Tsakos Energy Navigation Limited
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good day, and welcome to the Second Quarter 2017 Tenneco Inc. Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Linae Golla, Executive Director, Investor Relations. Please go ahead.

[Linae Golla:]

Thank you. Good morning. This morning we released our second quarter 2017 earnings and related financial information. On our call today, to take you through the results, are Brian Kesseler, Chief Executive Officer, and Ken Trammell, Chief Financial Officer. The 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, I need to tell you 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 J. Kesseler:]

Thanks, Linae. Good morning, and thanks for joining our call. At mid-year, we've delivered a strong year-to-date performance with revenue and earnings growth, stronger cash performance, and returns to our shareholders. Effective growth drivers and a uniquely diversified portfolio continue to deliver consistent results, including revenue growth that outpaces industry production. In the second quarter, global light vehicle production was flat while our constant dollar revenue grew by 6%. We had strong double-digit revenue growth in commercial truck and off-highway, including improving volumes with North America off-highway customers versus last quarter. We also delivered record high second quarter adjusted EBIT, net income and earnings per share, and we continued returns to our shareholders through dividends and share repurchases. Let's first look at revenue on slide four. Revenue in constant currency grew 6% in the quarter, strongly outpacing the industry with solid gains in both Ride Performance and Clean Air. Structural drivers in both product lines continue to underpin our revenue performance. Including our outstanding light vehicle platform position globally, we serve nearly every major vehicle manufacturer with product on more than 400 platforms around the world. Clean Air regulatory-driven content on light vehicle, commercial truck and off-highway programs; increasing Ride Performance content as demand for advanced suspension systems increases with higher installation rates for these technologies; and Tenneco's strong global aftermarket position. Our revenue growth this quarter demonstrates Tenneco's competitive advantage with strong balance across the end markets, customers, regions, vehicle platforms, and product lines. Light vehicle revenue was up 5% against flat global industry production. This solid growth was due to our diversified customer base and having content on top-selling platforms, including in North America where our revenue mix is strongly levered toward crossovers, SUVs, and light trucks, the preferred vehicle choices for consumers today. We also benefited from serving multiple end markets. Commercial truck revenue increased 26% on stronger volumes in all regions and off-highway revenue was up 8% on higher volumes in Europe and Japan. In North America, off-highway volumes were roughly flat year-over-year although sequentially up from the first quarter, which is encouraging for a market that has been extremely weak. Finally, our global aftermarket revenue was flat, about in line with what we're seeing in the market for our product lines in North America and Europe, our two largest aftermarket regions. Turning now to earnings on slide five. On an adjusted basis, EBIT grew to a record $179 million, including $8 million in negative currency. Our EBIT margin in the quarter, excluding a 30 basis point currency impact, was 10.4%, in line with the prior year. This quarter, EBIT was driven by our top-line growth, including leveraging higher light vehicle volumes with a strong platform mix, a benefit from new light vehicle program launches in both Ride Performance and Clean Air, incremental content and stronger volumes on commercial truck programs, and higher year-over-year off-highway revenue. In addition, we saw sequential quarterly improvement in our North America Clean Air margins and continue to expect them to return to normalized rates for the second half of the year. Working against us in the quarter was the timing of steel recoveries and other offsets in Ride Performance Europe and North America, and in Asia Pacific, Clean Air. We fully expect to be in normal margin ranges for these businesses beginning in the fourth quarter into the first quarter of next year. Overall, we delivered a strong quarter with record second quarter adjusted earnings per share of $1.90. Finally, before I turn the call over to Ken, I want to thank our team members for their efforts every day to meet customer commitments and drive results. Their focus on execution and continuous improvement in everything we do allows us to deliver greater value to our customers and to our shareholders. With that, I'll turn the call over to Ken.

[Kenneth R. Trammell:]

Thanks, Brian, and good morning. I'll turn first to our Ride Performance and Clean Air segments. And please keep in mind that value-add revenues are at constant currency. The details are on the slides. So I'll just add some color, starting with Ride Performance on slide six. Revenue was up 6% with all three segments outpacing industry production on the strength of new programs and stronger volumes on current platforms. In particular, in Asia Pacific, light vehicle revenue increased 25% on strong China growth and market share gains, including new program launches with Jaguar Land Rover and SGM and higher volumes on existing platforms with SVW, SGM, and Fiat Chrysler. We also had a number of new launches in Europe, including with Jaguar Land Rover, Peugeot, Renault, and on Monroe Intelligent Suspension systems with Volkswagen. Stronger volumes also drove Europe's growth on platforms with Audi, Mazda, and VW. And in North America, we benefited from new programs with Ford, Jeep, and VW. Ride Performance in the commercial truck market also delivered good performance, with growth in Europe on platforms with Daimler, Paccar, Scania, and Volvo Truck. In addition, we saw improvement in North America where we outpaced industry truck production driven by stronger volumes. Globally, Ride Performance aftermarket revenues were about even with last year. Ride Performance adjusted EBIT this quarter was $72 million, and EBIT margin was 10.3% reflecting top-line growth. However, the timing of steel economic recoveries and other offsets had a negative impact. As Brian already mentioned, we expect Ride Performance margins for both the North America and the Europe/South America segments to return to normal ranges beginning in the fourth quarter and into the first quarter of next year. Now looking at the Clean Air results on slide seven. Clean Air revenue was up 6%. Both the North America and Europe/South America segments delivered light vehicle revenue growth outpacing industry production, and China was in line with the industry. In North America, we had strong volumes on existing programs with Ford and GM, including the Ford F-150 and Super Duty pickup trucks, and on the GM Colorado Canyon, Equinox, and Duramax platforms. In Europe, light vehicle revenue was also driven by stronger volumes on existing platforms, including with VW, Daimler, Jaguar, and Renault. Clean Air commercial truck and off-highway revenue showed strong increases in the Europe/South America and Asia Pacific segments and was flat in North America. Asia Pacific CTOH revenue was up 48%, driven by higher commercial truck volumes in China and a ramp-up on programs in India that we've launched to meet the Bharat Stage IV regulations. Stronger commercial truck volumes in Europe and South America also contributed to the gain. In off-highway, the highlights include higher volumes on programs with Kubota in Japan and incremental business with Deutz in Europe. North America revenue was flat with a year ago but has improved since the first quarter. This is a positive sign for a market where we are well positioned to leverage stronger volumes. Clean Air adjusted EBIT was $126 million in the quarter, and EBIT margin was 11.7%, driven by stronger light vehicle volumes and the benefit from higher commercial truck revenue. The timing of steel economic recoveries also had an impact on our Asia Pacific margins where we expect to return to more normal margin levels later this year and into the first quarter of 2018. In North America, the Clean Air margins continue to improve sequentially, and as we have said before, we expect to be at normal levels for the back half of the year. Brian has covered our second quarter financial highlights. So I'll move on to adjustments on slide 10, affecting year-over-year comparability. First, we recorded a $132 million reserve for settlement of the global anti-trust litigation, investigation, and related litigation. We initially announced the global anti-trust investigation in March 2014. Since then, we have obtained conditional leniency from the U.S. Department of Justice in November 2014, and earlier in the second quarter, the European Commission notified us that it has administratively closed its global anti-trust inquiry. No charges against Tenneco or any other competitor were initiated at anytime, and the EC inquiry is now closed. The reserve we recorded is for settlement costs that we expect will be necessary to resolve remaining anti-trust matters globally, which are primarily civil suits and related claims. To-date, we have paid a total of $45 million of this reserve. It's difficult to estimate when settlements will be reached and cash payments made, but we do expect that remaining matters will be resolved over the next 12 months to 18 months. This quarter, we have restructuring and related expense of $17 million, mostly related to a $12 million charge for the closure of a Clean Air plant in Australia, as General Motors and Toyota are ending vehicle production in that country later this year. We expect an additional $8 million of charges related to Australia in the third quarter. Additionally, we settled an outstanding warranty matter, resulting in a $7 million charge. Also, this quarter, we sold our interest in a non-core unconsolidated joint venture in Europe, and we realized a net gain of $5 million on the disposal. And in May, we amended and restated our senior credit facility and we recorded a $1 million refinancing charge. I'll go over the highlights of the refinancing in just a few slides. Now before I move on to taxes, let me explain the prior-period financial result revisions. Those financial results have been revised for certain immaterial supplier cost reduction payments that we determined should have been recognized in future periods and not in the period that payment was received. Our 10-Q will contain a more detailed reconciliation of these immaterial changes. Now, let's turn to taxes on slide 11. We continue to optimize our business structure and lower our global effective tax rate with a goal to produce measurable long-term results. Excluding the tax impact of second quarter adjustments, tax expense was $41 million for an effective tax rate of 26%, and year-to-date, our effective rate is 27%. Based on our comprehensive global tax planning activities, we're updating our expectations for 2017. We now expect the full-year effective tax rate between 27% and 28% in 2017, and we expect cash taxes in the range of $110 million to $120 million. Moving on to our senior credit facility on slide 12. In May, we took advantage of very strong credit markets to enhance our financial flexibility by extending the maturity of that facility to 2022 while expanding its size by $500 million to a $2 billion facility to keep pace with our anticipated growth over the next five years. The new facility consists of a $1.6 billion revolver and a $400 million term loan A. Pricing on the facility is currently LIBOR plus 175 basis points. Our debt and cash positions are summarized on slide 13. Interest expense in the second quarter was $19 million. We expect full year interest expense of approximately $72 million this year. Turning to cash flow on slide 14. Cash generated from operations was $119 million, a bit lower than last year, as we used cash for components of working capital. We made capital investments of $91 million in the quarter, and we continue to expect that full year capital expenditures will be in the range of $360 million to $390 million. This quarter, returns to shareholders included $44 million for share repurchases and $13 million for dividends. We have $340 million left on the buyback authorization that we announced in the first quarter. Lastly, the lower expense in the Other segment, which is mostly the corporate office, primarily reflects the timing of incentive compensation costs compared to last year's second quarter. In the third quarter, we anticipate a more normalized level of Other segment expense, which is usually around $25 million to $30 million. And with that, I'll turn the call back to Brian.

[Brian J. Kesseler:]

Thanks, Ken. Before I turn to our outlook on the third quarter, our mid-year results are highlighted on slide 15. We are executing on our plans to build strong customer partnerships that drive revenue growth, investing to support product and technology leadership, and continuously improving our operations. With this focus, our year-to-date results include a year-over-year revenue increase of 7% against global light vehicle production growth of 3%; value-add adjusted EBIT margin of 9.3% net of a 30 basis point currency impact; a 10% increase in adjusted net income and a 16% increase in adjusted earnings per share; a 7% increase in cash flow from operations; and $86 million in returns to shareholders through share repurchases and dividends. With this solid first half performance behind us, let's turn to our outlook for the third quarter and full year on slide 17. In the third quarter, assuming constant currency, we expect revenue growth of 7%, which is 5 percentage points above forecasted industry production. With this guidance, we expect higher light vehicle revenue and double-digit growth in both commercial truck and off-highway in the third quarter. On top of OE growth, we expect a solid contribution from the global aftermarket. Based on our strong first half performance, we're raising our full year revenue growth expectations to 6%, five percentage points above the forecast for light vehicle industry production. In addition, we expect our margins for the second half of the year to be in line with the second half of last year, with a cadence of lower year-over-year margin in the third quarter and higher margin in the fourth quarter. As you can see on slide 19, Tenneco has a 10-year record of delivering profitable growth in shareholder value with a five-year average return on invested capital of 22.6%, and in 2016, we achieved ROIC of 24.5%. With our diversified profile, favorable industry trends creating opportunities in both product lines, and sustainable growth drivers, we are uniquely positioned to deliver on our commitments in the near-term and well into the future. Underlying all of this is Tenneco's strong balance sheet, which gives us the flexibility to continue growing our business. We have a disciplined capital allocation strategy centered on shareholder value creation, balancing investments in the business, and returns to shareholders through share repurchases and quarterly dividends. With our financial strength and strategic approach to deploying capital, we are in an excellent position to take advantage of strategic opportunities, including those that might enhance our technology portfolio, expand our footprint and customer base, or increase Tenneco's aftermarket exposure. We have multiple and diverse drivers for accelerating core growth, as outlined on slide 21. We're leveraging our aftermarket leadership in established markets, develop a strong position in China and India to capture growth on what will become the largest vehicle aftermarket region in the world. In Ride Performance, installation rates for Tenneco's Monroe Intelligent Suspension technologies continue to grow with increased content and new opportunities on the horizon, driven by autonomous vehicles, electrification and connectivity. We also see accelerating Clean Air commercial truck and off-highway opportunities with an increase in regulated powertrains compared with today and higher content required to meet increase in these stringent regulations, particularly in the Asia Pacific region. And finally, we have an outstanding global footprint to serve our customers anywhere in the world, including in Asia Pacific, where we are capturing new light vehicle opportunities in a region that expects to see the majority of global light vehicle production growth over the next 15 years. Tenneco is a compelling investment, and we're excited about the opportunities in both product lines. Our priorities for today and into the future are clear. We intend to continue outpacing industry production by 3% to 5-plus%, continue to drive the margin improvement and improve our cash flow performance, strategically invest to capitalize in the future market trends, and become more light vehicle powertrain agnostic as that mix evolves. And we will maintain our focus on being a financially strong company with the flexibility to achieve our goals for accelerated growth. In summary, with tremendous opportunity before us and the right formula for success, we are confident in Tenneco's future and in our ability to drive even greater value for our shareholders. With that, we'll open the call for questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from David Tamberrino of Goldman Sachs. Please go ahead.

[David Tamberrino:]

Great. And good morning, everyone. Can you just walk us through your annual steel-buy exposure and then what the historical lag is with your customers?

[Brian J. Kesseler:]

The overall steel buy, David, I don't have it at my fingertips right now. The lag – with many customers, we have economic recoveries, especially in the Clean Air business. We've communicated pretty routinely that those don't exist in our Ride Performance business on the carbon steel side generally. And so those over the years have continued to be a one-by-one negotiation. We've had some success in the last few years of getting those economics on an index, and that's what we're continuing to work on this year.

[David Tamberrino:]

So, is the right way to think about it, 50% of the business or 75% of the business has a pass-through in Clean Air, or how should we think about that?

[Brian J. Kesseler:]

So -

[Kenneth R. Trammell:]

Yes. I would say, David, really if you look at the areas outside of the Asia Pacific region, the Clean Air side is pretty much indexed to a pass-through. It's not 100%, but it's close enough -

[David Tamberrino:]

Got it.

[Kenneth R. Trammell:]

– that we don't – that we don't see it. It's really just the Asia Pacific side on Clean Air that we're still working on.

[David Tamberrino:]

Okay. And then from a margin perspective, can you just walk us through some of the other puts and takes for this year and then really heading into next year for 2018? Should this set up pretty strong improvements year-over-year for margin expansion, incremental margins, or is there any further drag that you foresee at this point heading into next year?

[Brian J. Kesseler:]

Well, I think there's always something that can move around on you inside a year. But returning to our margin profile in the Q4 on the Ride Performance and the Clean Air Asia side and a bit into the first quarter should set us up pretty well for return to margins there. Our Clean Air North America team continues to do a nice job and do what we expect them to do from a margin improvement returning here in the second half. So the comps in the first half with Clean Air North America will be pretty good. The comps in the second half with a couple of the regions we're talking about here should be better in the second half of the year.

[Kenneth R. Trammell:]

Yes. I mean, David, once we get past the increase in the steel and the recovery that Brian's talked about baked into the numbers, then it goes back to the drivers that we've always had. It's the growth in the value-add content on the Clean Air side. It's the growth in some of our higher margin businesses, including intelligent suspension on the Ride Performance side, that all should help us look pretty good we would hope.

[David Tamberrino:]

Understood. And just last one from me, with your organic revenue growth. What are you seeing in the commercial truck and off-highway business? Are you seeing green shoots from your customers? And should we expect this positive inflection we've seen in the past two quarters to continue and potentially accelerate?

[Brian J. Kesseler:]

Well, what we saw in the off-highway in North America where we're obviously very well positioned with some great customers, earlier this year, if you remember, our first quarter discussion, some great commentary from Caterpillar, but it was in places that we're not regulated or was in there aftermarket. We saw good year-on-year and quarter-to-quarter improvement there in North America. And we see strong double-digit growth in off-highway in North America in the back half of the year. Continue to see good things in Europe and in Asia-Pacific. So we're cautiously optimistic that we're starting to see this thing come back like we'd like to.

[David Tamberrino:]

Understood. Thank you very much for the time.

[Brian J. Kesseler:]

Thank you.

[Kenneth R. Trammell:]

Thanks, David.

[Operator:]

The next question comes from Colin Langan of UBS. Please go ahead.

[Colin Langan:]

Thanks for taking my question. Just a follow-up on that. I mean – so the guidance outlook, I think you originally said, was going to be margins would be up year-over-year. Now it looks like I guess, since they're slightly down in the first half and flat in the second half, it will be a little worse. What are the main drivers? I mean, is it really just the steel cost, or are there other factors that we should -?

[Brian J. Kesseler:]

There are lots of puts and takes in the business, but this is really around the steel economic recoveries and the timing of getting those into the income statement.

[Colin Langan:]

Okay. And what is – and from a sales perspective, I mean, I don't think I want to repeat the other statements, but is it that the off-highway commercial is coming in better? So, is that why guidance has gotten better, or are there other things we should be considering as well?

[Brian J. Kesseler:]

Well, I think if you take a look at our light vehicle growth, we were 5% above the vehicle build in the light vehicles markets. We're very well positioned in North America on the truck, SUV, and crossover product lines. And that's – as you look at kind of the mix of production rates and versus that and sedans and cars, that's a benefit to us. We've always had a solid contribution off of the aftermarket. Even though it's flat, we're in line with the markets, and in some cases, doing better than parts of our channels. So we're well positioned there. So the light vehicles contributing, the commercial trucks contributing, the off-highways contributing, and we're getting solid performance out of the aftermarket.

[Colin Langan:]

And so from beginning of the year, it's better even light vehicle truck and then off-highway truck are the two factors that kind of flip the pulley around?

[Brian J. Kesseler:]

Yes, better – yes, better performance there, and then obviously with the good signs on the commercial truck and off-highway, that's beneficial too.

[Colin Langan:]

And lastly, I know you've talked about it on the call. Just to make sure I get it straight. The settlements that are coming, what's final, and what do we still have to wait for final settlements, and any timing that we should look for?

[Brian J. Kesseler:]

So, Colin, from the inquiry standpoint, both the European Commission is complete. We have conditional leniency with the U.S. Department of Justice. And I believe we said when we released the information about the reserve that we would expect that conditional leniency to be finalized here in the near-term. So those are pretty much behind us. There's probably a couple of other – there are a couple of other smaller regions that are still active, but most of what's left is really just civil litigation. And that's been in our 10-K and our 10-Q for a while. As you can imagine, those take a while to get resolved. But we do expect to get that behind us in the next roughly year to year-and-a-half.

[Colin Langan:]

Okay. All right. Thank you very much.

[Brian J. Kesseler:]

All right.

[Kenneth R. Trammell:]

Thanks, Colin.

[Operator:]

The next question comes from Joe Spak of RBC Capital Markets. Please go ahead.

[Joseph Spak:]

Thanks. Good morning.

[Brian J. Kesseler:]

Good morning.

[Kenneth R. Trammell:]

Good morning, Joe.

[Joseph Spak:]

Just on the – on the guidance, if I did the math correctly, it looks like – I know you raised it for the year, the third quarter looks strong, but it also implies the fourth quarter is pretty flat. I just wanted to get some – see if that's about right and maybe some texture as to sort of what you're seeing that lead you to believe that the growth moderates in the fourth quarter?

[Brian J. Kesseler:]

Well, a lot of that growth and some adjustments we made were the China growth. You expect that to moderate a little bit more than maybe what's predicted right now. And so that's obviously – becomes a little bit of a headwind. But everything else – and as we comp out on the fourth quarter, we had some pretty strong catch-up in the North America Clean Air last year when a couple of our customers were having difficulty in the third quarter, and they finally broke some constraints and ramped pretty hard in the fourth quarter last year.

[Joseph Spak:]

Okay. And then on the margin, I mean, I know you listed a lot of things. It sounded like a big one is sort of timing of some of the recoveries. I guess, just to be clear, what exactly changed there on the – were you expecting some of the timing – some of the recoveries to come in a little bit sooner? And is what you're planning for now really that the headwind you faced from the surcharges doesn't get worse? So it actually just – the impact moderates and then you should eventually get a benefit as you begin to lap that in early 2018?

[Brian J. Kesseler:]

Yes, that's a great way to think about it. The timing of when we expected to close out some of these issues has slipped a bit. We don't see the economics moving around quite as bit as it did jumping into the year. And so we think we've captured in our thinking here the total of the impact for the year from a cost increase. And now it's getting those recoveries in place and finalized with our customers. And we're also negotiating with supplies as we go, and as always, continue to look for opportunities to drive our cost position lower in our operations.

[Joseph Spak:]

Okay. Thanks. And last one, Brian, I heard you mention there, in some of your closing comments, to try to become more powertrain-agnostic going forward. Is that – how do you think about that strategy and that plan? Is it organic? Is it inorganic? I mean, broad strokes, how are you approaching that challenge?

[Brian J. Kesseler:]

Well, I think it's a – probably eventually a combination of the two. We've got great organic growth drivers on our Ride Performance side in our aftermarket, especially with opportunities we still have in Europe in the aftermarket and as the China market matures for the aftermarket going forward. Ride Performance and the MIS, the installation rates continue to go up, the content per vehicle continues to be good. And even in our Clean Air business, that commercial truck off-highway space is not as sensitive or nearly as sensitive to any of the full battery electric vehicle powertrains there. And that market's more than doubling with new powertrains coming under regulation and up to a 25% to 35% increase in content, as the Asia Pacific powertrains come under regulation over the next 10 years to 15 years. And then -

[Joseph Spak:]

Great. Thanks.

[Brian J. Kesseler:]

– tried to highlight a little bit in the strategic opportunities of how we're looking at opportunities there. Technology, we can expand with a particular customer set that we may be underrepresented on. Geographically, we've talked about our NVH solutions business being really a very successful North America-centric business. And then also we'll always be looking for opportunities to get to the aftermarket in a stronger way. I mean, if you think about the core of the core at Tenneco, our teams are – and parts of our teams over the years have been at this aftermarket thing for over 100 years.

[Joseph Spak:]

Thanks a lot, Brian.

[Brian J. Kesseler:]

Yes. Thank you.

[Operator:]

The next question comes from Rich Kwas of Wells Fargo Securities. Please go ahead.

[Richard M. Kwas:]

Hi, good morning, everyone.

[Brian J. Kesseler:]

Good morning, Rich.

[Richard M. Kwas:]

Brian, question on commercial. So, improved demand, as we go into the back half and potentially into '18, how do you characterize capacity utilization at this point? Any meaningful improvement? I think the numbers that were disclosed previously have been around 50% or so, a little bit better than that. But where are you now and what's the opportunity over the next 12 months to 18 months as the market continues to strengthen?

[Brian J. Kesseler:]

Well, if I kind of break it into the regions, as watched the markets continue to come back in the Americas, we're probably about 50%, hovering a little bit over that in Europe, nice improvement there. We're in the mid-80%s, and in China we're in the closer to 60%. So net-net, all of that says we're in the mid-60%s to 70% or 60% to 65%. So we've still got a lot of room to bring capacity in and lever that revenue.

[Richard M. Kwas:]

And so the volume gets better, wouldn't you think, given that the margin profile is a little juicier there and capacity utilization improves that that should be certainly beneficial to the overall margin mix, correct?

[Brian J. Kesseler:]

That would be our intent, yes.

[Richard M. Kwas:]

All else equal. Okay. And then just what's the update on commercial vehicle launches, you talked to – Kubota has been ongoing. You referenced some incremental business with Deutz. And I know you had been investing in China. What's the latest in terms of where you are with launches and how far along? And I understand it's always a moving target, but just kind of an update there as we think about 2018 would be helpful.

[Brian J. Kesseler:]

We've had some good wins. We can't necessarily disclose which customers, but we've had a good win or two here in North America where we've got room to run from a share standpoint, continue to have good wins in Europe. And in the commercial truck side in Europe, we've got some wins there. And our China team is just doing a great job of continuing to get the new customers there and get set up for the regulations as they come on board, especially in the commercial truck space.

[Kenneth R. Trammell:]

And I wouldn't forget India too. It's still fairly small, but the regulations are incrementing, and as we've pointed out over the course of the next two years or three years, we've got a significant jump going from Bharat Stage IV all the way to Bharat Stage VI. And all of our customers are working pretty intently on being prepared for that. So we've got Bharat Stage IV. Launch is ongoing now, and working pretty hard on being prepared for Bharat Stage VI with a number of customers down there.

[Brian J. Kesseler:]

And Rich, as you know, we've got great technical and manufacturing footprint on the ground already in both India and China and proven solutions that we're bringing in from the more established markets in North America and Western Europe. And we'll obviously make the right applications for those markets, but we're – I think we're pretty well positioned.

[Richard M. Kwas:]

The launch cadence sounds like it's going to be fairly steady as we move forward here.

[Brian J. Kesseler:]

Yes. I don't – right now – we're always trying to work that to make the launch status higher, but right now we see – we see it kind of coming in pretty steady over the next couple of years.

[Richard M. Kwas:]

Okay. And then just a couple of housekeeping for Ken. Tax rate with the reduction here for 2017, should we – Ken, should we think about that, the current updated level as the right way to think about 2018 as we model?

[Kenneth R. Trammell:]

Yes, I think I would carry that forward, Rich. I mean, always, the other driver of the tax – the other driver of the tax rate is the mix of where the earnings comes from. But – so, to the extent that that changes, that will be a driver. But from a structural standpoint, based on where we are today, I think that's a pretty good assumption. Just carry that one forward.

[Brian J. Kesseler:]

Yes. And that's – there's been a lot of great work being done by Ken and the finance team and our tax team and business teams, getting those things to a structural shift for a mean shift down in that performance. So we're really pleased with the work that the team's been able to accomplish there.

[Richard M. Kwas:]

Okay. And then last quick one. Warranty, this number is pretty decent size. What product lines did this affect and what reasons?

[Kenneth R. Trammell:]

Yes. If you take a look, it was actually in the North American Ride Performance product line. And it is large, which is the reason that we called it out so that you can make sure that you saw that it was there. Don't see a reason why we should have that issue again.

[Brian J. Kesseler:]

No, the issues – the issues contain permanent corrective actions put into place, validated and run, and this is – this is from some production a year or two ago.

[Richard M. Kwas:]

Okay. All right. Thank you.

[Brian J. Kesseler:]

Thank you, Rich.

[Operator:]

The next question comes from Brian Johnson of Barclays. Please go ahead.

[Unknown Speaker:]

Yes. Hi, this is actually Steven Huntborn (37

[Brian J. Kesseler:]

Good morning.

[Unknown Speaker:]

Just a couple of questions here. I want to drill down on light vehicle. Well, I want to start off and say great job on the presentation. I think it's very good detail and also for analysts and investment community. And congratulations, Brian, on your – I think this is your first technical earnings call as the CEO.

[Brian J. Kesseler:]

Thank you.

[Unknown Speaker:]

But just want to drill down on light vehicle here, particularly in the Europe and South America regions. If we look – if we compare kind of Clean Air versus ride control, it looks like light vehicle revenues in Europe were up 3% organically in Clean Air, but they're actually up 5% in Ride Performance, which is obviously a very strong performance on the Ride Performance side as well as the Clean Air. But just wondering we would have thought – with obviously the new Euro 6c emissions standards going into effect here in September, we would have thought some strong organic growth in Europe Clean Air. Just wondering if there was any diesel impacts in the quarter and kind of what the outlook I would say for that businesses moving forward.

[Brian J. Kesseler:]

Yes. So if you remember, with the Euro 6c and 6d coming in, those are going to migrate in between now and 2022. And so, as the OEs are making their changes and making their choices between platforms and powertrains and hitting the overall target, the target gets tighter as you go through from now to 2022. So those are probably more mid to back end loaded as those things come in. Obviously some are coming in this year and next year, but the more meaningful moves will be a bit kind of middle of that period.

[Kenneth R. Trammell:]

And no impact for diesel. Our diesel mix – we recognize that the overall diesel mix in Europe has changed, but our diesel mix really has not changed. And don't forget that from the perspective of our diesel mix, because two of the larger diesel producers in Europe being Volkswagen and PSA have in-house hot end providers, gasoline (39

[Brian J. Kesseler:]

And from a Ride Performance side in Europe, we launched last year three of the MIS programs, we've got six launching this year. So we're starting to see some lapping of those launches from mid to late last year and then we're ramping in more launches this year. And we've got a pretty good cadence going into 2018 too.

[Unknown Speaker:]

Okay. And then just sticking with the kind of Clean Air emissions business, particularly on the light vehicle side, what's – how is the pricing at this point? I mean, it looks like – obviously these standards are coming into effect and I would imagine there's a lot of other suppliers jumping into this space. But at the same time, you have obviously more regulatory pressures coming in on the OEMs right now. Daimler is one of the most recent ones to be called out. Is there opportunity for pricing for Tenneco to recapture moving forward just given the regulatory scrutiny on this front or is it basically just kind of status quo at this point?

[Brian J. Kesseler:]

Well, I think from a content perspective, that continues to move in an increased direction because of new things that are required. Gasoline particulate filters, in particular, as you can – as we get into Tier 3 and Euro 6c and 6d. The competitive set is always there. You always got to be best value for best-delivered cost. But we're holding our own and we think we'll be able to capture the content that comes in and continue to build on the margin profile with that.

[Kenneth R. Trammell:]

But just to be clear, there's really been no change in sort of the overall pricing position relative to our customers.

[Unknown Speaker:]

Okay. And then just looking at Europe, sticking with this thing I guess, is – we've seen a lot of headlines come up more recently in terms of potential for aftermarket/retrofit. Obviously it's nobody's guess how that's going to play out. But does Tenneco participate in that market today? And if not, why? And kind of, is that potentially an opportunity here in the short to mid-term for Tenneco to be doing retrofit/aftermarket products?

[Brian J. Kesseler:]

Yes, we participate in the Clean Air aftermarket in Europe. We continue to monitor all the movements from a technology standpoint and what that means from a replacement rate perspective for certain components inside the emission system. So we're there. We've got good footprint. We've got good product. Obviously, being the OE gives you good credibility and good presence, and a lot of the engineering, especially from a component level, are already complete. So if that matures like we would hope it does, we're in good position to capture growth there.

[Unknown Speaker:]

Okay. And then one last quick housekeeping. Would you call that you're opening five new plants here in 2017, any impact from those or any of them in the quarter, and maybe the outlook for the second half of 2017?

[Brian J. Kesseler:]

No, most of those – most of the dialog we were giving on that was around capital going in this year. Launch costs and – that will come into next year.

[Unknown Speaker:]

Got it. Okay. Thanks for taking my questions.

[Brian J. Kesseler:]

No problem.

[Kenneth R. Trammell:]

Thanks.

[Operator:]

The next questions comes from Emmanuel Rosner of Guggenheim. Please go ahead.

[Emmanuel Rosner:]

Hi. Good morning, everybody.

[Brian J. Kesseler:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Emmanuel Rosner:]

I was hoping to get your take on Tenneco's market valuation. You achieve above industry growth, and you seem to have a solid outlook for that to continue. Yet Tenneco trades at the lowest multiple in the entire supplier group. Why do you think that is? And besides for continued strong execution, which you clearly do, what could be done to change it?

[Brian J. Kesseler:]

Well, a couple things. I would agree with you on the valuation. But our responsibility in that is to continue to deliver results. We're continuing to grow the top-line. We're continuing to grow the bottom line. As you saw on our presentation, we have a great return on invested capital track record. We've got strong balance sheet. We're happy with the product lines we have. It's served us well in the past, and it will serve us well in the future. We've got great Ride Performance growth drivers, most of all highlighted on kind of those core driver slide that we presented. Clean air is a great business, still has growth – a lot of growth left in it. Great cash generator. We're stronger together than we are apart. And we'll continue to put up numbers, and we'll continue to execute. And we highlighted, and hopefully you saw on the last page of the presentation, we don't have our head in the sand around the evolution of the powertrain. We believe it's going to come. But we've got balance sheet strength, and we've got the time to make sure that we make the right investments in Ride Performance in the aftermarket to continue to diversify our portfolio. As you can see by even the results this quarter, the diversification of our portfolio is a core strength of what Tenneco brings to the marketplace. We'll keep – we'll keep doing the growth side of it and mix the – we'll mix the revenue up over the medium to long-term, and we think we'll be in great shape.

[Emmanuel Rosner:]

So I hear the point on diversification, but I guess from just an operational point of view, can you just remind us what the synergies are between your two main businesses and besides what we see (45

[Brian J. Kesseler:]

Well, the aftermarket is a key link between both product lines. We got strong positions in both. And as you heard from the previous question, the potential for further growth on the Clean Air side as we go forward. Our NVH solutions business, which is a very nice business, also is a key differentiator. They serve both product lines, and they bring the systems capability of both product lines to a level that gives us a competitive advantage. Most, with maybe the exception of one, competitors of both our product lines do not bring that NVH capability from a systems design perspective. We've obviously got them the benefits of scale from a corporate structure, a borrowing structure, financial structure, to get there, and we – and both give us great cash flow to be able to continue returns to shareholders and make the necessary investments in strategic opportunities as they present it – as they present themselves.

[Emmanuel Rosner:]

That's great color. And then just one final one for me. I wanted to ask you about your active suspension technology. It seems like this is sort of technology that should be of pretty high interest to autonomous vehicle fleets of ride-sharing operators looking to offer smoother rides. Have you had any contact with the sort of non-traditional autos company or any sense that these sort of move towards ride-sharing could actually help adoption rates?

[Brian J. Kesseler:]

Well, the ride-sharing and the mobility is good on two fronts. It's one on the – especially at the autonomous feature for the advanced rides and suspension technologies, the mobility models is actually great for our aftermarket. As utilization rates continue to go up, replacement rates usually follow miles driven in some form or fashion. From contact with the non-traditional, we have contact with all of them. We have agreements and design studies with many, but don't forget our traditional customers are also coming pretty fast in this space too. And what's great about that is we're already a respected supplier, and in many cases a trusted partner, a strategic partner, as they go to think about that. And those have – those relationships have continued to get more business for us in the Monroe Intelligence Suspension space year after year after year. So we're really excited about that, the Ride Performance business and the aftermarket business. I mean, all the major trends inside the industry right now are working in favor of both those markets.

[Emmanuel Rosner:]

Great. I appreciate all your insight.

[Brian J. Kesseler:]

All right. Thanks, Emmanuel.

[Operator:]

The next question comes from Brian Sponheimer of Gabelli. Please go ahead.

[Brian C. Sponheimer:]

Hi, good morning, Brian and Ken.

[Brian J. Kesseler:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Brian C. Sponheimer:]

Brian, you got a pretty unique perspective on the aftermarket given your background from JCI. I'm curious your thoughts on kind of the North American aftermarket right now, whether you think there's any excess inventory in the channel that could affect Ride Performance for the back half of the year, given the second consecutive mild winter.

[Brian J. Kesseler:]

Yes. Actually, as we look at that, we're – as you would probably suspect, we're very well represented even in the sub-channels that break down in the aftermarket North America retailers and then the pure wholesale play. Interestingly enough, what we're seeing is out-the-door sales from those customers that we do get that information are improving year-on-year. And there are a couple, which – who – and I'm sure you can imagine who they are – who are destocking but have destocked. They're not destocking now. So, is there a risk or is there a potential they can further remove inventories on our product line? Maybe. But we're encouraged especially on the major retailer space across the board. The out-the-door sales have been better year-on-year. The wholesalers haven't been doing so well – as well as that. Let's put it that way.

[Brian C. Sponheimer:]

Any reason why you think that's the case?

[Brian J. Kesseler:]

Well, I mean, you're – you're familiar with their strategies. I mean, all the big dogs in the retail space for a number of years kind of shifted their focus and the importance of the strategy on reaching that installer. Some people call it commercial space, some people call it kind of a two-step, but my sense is that they're probably gaining some ground there. Many of them are kind of interestingly positioned. With the stores they have, you can use those as hub-and-spokes to get product to the installer because getting product and having a broad range is extremely important. That's one of our core strengths that we bring. But getting it to them in a couple of hours or less is also very critical for the installer to be able to turn their bays around as fast as possible and get utilization off of that. So I don't – I'm not sitting in their room or – but if you listen to what they've been doing over the last couple of years, you can see where a couple of them are probably gaining traction.

[Brian C. Sponheimer:]

Okay. That's helpful. And then – I appreciate that. Ken, just one for you. The tax deductibility of any payments made with the accrual, I'd imagine they are not tax deductible?

[Kenneth R. Trammell:]

Actually, Brian, because they're predominantly settlement of lawsuits, they will be tax deductible.

[Brian C. Sponheimer:]

Oh, okay. Terrific. Thank you very much.

[Brian J. Kesseler:]

Thank you.

[Kenneth R. Trammell:]

Thank you.

[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, Andrew. This concludes our call. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone. In North America, you may reach the playback at 877-344-7529. For those outside North America, the playback number is 412-317-0088. 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 now disconnect.