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Q2 2018 Earnings Call Transcript

Published: 27 Jul 2018

[Operator:]

Good morning and welcome to the Tenneco Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Linae Golla, Vice President of Investor Relations. Please go ahead.

[Linae Golla:]

Thank you. Good morning. This morning, we released our second quarter earnings and related financial information. On our call today to take you through the results are Brian Kesseler, Chief Executive Officer; and Jason Hollar, Chief Financial Officer. Slides related to our prepared comments are available on the Investors Section of our website. After our comments, we will open up the call for questions. Before we begin, please be aware that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachments. The earnings release and attachments are available on our website. Additionally, some of our comments will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. And with that, I will turn the call over to Brian.

[Brian Kesseler:]

Thanks, Linae. Good morning, and thanks for joining our call. Before I get into our second quarter results, a reminder that at the end of today's call we will be joined by Roger Wood. Roger has been a member of Tenneco's board since 2016 and earlier this week was named as the Chairman and CEO of the new Powertrain Technology Company that will be created next year all in the federal mobile acquisitions and then suing spend. Following the close and before the spend, Roger and I will lead Tenneco together as Co-CEOs. I expect many of you are interested to hear from Roger, so we've asked him to join us during the Q&A portion of today's call. Beginning with the second quarter highlights on Slide 5; we delivered another quarter of strong organic revenue growth doubling underlined industry production. Revenue was the second quarter record, up 9%. In constant currency we were up 8% with higher revenues in Clean Air, Ride Performance and the Aftermarket. And consistent with last quarter, we delivered double-digit revenue growth in Commercial Truck & Off-Highway, as well as from our intelligent suspension product line. On the strength of our topline growth, we also delivered sequential adjusted EBIT margin improvement of 150 basis points, in line with our previous guidance and second quarter records for adjusted EBITDA and earnings per share. Our cash performance was strong in the second quarter, was $75 million in cash flow from operations. Taking a closer look at value add revenue on Slide 6; value add revenue was up 6% in constant currency, outpacing industry production with growth in all reported segments. Higher Commercial Truck & Off-Highway revenue was a major contributor again this quarter but you can also see the strength of our diversified portfolio in each of the product applications. Turning to earnings on Slide 7; while adjusted EBIT was down slightly versus last year, we showed sequential improvement and value added adjusted EBIT margins in all three reporting segments as we continue to manage three main factors. First, steel cost impacted margins, but to a lesser extent than last quarter, thanks to our continued progress on recovering mechanisms. Second, even with double-digit aftermarket growth in Asia Pacific and South America, another quarter of strong OE revenue growth results in a lower global aftermarket versus OE revenue mix impacting margins by 20 basis points versus last year. And third, higher Ride Performance launch cost continued but improved sequentially from the first quarter. These costs are related to relocating our production for a major North America truck program launch that begins production and ramp up in the third quarter. At this point I would like to recognize our 32,000 plus team members around the world who are committed to improving Tenneco every day. During the second quarter I had the opportunity to visit half a dozen plants in North America and Europe and witness first-hand their passion and dedication. I want to thank them for their ability to meet the daily challenges, help fulfill our commitments to our customers and make Tenneco a special place to work. With that, I'll turn the call over to Jason for the Clean Air and Aftermarket segment results.

[Jason Hollar:]

Thanks, Brian. Reminder that as we look at the segment results, the revenue numbers are all value-add, with year-over-year performance calculated in constant currency. Beginning with Clean Air results on Slide 8, revenue was up 5% in the quarter. Some highlights from the quarter include; more than 20 new business wins in China, the majority with domestic OEMs including two China National Six Commercial Truck platforms. We continue to win new commercial truck business in India, and to-date have been awarded broad stage six programs with six customers. And we have received seven hybrid program awards year-to-date including four in China, two in Europe, and the plug-in hybrid variance with top selling SUV in North America. Looking first at Commercial Truck & Off-Highway, strong revenue growth continues in all three geographic regions with higher volumes, new program launches and regulatory-driven content, all contributing to 24% growth versus last year. The ramp-up on our new medium duty commercial truck business with Daimler truck contributed to revenue gains in the Americas, new programs with Deutz and MAN, and stronger volumes for Caterpillar and Daimler truck in Europe drove higher revenues for EMEA. Asia Pacific growth was driven by the ramp up of new content to meet the Bharat Stage IV regulations in India, as well as higher volumes on existing off-highway platforms for Kubota in Japan. Looking at light vehicles, Tenneco's global Clean Air light vehicle revenues in the second quarter were up 2% versus last year. In North America our revenues were down 4% both in line with industry production and impacted by the production disruption on the Ford F-Series trucks. In addition, we saw lower revenues year-over-year with GM and VW mainly due to model changeovers, launch timing and ramp up on new models we discussed last quarter. South America revenue is up mainly on higher volumes with GM in Brazil. Light vehicle revenue in EMEA improved 7% outpacing industry production growth. Higher volumes on existing platforms including the VW Golf, as well as new content for the BMW X1, Ford Focus, and Daimler MFA-2 drove revenue growth in the quarter. In the Asia Pacific region, our China revenue increased 12% outpacing 9% higher industry production driven mainly by higher volumes in current programs and launches with SVW and Daimler. India revenue was also up in the quarter with higher volumes on current programs with BMW and Daimler, and the ramp up of the new program with Fiat. Clean Air adjusted EBIT was $122 million in the quarter and adjusted EBIT margin was 11.4%, a sequential improvement from the first quarter. The Aftermarket results for the quarter on Slide 9. Total Aftermarket revenue for the quarter was up 1% versus last year, investing in future growth and expanding our product coverage in mature market remain our focus with progress in the quarter including, in China we strengthened our market presence with the addition of 28 new customers and 468 new Monroe Installers, and continued to expand market coverage in North America with 125 Monroe shock and strut part numbers launched in the quarter. The ultimate business wins including key distribution customers in Mexico, South America and Italy. Revenue in the Americas was essentially flat, we saw big year-over-year with North America wholesalers while some retail customers were still tightly managing their inventory positions. Although our customers out the door sales did improve late in the quarter. South America had another strong quarter with Aftermarket revenue up double-digits year-over-year. The EMEA region returned to growth with revenue 3% higher versus last year driven in part by stocking orders for the new distributor in Italy. Solid growth continued in Asia Pacific Aftermarket with double-digit revenue growth fueled by the investments from making the door [ph] brands and distribution networks in China and India. Aftermarket adjusted EBIT was $53 million and EBIT margin was 15.7% with sequential improvement from the first quarter. I'm going to now turn it over to Brian to discuss high performance.

[Brian Kesseler:]

Thanks, Jason. Let me finish the segment review with a look at Ride Performance on Slide 10. Revenue in the second quarter was up 13% with highlights that include five intelligent suspension launches, four of which are incremental and four program wins for intelligent suspension systems, two of which are incremental including the battery electric vehicle. These four wins represent about $20 million in annualized revenue. Light vehicle revenue growth continue to outpace overall production growth in each of our three geographic regions driven by new platforms, stronger volumes, intelligent suspension content gains, and higher NVH revenue. In the Americas, we outperformed the market again this quarter with growth driven mainly by higher revenue on new programs with VW and FCA and NVH content on a new battery electric vehicle. EMEA delivered another strong quarter with higher revenue on new platforms with BMV, Land Rover, Ford and PSA; and double-digit intelligent suspension growth including new content with VW and Daimler. We also continue to grow in Asia Pacific as we outpace production at China and India with current programs and recently launched business of China with Beijing Hyundai, SGM [indiscernible]. CTOH revenue increased by double-digits again this quarter supported by growth of Paccar, Hendrickson and Daimler in the Americas, as well as volume strength in South America. Year-over-year revenue growth in EMEA was driven by higher volumes with Volvo Truck, DAF [ph] and Scania. Ride Performance adjusted EBIT was $23 million and EBIT margin was 4.5%. Our Ride Performance business has lower margin performance than our other two segments but has tremendous upside in growth and earnings potential. I'm pleased with the growth in margin performance in our intelligent suspension systems and we expect that positive trend to continue. As we have highlighted here before, we're seeing sadly improving take rates and are winning more new business every quarter including our first intelligent suspension program for production at China. I'm also pleased with how we continue to deliver growth in margin performance in the Asia Pacific region and particularly in China. In addition to introducing their intelligent suspension technology, we continue to aggressively grow our conventional Ride Performance business there gaining share with leading domestic and global OEMs. To support this growth we're planning for a third manufacturing facility that will begin construction and be ready for launch in 2020. Our NVH [indiscernible] product team also is gaining business delivering growth on both the top and bottom line. And as we have highlighted in previous discussions, their engineers solutions capability is the benchmark in both our eyes, and most importantly, the eyes of our customers. We continue to invest in Ride Performance for future growth with capital for new capacity in Asia Pacific and an engineering and product development for new technologies and products for the quickly evolving intelligent suspension market. Higher steel commodity cost continue to put pressure on our North America and Europe conventional damper business. And while we have been making progress on the negotiations for customer recoveries, there is more to do to address our long-term cost position, particularly in North America. We need to ensure that we build and maintain a strong competitive position and address structural cost improvements in North America. For the last two quarters, we've mentioned costs associated with relocating our production from major truck program that launches and lands up in the second half of this year. This is the first step in a number of actions we've identified to improve our competitive position and fundamentally lower our fixed cost structure in this region. Keep in mind that these operational improvements are completely separate from the synergy related actions that we are planning on the federal mobile acquisition. We expect that the opportunities we've identified would result in annual fixed cost savings of $20 million to $25 million which we would expect to begin our run rate by the end of 2020. We'll provide more detail on these and additional actions as they are identified and implemented. Now I'll turn it back to Jason and he will cover some of the financial highlights from the quarter.

[Jason Hollar:]

Thanks, Brian. Moving onto Slide 11, I'll walk through the adjustments this quarter affecting year-over-year comparability of our results. We recorded restructuring related expense of $31 million including cost related to the accelerated move of our Beijing Ride Performance plant which we expect to be completed by the end of 2018. Manufacturing headcount reduction cost in Europe Clean Air, and additional cost improvement initiatives in Ride Performance. We incurred costs related to the Federal-Mogul acquisition in the second quarter including $18 million of acquisition advisory costs, and $9 million in structural cost improvements by reducing our salaried headcount in advance for the closing of the transaction. This quarter we also recorded a $4 million environmental charge related to [indiscernible] that was never operated. The environment remediation at that site was part of the Pullman acquisition indemnities that reverted to us as a result of the 2009 bankruptcy of Mark IV industries. Turning to taxes on Slide 12. Before adjustments, second quarter tax expense was $37 million for an effective tax rate of 24% in the quarter and year-to-date, that is at the midpoint of our full year effective tax rate guidance range of 23% to 25%. Cash tax payments in the quarter were $31 million, and for the full year we still expect cash tax payments in the range of $105 million to $125 million. Moving to cash flow on Slide 13; our cash performance in the second quarter was solid with $75 million generated from cash from operations. The performance included $17 million of anti-trust payments and acquisition-related payments of $11 million. Before these items, cash from operations improved $11 million year-over-year primarily due to working capital improvements. Capital expenditures for the quarter were $78 million, that's down from $91 million spend in the second quarter last year. We continue to expect full year CapEx in the range of $380 million to $410 million. In the second quarter we paid a $0.25 per share dividend to stockholders totaling $12 million. Turning to Slide 14; at quarter end, net debt was $1.222 billion, interest expense was $20 million, $1 million higher than last year, primarily due to higher interest rates in our floating rate debt. We expect full year interest expense of around $80 million and net leverage ratio was 1.4X. With that, I'll turn the call back to Brian.

[Brian Kesseler:]

Thanks, Jason. Turning now to Slide 15 and our outlook for the third quarter. We expect revenue growth of 5% in constant currency, that growth will outpace forecasted light vehicle and industry production by 2 percentage points. Regarding our margins in the third quarter, we expect value-added adjusted EBIT margins to be down about 40 basis points to 50 basis points versus last year reflecting steel commodity cost increases, newly enacted tariff costs and the timing of their recovery. And while we expect flat to slightly better Aftermarket revenue year-over-year, the Aftermarket versus OE revenue mix will continue to be lower. This outlook represents an improvement from the first half of 2018 which was down 80 basis points year-over-year. For the full year, we are reaffirming our 2018 revenue outlook with organic growth of 5% in constant currency outpacing forecasted industry production by 3 percentage points. Our outpace moderates in the second half of this year primarily due to the year-over-year comparison with last year's strong CTOH revenue increases. For the full year, we expect value-added adjusted EBIT margin in the range of 8.5% to 8.7% due to the continuations of the factors I just mentioned for the third quarter. Looking ahead, I continue to be highly optimistic and positive about Tenneco's opportunities for continued growth and improved profitability. In Clean Air, our technology can choose to drive content growth including hybrid power trends and CTOH applications. In addition to light vehicle hybrid wins we mentioned this quarter, over the past decade Tenneco has supplied more than 60 hybrid powertrain programs in North America, Europe and China for global OEMs and we have secured an additional 70 program so far this year. As we've mentioned, hybrid require more highly engineered high value administration [ph] control system in order to comply with the missions regulations and packaging constraints. Hybrids also present high value growth opportunities for advanced technology content such as heat exchangers and electronic valves to meet customer requirements for engine performance and acoustics. We continue to leverage our technology portfolio and global capabilities to capture growth opportunities in Commercial Truck & Off-Highway and the complete Diesel Act Treatment System for Daimler's medium duty on-road trucks in North America and our recent Bharat Stage VI wins in India are great examples. Investments in our intelligent suspension technology continue to drive growth including expansion into new segments. Earlier this week we announced that the all new Daimler G-Class Premium SUV will feature our latest CVSA 2 advanced suspension technology. This is the first SUV application for our two-valve technology and the evidence of the growing interest we're seeing and the benefits of intelligent suspension for the SUV and CUV platforms. And earlier this year we kicked off an advanced research initiative to identify key consumer and industry trends that are shaping expectations for vehicle suspension systems of the future and identify innovative solutions to meet those needs. We know that the tracking system architecture in the future will change significantly and we're developing innovative solutions today that will put us in a position to help define the suspension [indiscernible] of tomorrow. In summary, our results in the second quarter and outlook for the third quarter reflect the strength of our Clean Air Ride Performance and Aftermarket businesses and our structural growth drivers which are the foundation for Tenneco's success. I'm confident our strategy and the groundwork we've laid as we move into the second half of 2018, our global team is fully engaged, focused on what we can control and excited about the future. As we move ahead, we will continue to work with speed, focus and commitment to execute our growth strategies, satisfy our customers and improve our profitability. Turning now to a brief update of our Federal-Mogul acquisition beginning on Slide 16. Through this transformational acquisition and ultimate separation, we will create two focused purposeful industry leaders in their respective markets. This unique strategic combination creates strong businesses with greater scale and each with a strategic and financial flexibility to drive long-term value creation. A major milestone came this week on Monday when the Tenneco Board of Directors announced their selections for the CEOs of the two new companies. As I mentioned, Roger Woods is with us today. I'd like to welcome him to the call and for him to say a few words.

[Roger Woods:]

Thank you, Brian. Having spent 30 years in the Powertrain business with BorgWarner and Dana, I feel right at home with this outstanding opportunity. I'm excited about creating a new company that will be one of the largest pure play powertrain company serving OE markets worldwide. As you know, I've been on the board for more than two years and I've been involved with this acquisition from the very beginning. There is no other powertrain company today that can match the range of product and capabilities the new company will have to address fuel economy, power output and criteria pollution requirements for gasoline, diesel and electrified powertrains. I'm looking forward to continuing to work closely with Brian to get the deal closed and help lead the company through the integration process and complete a successful spend late next year. I see significant opportunity for the powertrain technology business as we move forward. This is truly a unique opportunity and one that I know will generate significant shareholder value, and I'm really excited to be part of it.

[Brian Kesseler:]

Thanks, Roger and I'm very pleased to have you on the team. On Slide 18 you will see the summary of recent progress made on the acquisition. During the second quarter we communicated some expectations for the net leverage for the future companies and have completed the [indiscernible] of a new credit facility. In addition to the CEO selections, the Tenneco board determined that the Tenneco name will be retained by the powertrain technology company. We continue to make good progress with regulatory approvals and have received anti-trust clearance from key jurisdictions including the U.S., China, Brazil, India and others, and with only Europe and Mexico remaining. The date for the special stockholders meeting has been set for September 12 this year and we're confident that we're on-track for closing early in the fourth quarter. In summary, the integration teams are hard at work planning for the close, integration and separation in the two new companies and there is growing excitement among the Tenneco and Federal-Mogul teams for the opportunities that we see ahead for both new companies. With that, we're ready to take your questions.

[Operator:]

[Operator Instructions] The first question comes from Rich Kwas with Wells Fargo.

[Richard Kwas:]

I guess the question here is either for -- I guess anyone but maybe Jason. Section 301 in terms of the incremental tariffs, is that now incorporated into the margin outlook for the balance of the year?

[Jason Hollar:]

We don't have the 301 fully baked into this, we have the 232 and what we have on the books and understood on the other pieces that are little less certain, at this point we don't have all that but we did increase the amount about $5 million to $10 million within this outlook for additional exposure related to tariffs in Federal as well as continuing in base pressure for that small portion that we have not locked in. But generally speaking, what's out there and locked in and understood with a lot of detail and certainty is in place, and of course, we're also working onto mitigating actions to ensure that whatever has been announced as well as what is possibly out there to provide as many options as possible to the organization to mitigate.

[Richard Kwas:]

So should we read that as the initial $34 billion, there is no impact at least as far as you know right now because that's in effect. And then the incremental 200 that you're evaluating at this point?

[Jason Hollar:]

That's right.

[Richard Kwas:]

Aftermarket saw little bit of growth -- Brian, you talked about POS getting better at some of your key retail customers towards the end of the quarter, how you're thinking about the U.S. market growth Aftermarket for the second half of the year?

[Brian Kesseler:]

We're seeing great growth year-over-year from the wholesale distributors. And with certain key retailers we're seeing good year-over-year growth. There is still a couple that are very tightly managing their inventories. We're seeing some pickup in the order pattern but not enough to be overly enthusiastic but we do expect it to be flat to slightly up in the second half of the year and that's -- what's driving a little bit of the change in the makeup of our revenue and the difference in profitability between the two of them. So I was here that we're on a latency with a couple of these retailers.

[Richard Kwas:]

And then a question for Roger, just -- you took the job, obviously you feel it's very good opportunity on the powertrain side in terms of packaging the company's products into a system. How should we think about this or how do you think about in terms of where this takes content front -- does it take content potentially from other existing suppliers or is this kind of a new bucket if you will in terms of offering to OEM customers given some of the technology changes, regulatory changes going on right now?

[Roger Wood:]

I think it's more than a ladder in my opinion, we're -- with this combination of companies I feel strongly that we're going to be able to offer our customers a value that maybe nobody else in the industry can offer. One, we have the technology in-house from the combustion changer through to the end of the tail pipe for emissions. We can engineer a system solution providing the trade-offs between what to do in the engine and what to do in the exhaust system to provide an optimized solution. So will there be any disruption with any other suppliers, there may be on a component here and there but for the most part we're looking at this as a real opportunity to provide what we believe is going to be several decades of need for the internal combustion engine in a variety of applications and to offer a total system solution in that regard.

[Operator:]

The next question comes from Colin Langan with UBS.

[Colin Langan:]

Just to recap, I mean the margin weakness -- further the full year, I mean what are the main buckets of drivers? You mentioned Aftermarket, any quantification of the steel and -- I mean are those just the two managed issues there?

[Brian Kesseler:]

Those are really the two main issues. You know, the steel and the things that have changed a bit on us is the enactment of the tariffs and the cost on those in the second half of the year for those that are in -- already in motion and scheduled to be motion in October. And that Aftermarket mix, we're growing pretty well on the OE side which is really good but in relation to the Aftermarket revenue which is our higher margin, that's -- those are the two major issues; think about half and half.

[Colin Langan:]

And then -- I mean any quantification of this deal had won the six pack to further share; is there…

[Brian Kesseler:]

Well, we couldn't talking about incentive to $20 million year-over-year since the beginning of the year and we continue to see that. As we mentioned in the last couple of updates, we have -- about 85% of our steel buyer locked in earlier in the year, so managing that last 15% is kind of normal, and so we still see that $20 million, it's really this $5 million to $10 million of extra tariff cost; that has increased and is what's effect in our outlook.

[Colin Langan:]

When it comes for the potential 301 tariff, I mean do you have a lot of part that are brought in from China; any color there that actually is on material risk at all or…

[Brian Kesseler:]

Not so much on our OE side of the business, so little bit on the Aftermarket but we also have the opportunity to in-store sales back into the state as necessary.

[Jason Hollar:]

And of course, the other piece of that is exactly what's going to happen with given that it's primarily Aftermarket. What will happen with the pricing in the marketplace as this works it's way through the overall supply chain and competitive environment; certainly that's where there is a lot of uncertainty as to the total net effect.

[Colin Langan:]

I mean, does that create an opportunity for you because isn't there a good chunk of Aftermarket parts that comes out of China today. They are from competition or is that not the case?

[Brian Kesseler:]

No, we believe it creates an opportunity in the Aftermarket for some of that entry point, product versus been offshored.

[Colin Langan:]

I mean any idea what percent of part that are currently out of China for Aftermarket?

[Brian Kesseler:]

Not in total, no. We have a general idea of the customers we serve but then there is the rest of the market, we're not exactly tuned into.

[Colin Langan:]

And just lastly, I mean maybe for Roger [ph], I mean you have pretty progress in powertrain from Borg and Dana. I mean what you see is different about Tenneco Federal-Mogul assets and sort of what is your sort of initial thought of strategy in your mind move differently on, going forward.

[Roger Wood:]

So again, I think it's the unique combination of the front part of the vehicle and the rear part of the vehicle when it comes to powertrain. There is nobody else that has the combination of that and for the last three decades that I've been in the business; we always kind of contemplate it what might mean to have both of those pieces together and this is an opportunity and one of the reason that I think it's a really exciting opportunity is because we have contemplated data over the last couple of decades and now we can actualize it and make it real. So again, my answer was to question's. I think there is an opportunity to provide trade-offs better than the two sides of this powertrain if you will; to provide an optimized solution for what the application is Off-Highway, industrial or even light vehicle. And there may be different ways to do that in each of those three sectors. But having both of them in-house, to be able to have the engineers work together on that optimized solution is I think what's unique about it.

[Colin Langan:]

And what is your view on EVs, I mean do you think -- it seemed like -- but do you really think you need to start of hedge that and grow opportunity there?

[Brian Kesseler:]

I think EVs actually have most definitive place and there is no question about it, there is a lot of people in the world focused on EVs right now and we believe that EVs will have a place in the line-up of vehicles if you will. We just believe strongly that it's not going to completely changeover to better electric vehicles in the near-term or the short-term and I think that's a view shared by most people in the industry. We believe the internal combustion engine and the related components with that are going to be around for at least the next three or four decades if you will. And supporting the electrification of vehicles, hybridization is a major focus of an awful lot of the OEMs right now and hybridization as you don't have an internal combustion system on them which has to meet all the regulatory requirements of the business. So, I think electrification is definitely a piece of our future but we don't think that it's going to obsolete internal combustion engines for decades.

[Operator:]

And the next question comes from Joseph Spak with RBC Capital Markets.

[Joseph Spak:]

The first question is just -- maybe you can talk a little bit about some of the factors for the organic growth in the back half because you're saying 5% for the year, 5% for the third quarter, and given the performance in the first half it's something softer in the fourth quarter. And we know there is issues in Europe with WLTT, I think you also have some much tougher commercial vehicle comps coming in the back half, so maybe just some of those factors and even what you're expecting for growth on CVs in the back half?

[Brian Kesseler:]

So we're exactly the growth in CTOH for the second half of the year wouldn't have given a view on that yet but you mentioned, we've got a tough comp year-over-year in the second half of the year, the CTOH really started rebounding strongly last year in the second half of the year. We do have some launches that are going on and some timing of returning platforms and new platforms that are affecting that and some of the softness that we're seeing in Europe is also affecting that. I think -- at the end of the day I think the year is going to show really good growth, just moderating little bit here as we whine down the year.

[Joseph Spak:]

And then maybe just on the deal and some of the structure that you guys have put out with the leverage. At least back in the envelope and based on some of the initial metrics you interfere for capitalization and EBITDA that you put out at the initial slide deck and which I think was back in April. You know, those net leverage targets [ph] that you point out for each business seem like they are on the synergized EBITDA, I just want to confirm that. And then also I guess I was a little bit surprised you didn't try to maybe put a little bit more on the Aftermarket business, a little bit less on the Powertrain, so maybe some of the discussion there and your level of comfort with that?

[Brian Kesseler:]

So it is like I figured on the synergized EBITDA, that's what we expect for the EBITDA that we see after one year after close. So the synergies that we expect to achieve in that first year. The second thing is if you look into what we currently believe the breakup will be the leverage ratio of the Aftermarket business will be higher than the Powertrain technology business. So we talk about 2.5X a year when it come out on the spin as an estimate, about 3X will be on the Aftermarket chassis [ph] business and Powertrain will be on the 2.2X, 2.3X range as we come out which -- cyclical businesses characteristics are different because of Aftermarket and our responsibility is to make sure that both new companies are set up to be highly successful right out of the gate. So that's already -- I think factored into our [indiscernible].

[Joseph Spak:]

Okay, because I thought -- and I could back and check this but I thought that synergy -- the initial sort of synergy that you realized -- that you mentioned were sort of more like a two-year rate; but so -- did something change there?

[Jason Hollar:]

No, I think just to be clear we've included within these leverage ratios the cadence of the synergies that we expect and what we said was, the $200 million would be achieved within 24 months but we also indicated that 75% of that will be achieved within the first year in our run rate. And so as we separate about a year after close, and you would expect a portion but not all that $200 million to be included within that run rate.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Linae Golla for any closing remarks.

[Linae Golla:]

Thank you, Phil. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone. The playback information is available in our press release. Thank you for joining us today.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may disconnect.