural recovery in the end market with the overbuilt in 2015, I think we are feeling comfortable to market is getting close to fully digesting that, started to come back but I think it's little too early to tell what that impact if any infrastructure spending on our business would be.
Ryan Brinkman
Okay. And then just the last question is recently Dana acquired the Brevini business in Italy, and they have been saying they are very excited about getting their tracked vehicles, which is somewhere that they really don't have any experience in, historically.
I was just curious if you have experience in tracked vehicles. And then also they were excited it might give them some expertise in the hybridization or electrification areas of commercial vehicles.
And I think that's probably pretty far off, but I was just curious if you are making any sort of organic investments there or feel that you need to make any kind of organic investments there. Thanks.
Jay Craig
Sure. Ryan, well, our focus is on tactical real vehicles for the military.
We do not have experience in tracked vehicle. And I have to say it is something we occasionally look up but haven't really chosen to invest in technology in that area.
As far as electrification, I had a couple sites I walked through on that where we are making some significant investments in various areas of potential electrification in medium and heavy duty vehicle including the partnership with Nikola Class 8 hydrogen powered electric vehicle. So we I think right now we are viewed as one of the leaders in electrification of commercial vehicles and we want to maintain that leadership position.
So I feel very confident with the capability of our internal resources and our partners to date that we are working with in that area.
Operator
Thank you. Our next question is from Mike Baudendistel of Stifel.
Your line is open.
Mike Baudendistel
Thank you and good morning. I just wanted to ask you, on your slide on page 6 where you kept all the global market outlooks the same, a couple of areas I was maybe a little surprised you didn't increase your outlook, US trailers, strong orders in November and December.
And then in China, it looked like there was some good production data in the fourth quarter. And I just wanted to know if you thought -- you were looking at the same data points, and did you think that those were just not sustainable throughout the year?
Or just any detail on those markets?
Jay Craig
I think what we've seen on the trailer side is, Q1 it was down about 8%, so we've seen a lot of volatility and certainly we've seen near term strength. But I think you are in the right in the way you have phrased it that we are taking little bit of wait and see attitude because of the amount of volatility in that market.
As I mentioned in my comments on the call, we've been encouraged by the slight pickup in China in the construction market. We'll have to see after the Chinese New Year if that continues or if it was just a small blip in anomaly.
So is there more upside potential to downside risk may be but we wanted to see a little more data before we makes a call on that.
Mike Baudendistel
Okay, great. And then you mentioned that your M2019 goals are based on a normalized Class 8 market.
What's your definition of a normalized market?
Jay Craig
Right now it's 250,000 units which I think is if you look at the large analytical services ACT, FTR, that's about what they call a normalized market as well.
Mike Baudendistel
Okay. And I just wanted to ask you -- PACCAR yesterday was talking in their press release about a PACCAR tandem axle in the North American market.
And of course, they are a big customer of yours. Is that a threat to what you are selling to them or does that address a different market?
Jay Craig
Actually it's an opportunity. So we, PACCAR and we had a partnership as part of our new contract where we jointly design that axle and engineered it and are manufacturing it in our plant in Asheville, North Carolina.
So we are very thrilled about that opportunity and so far it's been performing to expectations in terms of performance and we are very -- both very, very pleased with the launch of that product.
Operator
Thank you. Our next question is from Colin Langan of UBS.
Your line is open.
Colin Langan
Great. Thanks for taking my question.
Can I just follow up on the question earlier on the OPEB litigation, that it went to -- there was a hearing in October, you are waiting to hear back. Can you just remind us what happens once you hear that result?
Is that a definitive result or could it still last longer? And what is the opportunity if you actually prevail in terms of reduction of OPEB?
Kevin Nowlan
I mean it is unclear. There are varieties of potential outcomes.
And I mean the Six Circuit part of appeal could rule from the bench, they could rule in favor of the plaintiffs and keep the injunction in place that exist today. They could rule in our favor or they could remand this back to lower court, the district court.
And that process would take some period of time. I think it's -- as a result of that there is just lot of uncertainty as it relates to the litigation.
And so to start to mention opportunities for us I think it's just premature because there are a variety of potential outcomes here.
Colin Langan
But if you prevail, I mean does the majority of your OPEB go away, or is it only a portion or --?
Kevin Nowlan
Well, I think it's premature, it depends what the court says. I mean if the court ultimately ruled in our favor in saying that retiree healthcare benefits are not vested for life, presumably that would give a company the ability or the right to modify those benefits within whatever the laws and regulations are that would apply to us.
But I think that remains to be seen what the outcome is actually going to be coming up out of the litigation.
Colin Langan
Got it. And just going into the quarter, the aftermarket margin expansion on lower sales is quite impressive.
You called out launch facility costs last year. What was the magnitude of that, because I'm trying to gauge what the incrementals would have been, maybe, ex that item or --?
Kevin Nowlan
It was pretty small. That was like $1 million to $2 million item.
If you -- I mean if you look at what really happen in aftermarket as we just had strong material, labor and burden performance. And that really that plus the fact we had that modest headwind a year ago $1 million to $2 million, the combination of those things allowed to us overcome revenue being down.
Colin Langan
Got it. And then you mentioned material.
Can you remind us how commodity works? You are hedged on a lag, and how much are you hedged in terms of that exposure there?
Kevin Nowlan
Yes, with material as steel indices, move we tend to see the impact coming from the supply base within 30 or so days. And then if those steel indices are moving up we would see an increase in our purchase cost and the supplier and then we would pass through that increased cost to our customers generally on about a six months lag.
So actually as we look on a year-over-year basis, we did see a steel headwind. So embedded within our Q1 results, we had about a $9 million headwind coming from steel index increases and really because last year or year ago this time we were getting the benefit of lower end to season hadn't passed those benefit on yet to the customer.
So that's what I think you can get a sense for how much material, labor and burden performance we had that overcame not just volume being down but that $9 million headwind in steel index movements.
Colin Langan
And the outlook for that going forward? The $9 million, that's an abnormally high number or is that --?
Kevin Nowlan
As we look ahead to the full fiscal year, we expect the headwind-- we expect to have a headwind in 2017 relative to 2016 between $10 million and $15 million. And I think given where indices have gone the last couple of months in North America where they spiked up a little bit; our expectation is probably closer to the $15 million at this point.
But that's all factored into our guidance. So the guidance range we've given 9.6% to 10%, it contemplates a little bit of incremental headwind coming from steel as well as the good news result that we had in Q1.
Colin Langan
And just the last question -- you talked earlier about potential border adjustment. Any color for your US-sourced product?
How much is actually small is sourced from outside the US, and how much of your parts or things assembled in the US are outside? Is it less than 10%?
Any gauge there on magnitude?
Jay Craig
I think it's too early to tell. And our supply chain as you would expect for all companies in our industry is fairly complex and balanced between internal suppliers in US and external suppliers from elsewhere in the world.
So could that balance and mix change somewhat possibly but I think it's too early to tell. And again, I think from our preliminary analysis of various ideas that have been floated so far, we don't think the impact would be that significant on us.
Operator
Thank you. Our last question is from Neil Frohnapple of Longbow Research.
Your line is open.
Neil Frohnapple
Hi, good morning. Congrats on a great quarter.
Just a question on guidance. So you delivered meaningfully better than expected EBITDA margins in the quarter at 9.2% on what is expected to be a below watermark quarter for North American Class 8 production.
And Kevin, you just talked about probably this most sizable year-over-year headwind for steel. Also, your Q1 is traditionally your lowest quarter within aftermarket and trailer as well.
So I guess my question is was there something one time that boosted results that is not expected to repeat, or other headwinds on the horizon that gives you guys caution? Because finally in the stronger first quarter performance to hit the low end of the EBITDA margin range implies a meaningful year-over-year compression for the remainder of the year.
And I appreciate it's still early in the year and it's a range, but can you just help us out with any more puts and takes we should consider from here on margins?
Kevin Nowlan
Yes. I mean I think you've characterized it correctly in your underlying question.
I mean as we look at Q1, Q1 is traditionally our low point from a revenue perspective. So as the year progresses and we see revenue increasing as we get into the spring selling season in Q2 and Q3 and see more selling days in that part of the year, we do expect our margin to see an uptick.
In terms of Q1, your question was there any one time reason there; overall it was a pretty clean quarter. I mean we had a little bit of gain on the rupee hedges that we have, hedging some of our purchasing activity, got a $1.5 million but overall it was a pretty clean quarter.
As we look at -- you touched on CVA margins, you are right; in CVA typically our first quarter is at a low point. And the fact that we are generating 12% margins in that first quarter gives us quite a bit of confidence that we are on track to deliver our full year margin that we expect from this business of north of 14%.
And I think we are positioned to do that. And so when I think about all those things, I think we are positioned to deliver on the guidance 9.6% to 10%.
There are moving pieces in it. The one headwind that we did see start to materialize here in the last month or so was the steel index movement but that's contemplated in our updated guidance.
So the fact that we reaffirmed just means that all the good news we are seeing there are still little bit of risk there that we see but it's all factored into guidance and we feel pretty confident in it.
Neil Frohnapple
Okay, great. And then pertaining to your outlook in South America for FY 2017 looking for a slight recovery, are you seeing any initial signs of pick-up in underlying demand in this region at this point?
Jay Craig
Well, we are. But a portion of that's due to there were significant number of shutdowns in our OE customers in the first quarter as they try to really get inventory balanced for the remainder of the year.
So we are starting to see a little bit of pickup in production as on the macro indicators I think the expectation has been 2017 results economy is expected to have a slight expansion for the first time in a few years. So there are some support for us high pickup but remember that business represents 5% or less of our total business now which is dramatic contraction.
So even if we see a step up there, it won't have significant influence on our overall results for the year.
Neil Frohnapple
And then one final one, if I may. Could you provide a little bit more granularity on the aftermarket and trailer sales decline in the quarter?
I mean you cited lower volumes across the segments. But anything else you would highlight?
And then I guess, more importantly, if you could just talk about the outlook for this segment for the rest of your, particularly as you expect North America aftermarket to be flat for the full year?
Kevin Nowlan
Sure, yes, I mean if I boil down the $19 million revenue decline, there are really two primary drivers, if you peel back the onion a little bit, the first is if you just look at the fiscal quarter on year-over-year basis, just the way the calendar lines up for us, there are actually three fewer selling days for us this first fiscal first quarter than a year ago. And that accounted for about $7 million of the revenue headwind in North American aftermarket.
The second thing is as we saw trailer production was down year-over-year as Jay mentioned few minutes ago down 8% year-over-year and that combined with a little bit of some mix shift between spring and air ride suspensions that contributed to the piece of the equation as well. So when you look at those two items overall that explain the bulk of $19 million year-over-year decline.
As we think about the outlook for the year for the segment, I think we continue to believe that in North America the aftermarket, market itself is going to be relatively flat, which means that our expectation is that we are going to see some pickup as the years going on here heading into Q2 and Q3 and positions us again to deliver in that segment of 14% plus margin in total.
Operator
Thank you. And that concludes our Q&A session for today.
I'd like to turn the call back over to Mr. Carl Anderson for any further remark.
Carl Anderson
Thank you, Christy. This does conclude our first quarter earnings call.
We thank you for your participation. And if you do have any further questions, please feel free to reach out to me directly.
Thank you. And have a great day.
Operator
Ladies and gentlemen, thanks for participating in today's conference. This does conclude today's program.
And you may all disconnect. Everyone have a great day.