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Q3 2018 Earnings Call Transcript

Published: 26 Oct 2018

[Operator:]

Good morning and welcome to the Third Quarter 2018 Tenneco Inc. 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, that this event is being recorded. I would now like to turn the conference over to Linae Golla, Vice President, Investor Relations. Please go ahead.

[Linae Golla:]

Thank you and good morning. This morning, we released our third quarter earnings results and related financial information. On today’s call to discuss our results are Brian Kesseler, and Roger Wood, Co-Chief Executive Officer; and Jason Hollar, Chief Financial Officer. Slides corresponding to our prepared remarks are available on the Investors Section of our website. After our comments this morning, 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 needless to say today’s earnings release and our remarks do not include any results from Federal-Mogul for the third quarter as we closed that acquisition on our October 1st. With that, I will turn the call over to Brian.

[Brian Kesseler:]

Thanks, Linae. Good morning, and thanks for joining the call today. Beginning with our third quarter highlights on Slide 4. We delivered another solid quarter with record revenue and adjusted earnings per share spurred by strong organic growth across all product applications. Revenue for the third quarter was up 4% year-over-year or up 7% in constant currency. Outpacing industry production by nine percentage points. Our strong organic revenue growth continue to be supported impart by strength in our commercial truck and our highway business, which was up 27%. Value add adjusted EBIT margins in the quarter were 8.4%, which is consistent with our previous outlook. Our solids results quarter come against the backdrop of dynamic economic conditions we are seeing across the industry including concerns over trade and the impact of tariffs as well as currency fluctuations. The team's ability to execute in this environment demonstrates the strength of our business and how well we are positioned relative to key industry revenue drivers, some of which are shown on Slide 5. In China, we have a strong platform position with the customer base that includes all the leading global automakers as well as select domestic manufacturers. Regarding WLTP and diesel declines our light vehicle product mix is relatively insulated from diesel, in fact approximately 85% of our value-added revenue in Europe is unaffected by passenger cars diesel take rates. At this rate for the remaining 15%, we often have the offsetting gasoline share further mitigating the impact. In North America we continue to capitalize us on a strong and positive mix trend with pickup trucks and SUVs, which account for more than 80% of our light vehicle revenue and our strength in both commercial truck and off-highway applications position us well to capture global growth opportunities as evidenced by the strong revenue increases this quarter. Taking a closer look at value-add revenue on Slide 6. Value add revenue was up 5% in constant currency, strongly outpacing light vehicle industry production, which was down 2%. Higher commercial truck and off-highway revenue was a major contributor to our results supported by the strength of our diversified portfolio in each of the other product applications. Earnings for the quarter on Slide 7. Adjusted EBIT was $149 million for value-added adjusted EBIT margin of 8.4% in-line with our previous outlook. Similar to last quarter, we are impact by steel economics and tariff related costs primarily in Ride Performance. The overall impact of the Company's EBIT margin was about 30 basis points year-over-year. Currency also had a negative impact on margins of about 20 basis points, mainly related to transactional losses in Argentina. Our adjusted EPS for the third quarter was up $0.03 to a record $1.70 per share. Our results this quarter are a tribute to the hard working Tenneco team members around the world and I want to thank them for all they do every day to make our customers and Tenneco successful. On October 1st we officially closed the Federal-Mogul acquisition marking an important first step in this process for us. Since closing day Roger and I have met and talked with 100s of employees who are as passionate about serving our customers today as they are to capitalize on tomorrow’s opportunities. Their enthusiasm is truly inspiring and their energy has already begun fuelling our transformation into two strong leading global businesses. With that, I will now turn the call over to Jason to discuss our results in more detail.

[Jason Hollar:]

Thanks Brian. As we turn to the segment results for the quarter, a reminder that all revenue numbers are value add with the year-over-year performance calculated in constant currency. Beginning with Clean Air results on Slide 8, value add revenue was up 6% in the quarter. Some of the highlights include; 16 platform wins in China, the majority of which are awards of leading global with domestic OEs, seven new platforms in India including four Commercial Truck programs and two additional hybrid wins in the Asia-Pacific region for total nine hybrid program awards in 2018 year-to-date. In Commercial Truck & Off-Highway strong revenue growth continue driven by the Americas and EMEA regions; and higher volumes new program launches and regulatory driven content all contributing to 25% revenue growth versus last year. In the Americas higher volumes with CAT and John Deere and a ramp up on our new medium duty commercial truck business with Daimler Truck contributed to revenue gains. In EMEA similar to last quarter new programs with Deutz and MAN and buying strength in existing programs with Caterpillar and Daimler Truck drove higher revenues. Asia Pacific region was basically flat with lower commercial truck volumes in China offsetting growth in India driven by the ramp up of new content to meet the broad stage four regulation. As well as higher volumes on existing off-highway platforms for Kubota in Japan. Turning to light vehicles. Tenneco’s global clean air light vehicle revenues in the third quarter were up 2% versus last year; in North America, revenues increased 7% outpacing industry production growth as we benefitted from our strong position in SUVs, cross-over’s and pickups. As Brian mentioned, pickups and SUVs represented more than 80% of our light vehicle revenue and we continue to benefit from this positive trend. Some of the models contributing to year-over-year revenue growth were Ford SUVs and F series truck, Chevy midsized SUVs and Jeep Cherokee and Wrangler. South America revenue was down slightly in the quarter. Light vehicle revenue in EMEA rose 3% strongly outpacing industry production that was down 5%; strong growth was driven by new content and recent launches for Daimler, BMW and Ford. In the Asia Pacific region revenues were lower versus last year; China revenue was down by 4% which was in-line with industry production. The end of OE customer production in Australia had a 500 basis points impact on the year-over-year revenue results which accounted for more than half the decline in the region; however, revenue growth remains strong in India driven by higher revenue on programs of Fiat, Audi, BMW and Ford. Clean air adjusted EBIT was $108 million in the third quarter and value added adjusted EBIT margin was 10.7%. Turning now to Ride Performance on Slide 9. Revenue in the third quarter was up 5%; we continue to have steady growth in our secured revenue from Intelligent Suspension Systems as highlighted by the addition of two new programs win and launches on two new platforms in the quarter. In the Americas we outperformed the market again this quarter with growth driven mainly by higher revenue on new light vehicle programs with VW and FCA and NBH content growth, including on our recently launched battery electric vehicle program. EMEA revenue was down 4%, which is in line with lower industry production. We saw lower volume for several programs, which more than offset growth on a number of new and existing platforms with Ford, BMW, Daimler, and Jaguar. Revenue growth continued in Asia Pacific region, as we outpaced industry production in China and India. Growth in India included higher revenues on new programs with Fiat and Tata as well as growth in current business with Ford, Maruti Suzuki and Toyota. CTLA’s revenue increased by double-digits again this quarter supported by growth with Paccar, Daimler truck and Henderson in the Americas. Year-over-year revenue growth in EMEA was driven by higher volumes with Volvo truck, Paccar and Scania. Right performance adjusted EBIT was $70 million and value-added adjusted EBIT margin was 3.7%. Including these results are still economics and tariff costs impacting year-over-year margin by approximately 90 basis points. We talked about the impact steel cost have on margins, particularly in Ride Performance and we continue to make good progress on recovery mechanisms and managing our exposure to indexing. We now have formal agreements in place with all but one customer and we expect that resolved by the end of the calendar year. During last quarter's call, Brian talked about the need to address our long-term cost position in conventional shocks and struts particularly in North America. Earlier today we announced plans to restructure our conventional shocks and struts operations in North America, which will result in the closure two of our four manufacturing facilities in the region. We expect actions announced today will strengthen our competitiveness in this critically important region by lowering our fixed cost structure, resulting in annual run rate fixed cost savings of between $20 million and $25 million, which we would expect to be realized by the end of 2020. Keep in mind that these operational improvements are completely separate from the synergy related actions related to the Federal-Mogul acquisition. The aftermarket results for the quarter on Slide 10. Global after market revenue for the quarter was up 1% versus last year. Aftermarket continues to win new business and expand product coverage, some third quarter highlights include, continued growth in China with a 44% increase in sales versus last year, 18 new distributors, 430 new Monroe's first providers and coverage expanded with 122 SKUs launched. We continue to expand our product portfolio and coverage reach in North America with 160 new ride control SKUs and two new distributors were added in both North and South America. After market revenue in the Americas was up 2%, driven mainly by continued double-digit growth in South America. North America, revenue was about even versus last year with continuing improvement in retail customers out the door sales, which resulted in late second quarter. The EMEA region sales were down 4% versus last year. During the quarter, we saw continued customer warehouse consolidation in established markets and lower revenue in Turkey due to economic pressures. Good growth continued this quarter in Asia Pacific aftermarket with double-digit revenue growth in both China and India fueled by the investments we are making to build our brands and distribution networks. Aftermarket adjusted EBIT was $48 million and value-added adjusted EBIT margin was 15.5%. Moving on to Slide 11. With the Q3 adjustments affecting year-over-year comparability of our results, we recorded restructuring related expense of $12 million, primarily related to costs for the accelerated move of our Beijing Ride Performance plant. We expect all assemblies to be relocated to the new facility by the end of the year and the component manufacturing relocation to be complete during the first quarter of 2019. Related to the Federal-Mogul acquisition, we incurred costs in the third quarter including $12 million of acquisition advisory costs and $4 million in structural cost improvements primarily for the reduction of salary headcount in advance of the closing of the transaction. This quarter we also recorded $10 million for costs associated with the litigation resolution. Turning to taxes on Slide 12. Before adjustments, third quarter tax expense was $28 million on effective tax rate of 22% in the quarter and 23% year-to-date. Our tax rate improved this quarter as a result of securing the high tech designation on our Chinese operations. With the addition of the Federal-Mogul business in our fourth-quarter results we expect Q4 effective tax rates in the range of 25% to 28%. Cash tax payments in the quarter were $23 million; in the fourth quarter we expect cash payments for the combined business of between $45 million and $55 million. Although we anticipate providing additional 2019 guidance early next year, it is important to realize that this Q4 effective tax rate range is lower than the anticipated 2019 rate by approximately 200 basis points as a result of the inclusion of a full-year Federal-Mogul results. Tax planning considerations are underway for long-term improvements to effective tax rate with the objective to improve them in a manner consistent with what Tenneco has experienced in the past several years. Moving to cash flow on Slide 13. Cash used by operations in the third quarter was $41 million driven by investment in working capital to support revenue growth as well as cash payments for transaction costs. Capital investments in the quarter were $77 million, that is down from $92 million spent in third quarter last year as a timing of capital expenditures is often lumpy from quarter-to-quarter. In the third quarter, we paid a 25% per share dividend to stockholders totaling $14 million. As a result of the Federal-Mogul transaction and resulting higher share count, this quarterly dividend payment will increase to $20 million beginning in the fourth quarter. In the view of our current stock price and overall sector valuations, we plan to evaluate the best methodology return this value to our shareholders next quarter. This may result in a change in the dividend and returning that capital via share buybacks in a comparable amount. Turning to Slide 14. At quarter end, net debt was $1.341 billion; interest expense in the quarter was $21 million, $2 million higher than last year due to higher interest rates on our floating-rate debt. Our net leverage ratio improved to 1.5 times. With that, I'll turn the call back to Brian.

[Brian Kesseler:]

Thanks, Jason. Turning now to Slide 15 and our outlook for the fourth quarter. Because this quarter will include Federal-Mogul results for the first time, we are providing more information than typical for this outlook. Beginning with revenue and looking just at legacy Tenneco revenue, we expect constant currency organic growth of 3% in the quarter which will outpace forecasted light vehicle industry production growth of 1%. Based on the September month end exchange rate, we anticipate currency would have negative 3% year-over-year impact on revenue. In addition to this organic growth we expect Federal-Mogul revenue of approximately $1.9 billion in the fourth quarter, resulting in a total combined revenue of about $4.3 billion for the fourth quarter. On the right side of the chart you will see a table of outlook information for the combined Tenneco and Federal-Mogul businesses. Notably in the fourth quarter, we expect value-add adjusted EBITDA margin in the range of 11% to 11.4%. Additionally, you will find other financial assumptions in the table and a reminder you that all these figures refer to the combined companies in the fourth quarter. For the full-year outlook on Slide 16, we are raising our Tenneco revenue outlook and now expect 6% constant currency organic revenue growth outpacing industry production by five percentage points. Because of this strong organic growth as well the acquisition of Federal-Mogul we expect full-year revenues of approximately $11.8 billion, which represent the fourth quarter, Federal-Mogul revenue plus a full-year of Tenneco revenue. For the full-year, we expect combined Tenneco and Federal-Mogul value add adjusted EBITDA margin in the range of 11.3% to 11.5%. We expect Tenneco only value-added adjusted EBIT margin of approximately 8.5%, which is within the previous guidance range. Because of the unique position we are in combining the businesses and creating two new companies, I thought it would be helpful to provide some insight as to what you can expect as we report our results for the fourth quarter and first quarter of next year. You will find this on Slide 17. We will report fourth quarter and full-year 2018 results in early February. For the remainder of 2018, we will measure our results under the existing segmentation and add two segments to represent the two Federal-Mogul businesses. As part of our transition of the operations towards the separation of the two companies, we expect to revise our segments beginning in first quarter 2019 to reflect how the business will be managed going forward. We expect this segments will be clean air and powertrain, which will transition to the new Tenneco company and aftermarket and OE, which will continue as segments in the SpinCo. We plan to provide our 2019 full-year guidance when we release our fourth quarter results in February. Our results this quarter reflect the strength of our growth strategies as well as our commitment to improve our profitability by continuing to focus on sound fundamentals, including achieving cost leadership, investing in advance technology and capitalizing on global trends to drive growth. As I mentioned when we spoke last quarter, I see tremendous upside in growth and earnings potential for the Ride Performance business and the path to success begins with a cost competitive manufacturing footprint. Restructuring actions we announced this morning will help us respond to changing marketing capacity conditions in North America, significantly enhancing our operational efficiency and improving our competitiveness in the region. Our focus on cost leadership accelerates profitable growth by enabling investments in advanced technologies and innovative products and systems. Our intelligence suspension portfolio is a technology with the power to set Tenneco apart from the competition and help our customers products stand out in the marketplace at the same time. The latest example of this is our CVSAe Intelligent Suspension System we are now supplying on the all-new Volvo XC 40. The compact SUV that was named European car of the year for 2018. We are also well-positioned for steady growth in the global aftermarket supported by a growing and aging car part particularly in high-growth areas like Asia Pacific and China in particular, but the average vehicle age from four years today to eight years by 2025 with a stable of industry leading brands and unmatched capabilities and distribution training and service, the combination of Tenneco and Federal-Mogul would be poised to capitalize on the long-term growth of the global aftermarket. Another enabler of our success is our ongoing focus on understanding and aligning with the global market and regulatory trends shaping the business landscape and creating opportunities for growth. Our commercial truck and off-highway business is a perfect example of this. The result we see today are the products of years of hard work and investment to develop the winning combination of after treatment technologies and global engineering and manufacturing capabilities to design specific solutions that meet customer requirements in any regulated market anywhere in the world. Before I turn it over to Roger, I will summarize by saying that our results during the third quarter are a testament to the strength and diversity of our business; between our geographic footprint, our strong platform position with the world leading OEMs and an unmatched portfolio of technologies, products and brands we are well-positioned to continue to outperform the industry. With that I would like to invite Roger to provide a brief Federal-Mogul update on Slide 18.

[Roger Wood:]

Thanks, Brian. As I'm sure you are all aware the acquisition officially closed on October 1st and integration teams are continuing the work of combining the best of Tenneco and Federal-Mogul to create two industry leaders in the respective markets. A major focus of the integration team is developing roadmaps to achieve the financial synergies targeted as part of the acquisition and I can report that we have a clear line of sight to achieving our targets of $200 million in EBITDA synergies and $250 million in working capital synergies. Brian and I are both putting the leadership teams in place for both companies and working on the brand positioning and identities for both as well. As Brian mentioned, you can expect to hear much more from us regarding our business strategies, organizations and details about the new companies early next year. Looking further out into 2019, some of the major milestones as we prepare for separation include the preliminary Form 10 filing, financing for the new aftermarket and Ride Performance company and legal separation complete in late 2019. To sum it up while I have only been an official employee since October 1, I have been extremely impressed with the engagement and the growing excitement among the Tenneco and Federal-Mogul team members that I have seen firsthand in my visits to plants, technical centers and offices. We have lots to do, there teams of talented hard-working people addressing every challenge and I’m looking forward to continuing to update you as we accelerate our progress. Back to you Brian.

[Brian Kesseler:]

Thanks, Roger. I’m excited to be working alongside Roger during this transformational time creating two strong purpose built global businesses. With an increasingly dynamic global landscape of focus and market-leading positions of the two post-spin companies will become increasingly important. With the close of the transaction now behind us our teams are laser focused on the integration and separation late next year. Thank you for your continued interest in Tenneco and for joining us this morning. And with that we are ready to take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Rich Kwas with Wells Fargo Security. Please go ahead with your question.

[Rich Kwas:]

Hi good morning everyone. Just on I think Jason talked about indexing so at this point what percentage on Ride Performance is now indexed for legacy Tenneco and early on I guess Brian or Roger could comment on this, but with regards to kind of capital efficiency et cetera with Federal-Mogul now under the umbrella, what are you seeing I mean I know it’s been less than a month, but what are your expectations around trying to rationalize some of the capital-intensity of the business as you forward. So thanks, so much.

[Brian Kesseler:]

I will grab the steel index and agreements we have with our customers as Jason mentioned we are down to one customer to get to an agreement. Our intention is to have that completed by the end of the year. Right now with the agreements we have, we are about 75%, 80% indexed in Ride Performance business with the conclusion and agreement that we reach with the final customer will be closer to 90% indexed and with other formal agreement. So I think the team has made good progress there. You know from a motor parts side of Federal-Mogul, we look at their capital with CapEx spending as a percentage of revenue on the OE side, it's roughly in-line with what we see in our Ride Performance, but we will always look for opportunities to maximize capacity utilization there to lower-cost. I think maybe from powertrain side I will let Roger speak to it.

[Roger Wood:]

Yes. I think it’s not that much super and Brian's answer for that side of the business. We are looking at that right now and the real positive news from my perspective is that Federal-Mogul invested I think quite well in the capabilities of the organization. And so looking out forward the investments as appose to infrastructure investments will be more in-line with the business that we are able to capture. So we are looking at how we can rationalize those right now and we will have better data for you in the begging of next year.

[Rich Kwas:]

Okay. And then just a follow-up on the indexing, so with Federal-Mogul my recollection was when you first announced the transaction the thought was they weren’t as covered with regard relative to legacy Tenneco, is there a lot more work to do with them under the umbrella on this front on motor parts.

[Brian Kesseler:]

Yes. I think on the motor part side we are pretty well indexed, remember on that motor parts business they are kind of the inverse of us on mix, they are more 30% OE and 70% aftermarket and as you know on the aftermarket with 90 day notice we go for recoveries there. On the powertrain side, you know obviously they have been hit with steel, but they also have a couple more commodities that come into play aluminum being a primary one. They have done a nice job of getting offsets I know Rainer and the team continue to work for clear formal indexing as we go. As we look at where they are at to-date, there is a lot of movement yet this quarter, and I think we will be able to give some pretty good insight there when we get into the first quarter.

[Rich Kwas:]

Okay. And then just last one on aftermarket with section 301 in effect now for China, how is this going to affect the business for the aftermarket piece is it cost or competitive.

[Jason Hollar:]

Yes so I think two kind of dimensions there, on the cost side the team has done a nice job of working with the customer base and are passing through those costs as they came into the fourth quarter on both sides maybe about a 30 day difference between the two business motor parts and the Tenneco aftermarket side and then the 301 as it comes into the beginning of the year there is lot of moving pieces there. On the aftermarket, it opens up some opportunity for us, we have got some capacity that we can activate and bring back into the U.S. some production that was currently or formerly in the China, and then we are finding good ways to offset some of the 232 duty drawbacks between steel movements between Canada and the U.S. So lot of moving pieces there and pretty dynamic environment, we are working with our customers for design changes and reclassification of parts. So I think our guidance last quarter was the tariffs would be about $5 million, $10 million impact. I think as we look at it now on the second half of the year, as we look at it now we are probably in the lower end of that range and that is contemplated in the margin guidance that we highlighted in our discussion earlier today.

[Rich Kwas:]

Great. Thank you for the color.

[Operator:]

And our next question comes from Colin Langan from UBS. Please go ahead.

[Colin Langan:]

Oh great, thanks for taking my question. Just a follow-up on that. I mean any sense of what percent of the market and aftermarket is coming from China today and how much are you sourcing from China for your aftermarket?

[Brian Kesseler:]

That is a little difficult to get our arms around from a total industry perspective. Probably the best way to think about it is the opening price point lines into the aftermarket are primarily coming from overseas and so there is a lot of pressure there that obviously started on October 1st. From our perspective, on our ride control business probably in the teens as a percent on the ride control side, so that is an opportunity for us. On the motor parts side, it really moves all over the place based on the product line. So it would be a real tough to give you a number that would make any sense.

[Colin Langan:]

I mean so do you think you have the advantage or disadvantage from potential for tariff that may go to 25% by the end of the year. So do you think you could maybe capitalize because you have the U.S. base and the Chinese competition gets flushed out or is it neutral? I mean any thoughts there?

[Brian Kesseler:]

On several of our product lines I think it’s an opportunity for us. A couple of them where we may not have domestic capacity on the grounds, you will be at least neutral I don’t know. So nowhere soft on any of the categories and upside on three to four of them for sure.

[Colin Langan:]

Okay. If we just cover the overall organic growth it clearly was a pretty good positive outlier relative to other companies in the quarter, and you mentioned a lot of factors, I mean what are the key drivers in your view if we would bucket in just two or three buckets. I mean was it a lot of customers mix that help because you mentioned a lot of product was there any help from WLPT, is there some content being added and Europe as a result of that or was it really like the commercial vehicle and off-highway being the big driver, I mean what were those the big bucket?

[Brian Kesseler:]

Yes. I guess if I go out maybe some up into four, in the U.S. where a lot of the pressure on the reduction in production comes from the cars. We are not mixed there very much at all, that is still above 80% of our U.S. business is truck SUV, CUV so that is a major factor. Obviously we had great growth in our commercial truck off-highway business so that was a major contributor. Our aftermarket business was steady, so holds there and that helps the overall mix from a revenue perspective, in the declining industry production light vehicle mix. And then from Europe perspective WLTP, we don't see a lot impact on our business there and even with RVE coming into effect the first round was came into effect last year, the second round was just coming here in September 2019, most of our business if not all of our businesses already RVE compliant and some of them are even more compliant especially in the new diesel programs coming in. So with less than 85% of our Europe revenue kind of diesel impacted, we are not getting hit very hard on that and in fact as we mentioned, even if there is a switch to gas in most applications, we probably have the gas side too, so it doesn't impact us nearly as much.

[Colin Langan:]

Got it. And just lastly, the Ride Performance restructuring, margins there clearly much lower in Ride Performance in the rest of the business. Any color on what is the North America opportunity, is that a big drag today, is that driving the overall segment down, is Europe much better, I mean any color on where we are I guess like I’m trying to get is where margin could go once the restructuring is completed and is there good precedent around the rest of the world so we are kind hitting the higher margin.

[Brian Kesseler:]

Yes. I think if you look at Ride Performance’s segment. Obviously, we are way over waited there from the steel and tariff impacts that have happened over the last - since the beginning of 2017. So that has been a major drag, you saw was year-over-year or even a lighter impact than it was last year 90 basis points year-over-year margin drag and that is both U.S. and Europe, you were probably better positioned from a Europe perspective more closely to that 90% today. So most of our opportunities with one the customer, we have left is in the U.S. So steel is the biggest impact, but you see that $20 million to $25 million fixed cost improvement as we realign our manufacturing footprint that is a big drag. As we mentioned last quarter very pleased with the profitability that we see on our Intelligent Suspension product line, our NVH group just continues to do a fantastic job. So satisfied with where we are at there. The conventional business in China with the investments we are making there, very pleased with. The conventional business in North America is by far the most challenged business and by getting this fixed cost out of the system and a couple of the moves that we are going to make and getting that steel commodity rest over the ground finally, I think we can get more into a normalized OE margin on that conventional product line.

[Colin Langan:]

Okay and what do you mean by normalized OE margin, because it looks like year-to-date you are like a four- looks like it’s even up slightly year-over-year? Do you still like the 10 or something like that or.

[Brian Kesseler:]

I think high singles, low 10 or 11s on a product line that is you know maybe lower technology, we would expect higher technology would have better margins.

[Jason Hollar:]

Yes and just another way of thinking about that as Brian mentioned is nearly 100basis points. Just this year in terms of the impact of steel, it was twice that amount roughly last year. So just to get it back to where we were a few years ago implies that we need to get a lead 300 basis points and of course then we have the excess capacity, which these restructuring actions are focused on as well. So that gets that same range Brian was talking about, which also I think is going to be the range that is needed to get the right return on invested capital. This business at this level we can’t justify additional investments, but with that type of margin we certainly can and that is where we need to build to get it go have a long-term strong stable business.

[Brian Kesseler:]

Yes, our intent both in Europe and in North America is we are going to cap our capacity on the conventional product line and make sure that it goes to kind of that customers set that is rounding out the portfolio with our Intelligent Suspension product line and their need then for the conventional to round off their platforms.

[Colin Langan:]

Got it. Good. Thank you very much.

[Operator:]

And our next question comes from David Tamberrino from Goldman Sachs. Please go ahead with your question.

[Unidentified Analyst:]

Hi this is [Mary] (Ph) on for David Tamberrino. So I guess the first question we had is it seems like you guys did a really good job of sort of mitigating like China as well as European headwinds in the quarter. Can you speak a little bit to your customer mix in those regions and I guess how much of that mitigation would be attributable to just better customer mix?

[Brian Kesseler:]

I think a lot of it is with our customer mix. I will start with China, China - we are heavily mixed towards the global OE JVs and we have been pretty selective over the years around specific domestic OEs. There is different characteristics that we look at and there is three or four domestic OEs that we enjoy great business with and they have been impacted less so than some of the other domestics. So I think that helps. We also get the content growth with the new regulations that are going on the clean air and then we have been growing good share on our Ride Performance business over in China. If I flip over to Europe, a lot of the movement that we hear and that we see related to WLTP and to diesel, most of our customers if not all are already compliant and so they are not having to take product lines out or delay product lines and so I think that helps a lot also. And don’t forget the commercial truck off-highway business did had some nice growth both in North America and Europe.

[Unidentified Analyst:]

I guess just on the commercial truck and off-highway I think that has been a tailwind for you guys for a while. What are you guys expectations going forward for that to continue being a tailwind or sort of like I guess to dampen a little bit?

[Jason Hollar:]

I think that we really have been looking forward to the recovery in commercial truck off-highway for a number of years. They are a little stronger this quarter than we initially expected coming in, so which was good to see, because we were lapping a pretty strong quarter last year. So we see the same double-digit in the 20s in Q4, no I think we are probably slowing down high single digits at least on a year-over-year comparison and that is still good because Q4 was a real strong growth for us there, but a lot of that is one that is recovery in marketplace, so we are also launching and lapping some great launches that we have in Europe. Last year we had MAN, we had Deutz lapping, Kubota continues to do well out of Japan and from a regulated region perspective the growth with CAT and Deeres is also helping us quite a bit too. So more and more as the emissions regulations get stricter in that commercial truck off-highway space, especially in APAC that is huge growth engine for the clean-air business and for the Federal-Mogul powertrain business going forward. So that is why we are still optimistic about the growth characteristics in that business.

[Unidentified Analyst:]

Thank you for taking our questions.

[Operator:]

And the next question comes from [indiscernible] from Alliance. Please go ahead.

[Unidentified Analyst:]

Hi good morning guys. A couple of questions, can you just remind me, and really ideally as a combined company if you don’t have that adjusted Tenneco's, kind of what proportion of your production facilities are actually based in China?

[Brian Kesseler:]

Proportion, I guess 20 plus Tenneco locations there between clean air, very heavy clean air but this is obviously Tenneco. And a handful on the Ride Performance side in China. I don't have the Federal-Mogul numbers memorized in my head like I do the Tenneco, but it is at least equivalent it is in the 20 plus range.

[Jason Hollar:]

20% range.

[Unidentified Analyst:]

And how many facilities in total, so the 20 is what percentage of your total globally?

[Brian Kesseler:]

Well, if I take tech center and plants 20% to 25%. That is legacy Tenneco.

[Unidentified Analyst:]

Okay thank you and then can you remind me, I know the new course going to be split again in two and you kind of gave a leverage target of three and 2.3 initial spin off. But can you remind me now that the Tenneco acquisition is - Federal-Mogul acquisition is closed, what is your kind of pro forma leverage now as of consolidated company where we stand today?

[Brian Kesseler:]

Yes. What we communicated in the past was three times leverage at close and that will be still the best estimate that we have for what the first quarter here of - now remember that the transaction closed within the fourth quarter. So you will see that at Q4 ending that is what we anticipate it being.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

And our next question comes from Joseph Spak with RBC Capital Markets. Please go ahead.

[Joseph Spak:]

Thanks. Good morning everyone. Just to go back to the possibility to reopen some U.S. capacity on the aftermarket. Is that initiative taken on your own or is that in conjunction with some customers that have asked you to do so. And if so, are there secured other potentials with that.

[Brian Kesseler:]

Yes, let me split the answer in two. From the OE side, really not impacted very much at all with the 301. Long standing policy that Tenneco has had around making where we sell, especially on the OE side. So there is really not a lot of impact on our OE side for the 301, specifically on the Ride Performance. A little bit in clean air with some of the smaller parts, but all in the process of being mitigated. It’s really an market opportunity that we see particularly on the Ride Control. So that is really the opportunity that we are doing, we are going to be more cost competitive with the tariffs now applied to the delivered cost formula and so it’s really something we are doing to be more competitive in the marketplace also to help our aftermarket customers be successful and get done what they want to get done.

[Joseph Spak:]

Right. So I guess like those aftermarket customers as that - is that something you are offering to them or they are coming to you or how is that…

[Brian Kesseler:]

So proactively when we started seeing these coming with all the noise in the system earlier in the summer, we activated the necessary changes to be able to bring in production. We will be able to have it here in the states within the first quarter.

[Joseph Spak:]

Okay and then I guess staying with aftermarket and correct me if I’m wrong, but I believe on the Federal-Mogul side, when it was under Icahn ownership, there were some customers who sort of moved away from Federal-Mogul as a supplier. I was wondering now that it seems to be maybe more independent to put it. Is there an opportunity for some of that business to come back, are you seeing any of that, are there discussion about that and can you help us if it's true help us quantify the potential magnitude?

[Brian Kesseler:]

Yes. I think there was some concerns from the big customers inside North America, and this is really a North America specific discussion, back two, three years ago around the perceived channel conflict and other activities that were going on and there was a momentum built up to seek alternative sources that was all contemplated within our discussion during the acquisitions. So we think there is a couple of $100 million of revenue that over the last several years has leaked out of the potential, but all those things are up on the table and we are talking to everyone of those customers to go earn that back. And our intent is to go get it back, but we are going to get it at the right profit margins and right returns, but the Tenneco team and the Federal-Mogul team, the overwhelming majority have great relationships with the OEs and I think now that maybe that conflict in their eyes being mitigated some opens the door for us to go back and get that business and earn it back with each of the customers.

[Joseph Spak:]

Okay, great. Helpful. thanks.

[Brian Kesseler:]

Thanks Joe.

[Operator:]

And 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, and thanks to everyone for joining our call today. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone and the playback information is available in our press release. Thank you. This concludes our call.

[Operator:]

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