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Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good day, and welcome to the Tenneco Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Linae Golla. Please go ahead.

[Linae Golla:]

Thank you. Good morning. This morning we released our third 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, please be aware that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachments. The earnings release and attachments are available on our website. Additionally, some of our comments will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. And with that, I will turn the call over to Brian.

[Brian Kesseler:]

Thanks, Linae. Good morning, and thanks for joining our call. As you see in the highlighted on Slide 3, our strong organic growth continued this quarter as we delivered Tenneco's highest ever third quarter revenue including gains in both product lines and outpacing industry production by four percentage points. We outgrew the industry in all the OEM markets we serve and in all regions by leveraging Tenneco's technology and capability leadership, capturing opportunities in high-growth markets and capitalizing on positive market trends in both product lines. As we've highlighted before, our business portfolio gives us a competitive advantage with two strong product lines and diversification across end market applications, regions, customers and platforms. This diversification continues to bolster our financial performance and helps to mitigate the risk of being overly dependent on any one revenue stream. The second highlight this quarter was a record earnings performance at a $1.67 per share we delivered an 11% increase in adjusted EPS which reflects strong topline growth, share repurchases and a more favorable tax rate due to our strategic focus on global tax planning to improve Tenneco's effective tax rate. Third we returned $85 million to shareholders in the quarter through share repurchases and dividend payments. These returns of the outcome of our disciplined capital allocation strategy that focuses on creating shareholder value while balancing investments in growing the business and shareholder returns. Now taking a closer look at revenue on Slide 4, in constant currency value add revenue grew 6% including a very solid growth in both product lines with ride performance up 8% and Clean Air increasing 5%. As you can see on the pie chart on Slide 4, we have multiple revenue streams across product and end market applications and each with effective and sustainable growth drivers including Tenneco's strong light vehicle platform position globally and increased take rate on our advanced suspension systems as demand for these technologies increases, regulatory driven Clean Air content opportunities in light vehicle, commercial truck and off-highway equipment and a strong global aftermarket. Looking at revenue by end market applications, light vehicle revenue was up 5% versus 2% global industry growth. We outpaced industry in all regions on the strength of our platform position with content on many of the best selling vehicles. We also benefited from the incremental content and Ride Performance in Clean Air programs and from roughly 60 new platform launches. We had a very strong revenue performance at both commercial truck and off-highway. The 31% increase in commercial truck revenue was driven by higher volumes in all regions and we continue to ramp up of the Bharat Stage IV emissions regulations in India. We have an excellent position with leading truck customers in India so we are well-positioned to take advantage of these regulatory driven growth opportunities. We continue to see solid recovery in off-highway volumes with double-digit increases in North America, Europe and Japan. In constant currency, our off-highway revenue was up 29% on the strength of our current programs as the industry recovers from very week conditions particularly in North America. Finally, aftermarket revenues were bottom line with the global market but lower than expected due to soft market conditions for our products in certain regions and some impact from the hurricanes in North America. On the positive side, we added new customers in South America and that region generated very strong growth in the quarter. Turning now to earnings on Slide 5. On an adjusted basis EBIT was $154 million and margin was 8.8%. Our EBIT margin results were driven by strong light vehicle volumes globally, new Ride Performance and Clean Air program launches and double-digit revenue increases in commercial truck and off-highway. This was most evident in North America where our Clean Air margins improved 80 basis points in part due to higher off-highway revenues despite relatively flat light vehicle revenue. And lastly, continued cost reduction and initiatives to improve productivity also had a favorable impact on EBIT. The timing of steel recoveries and other offsets in Ride Performance North America and Europe and in Asia Pacific Clean Air continue to work against us in the third quarter with a $12 million headwind. Our customer teams are making good progress with the recovery negotiations and we are taking steps to help reduce our exposure to future swings in commodity pricing. Again, this is a timing issue and we still expect to be in our normal margin ranges for these businesses beginning in the fourth quarter and into the first quarter of next year. We also had an increase in cost related to launching this significantly higher number of new customer programs in Europe Clean Air versus last year. We fully expect to launch cost impact to decrease as these programs ramp up to full production. Before I turn the call over to Ken, I want to thank our global team for their hard work and dedication. They have been outstanding in executing our growth, opportunities and consistently driving strong revenue increases each quarter. In addition to growing the topline, the team remains focused on converting their growth to margin improvement and cash generation. With that, I'll turn the call over to Ken.

[Kenneth Trammell:]

Thanks Brian. As we look at the segment results in more detail, just a quick reminder that revenue numbers are all value add and in constant currency. Now beginning with Ride Performance on Slide 6, revenue was up 8% with all three regions outpacing industry production. In addition to our highest growth product line this quarter, Ride Performance results also demonstrated strong balance with growth in conventional and advanced technologies and a light vehicle and commercial truck applications. In light vehicle, Europe revenue was driven by conventional content launches with Jaguar Land Rover, Peugeot, Ford and Opal, as well as stronger volumes on the Monroe Intelligent Suspension systems with Volkswagen and Volvo. In South America with the strengthening economy we benefited from higher light vehicle production volumes overall. In China, we had higher volumes on existing platforms with SVW, SGM and Fiat Chrysler and in North America revenue was driven by content growth on new programs with Ford, Jeep, and VW. The Ride Performance commercial truck business also delivered strong growth driven by higher revenue in Europe on existing platforms, new programs in South America was Scania and [indiscernible] and high revenue in North America from NVH solutions business with Daimler, Hendrickson and PACCAR. Globally Ride Performance aftermarket revenues were about even with last year. Ride Performance adjusted EBIT this quarter was 63 million and EBIT margin was 9% which reflects the headwinds due to the timing of steel economic recoveries and a shift in OE aftermarket revenue mix in North America and Europe where market conditions were a bit weaker than expected. Turning now to Clean Air results on Slide 7. Clean Air revenue was up 5% with increases in all three segments. In light vehicle, our strong platform position was a key growth driver. In North America, we benefited from a platform and that's more heavily weighted towards the light trucks and SUVs, which help to deliver consistent revenue year-over-year in a weak production environment. We leverage our strong position with leading OEMs in China, where we also outpaced industry production. The growth on new and existing platforms with SVW, Daimler, SGM, and Volvo. In Europe, light vehicle revenue increased due to higher volumes on existing platforms, and several recently launched Range Rover programs. And as Brian mentioned, we've roughly double the number of launches this quarter versus last year. So a lot of new businesses now ramping up in Europe. Clean Air commercial truck and off-highway revenue showed strong increases outpacing industry growth in all regions. We had very strong revenue growth in Clean Air commercial truck driven by higher volumes, new program launches and regulatory driven content. Higher volumes and new customer launches in China, and the ramp up on programs to meet the Bharat Stage IV regulations in India drove Asia-Pacific growth. Higher volumes on current platforms and a new on-road program for MAN in Europe, and stronger volumes in South America also contributed to our revenue gain. In North America, revenue from our medium-duty on-road business was up versus last year. Clean Air off-highway revenue was also significantly higher in the quarter as strong volume increases with both Caterpillar and John Deere drove revenue growth in North America and Europe. Incremental business with Deutz added to revenue gains in Europe, and higher volumes with Kubota contributed to year-over-year growth in the Asia-Pacific segment. Clean Air adjusted EBIT was $110 million in the quarter and EBIT margin was 10.5% driven by stronger light vehicle volumes and a significant increase in commercial truck and off-highway revenue. In North America, the Clean Air margins were up 80 basis points versus last year and continue to improve sequentially. The timing of steel economic recoveries had an impact on our Asia-Pacific Clean Air margins. And in Europe, we had roughly $5 million in higher costs due to the heavy launch occurred in the quarter. Now moving on the adjustments on Slide 10 that affect year-over-year comparability. We've recorded restructuring and related expenses of $20 million, $9 million of which related to the charges we told you about last quarter to complete the closure of the Clean Air plant in Australia and to downsize our right performance operations there as General Motors and Toyota in vehicle production in Australia. Additionally, we incurred non-recurring cost related to cost improvement initiatives. And we had tax adjustments of $6 million in the quarter related to adjustments to prior year estimates. Now let's turn to tax expense on Slide 11. Excluding the tax impact to the third quarter adjustments, tax expense was $31 million for an effective tax rate of 23% in the quarter, a direct result of our continued focus on global tax plan. Year-to-date, our effective tax rate is 26%. We now expect a full year 2017 effective tax rate between 26% and 27%, and we expect cash taxes in the range of $95 million to $105 million. As a reminder, the full year effective tax rate does not include the benefit of high tech designation at one of our China locations. The high tech designation expired at the end of 2016 and we expect the decision on the new application during the fourth quarter. A favorable ruling would result in around 100 basis points improvement to our global effective tax rate. Turning to cash flow on Slide 12. Cash generated from operations was $53 million and would have been $98 million without the $45 million paid related to the antitrust that I mentioned last quarter. We also invested an incremental $17 million in trade working capital. Capital expenditures for the quarter were $92 million and for the year, we expect capital expenditures will be about $390 million, at the high end of the current guidance range. As we begin to accelerate a required move of our Beijing drive performance plant outside of the Beijing area. We anticipate this move will be complete by the end of the first quarter. We expect to carry higher inventory levels through the first quarter, to protect customer deliveries and we will incur some additional cost in connection with this move. In the third quarter, we opportunistically brought 1.3 million shares for $71 million, at an average cost of $54.90. Year-to-date, we have repurchased 2.3 million shares for $131 million. Returns to shareholders this quarter also included dividend payments of $14 million. There is $269 million left on the buyback authorization that we announced at the beginning of the year. Our debt and cash positions are on Slide 13. Interest expense in the third quarter was $19 million, consistent with second quarter expense levels and we continue to expect full year interest expense of approximately $72 million. With that, I'll turn the call back to Brian.

[Brian Kesseler:]

Thanks, Ken. Turning now to our outlook for the fourth quarter on Slide 14. In the fourth quarter, we expect revenue to grow 7% or 3% in constant currency, which will outpace global light vehicle industry growth of 1%. We expect double digit revenue growth for commercial truck and off-highway, light vehicle revenue in line with the industry and global aftermarket revenue about even with last year. We expect the same growth in value add revenue, up 7% or 3% in constant currency, which resulted in fourth quarter revenue consistent with the fourth quarter. We expect fourth quarter margins will be roughly even with last year and sequentially up versus third quarter. The reporting segments impacted by steel economics will begin to show improvement in the fourth quarter, and the launch CTOH impact in Europe Clean Air will begin to moderate as new customer programs ramp up. For full year 2017, we expect to deliver a strong year of organic revenue growth, up 7% or 6% in constant currency, outpacing full year light vehicle industry production growth of 2%. Clearly, we are about in consistent strong revenue growth, but what really excites all of us are the opportunities to accelerate core growth with initiatives around four key areas as summarized on Slide 16. The first with the global aftermarket. In China, we are expanding product coverage, developing our manufacturing and distribution footprint and building the Monroe and Walker brands to be well positioned as the car park ages and reaches the sweet spot for our replacement parts. As a reminder, the global car part nearly doubles between 2015 and 2017 with most of that unprecedented growth in China where we have made excellent progress in establishing our presence. Second, is increasing demand from Monroe Intelligence Suspension Technologies within right performance. Installation rates and content are increasing, as customers demand new technologies that differentiate the ride and handling the various vehicle models. This quarter we won two new programs with Daimler, and revenues increased by double digits versus last year. Looking ahead, we expect this growth to accelerate with 10 new programs featuring these technologies planned for launch in 2018. A third area is the opportunity for commercial truck and off-highway growth in Clean Air. By 2025, more powertrains are moving into regulation than are regulated today particularly in the Asia-Pacific region. These regulations required higher content which will be a strong driver for Tenneco. We continue to grow our customer base, both in the established markets and high growth regions. This quarter we announced new business with Daimler Truck in North America, MAN in Europe and with DFAC, a Dongfeng joint venture in China. Fourth, we serve nearly every major light vehicle manufacturer around the world, with a very competitive engineering, manufacturing and supply chain footprint. This assures that we will continue to capitalize on light vehicle industry production growth, 70% of which is expected to be in the Asia-Pacific region over the next 15 years. I also like to highlight the pie chart on Slide 16, where we continue to drive growth across diverse product in the end market applications. Year-to-date just under 50% of our value add revenue would be impacted by any long-term migration to full battery electric powertrains for light vehicles. We expect that to evolve lower overtime as we continue to invest in our portfolio and capitalize on opportunities and other revenue streams. As you can see on Slide 17 and 18, our products went very well with the trends by the industry from autonomous driving in the new mobility models, to electric powertrain variations and the regulatory push for clean engines. The Clean Air, in addition to regulatory driven content on light vehicles, we have a tremendous opportunity for commercial truck and off-highway growth with the number of regulated vehicles expected to increase and the 15% CAGR through 2025. Electrification in light vehicles is also an opportunity for Tenneco, as the majority of production growth in electrified powertrains as in the hybrids. These powertrains are projected to grow at a 32% CAGR through 2024, 0.25. Furthermore, Euro 6 hybrid value-add content per vehicle is expected to increase 30% to 40%, similar to ICE content. Plug-in hybrids offer additional content opportunities to the packaging requirements to drive unique engineering solutions for acoustics and thermal management. In Ride Performance we have a number of strong drivers accelerating future growth. Customer demand keeps increasing for advanced suspension technologies that creates signature ride and handling characteristics. In addition, our existing product portfolio aligns very well with our autonomous and electrification trends, as vehicle manufacturers look for solutions that deliver smoother ride, better handling, reduced noise and lighter weight components. Finally in addition to strong aftermarket growth opportunities in China, new mobility models will drive greater vehicle usage and create more demands for Aftermarket products. In closing, we are very confident in our position today and in Tenneco's future. Our products, capabilities and diversification give us the flexibility to capitalize on industry trends and continue our growth trajectory regardless of our mix between Aftermarket, Ride Performance and Clean Air. As you can see on Slide 19, we have clear strategic priorities that will drive future success by continuing to outpace industry production by 3% to 5 plus percent driving margin expansion and improving cash flow performance and best things so that we become more like vehicle powertrain agnostic as the mixer balls and continuing to build financial strength and maximize flexibility. We are committed to delivering on these priorities, accelerating profitable growth and continuing to enhance shareholder value. With that we’ll open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from Colin Langan with UBS. Please go ahead.

[Colin Langan:]

Any further color on the margin outlook. What are really the drivers as I believe your last guidance was margins will be flat year-over-year in the second half, Q3 weaker and then recover in Q4. Now it was down in Q3 and then flat in Q4. So what, it got worst, is it? Really just steel recoveries are taking longer to come through? Is it the launch costs are bit worst and then pullover third has been the surprise on the margin side?

[Brian Kesseler:]

Probably three contributors, two of which you had. You know the steel recoveries coming back a little bit slower other than expected. Launch costs are little bit higher and spilling over in the fourth quarter little bit more as the ramps aren't as high as we expected. And our Aftermarket, the market conditions in Aftermarket in our larger markets are a bit lower than what we had expected. With those types of things and then with the revenue being equal to Q3, we are still seeing and predicting good sequential improvement Q3 to Q4 from a marginal rate perspective.

[Colin Langan:]

And with the recoveries, does that mean you might just outsize margins when those recoveries come through in the first half of next year, how should we think of that?

[Kenneth Trammell:]

So Colin I think those will be mostly prospective recoveries, so I don’t think we are going to be in a position to catch up with the payouts. So I would see as return to normal margins as opposed to the outsized margins that you're thinking about.

[Colin Langan:]

And then the guidance for Q4 on sales in 7% to 3% when you adjust for FX, what is the big FX segment there coming I think in Q4?

[Brian Kesseler:]

The year-over-year, the biggest change is obviously in the Euro exchange rate up here significantly versus fourth quarter last year.

[Colin Langan:]

Is it negative? I remember how much interpreting of it, I thought it as the drag but I hope Euro is now at the tailend?

[Kenneth Trammell:]

It's just when you adjust for the currency. So that you put them on constant currency this quarter versus the same currency we had last quarter. Then it's very - it’s not a headwind, it's simply that when your find to look at just currency adjusted, I did not explain this quite well but that gives you the...

[Colin Langan:]

I got it.

[Brian Kesseler:]

All right. I am glad you got it because I wasn’t explaining it well.

[Kenneth Trammell:]

We are somewhere around 1.10, 1.12 last year. 1.17, 1.18 is where we are running today. So we will see good revenue increase from the currency. But when you take that piece out then you have got what's the percentage of either constant currency changes.

[Colin Langan:]

Just lastly, you touched on through AVN, I mean how are you thinking about the EV risk. I mean at the Investor Day you were pretty clear you wouldn’t add for the third - any additional thinking around how it is potentially derisk for the long term shift that you think particularly around the, with Clean Air.

[Brian Kesseler:]

When we think about the EV risk, it’s really again around four battery electric vehicles. Hybrids are even and in fact it’s good news for us as we go to the plug-in hybrid take risk. So we see those increasing because the content per vehicle continues to pick up from there. Commercial Trucks or Off-Highway space is a great diversifier against the light vehicle four battery electric vehicle, our four battery Electric Powertrain space. Further investments in our technologies and our Ride Control business, our NVH business expanding that worldwide. We are very much in North America centric business at this point. And then continuing to look for opportunities to grow our Aftermarket mix including potentials working in other product lines in the future. It’s really in those three to four things that we will continue to see our light vehicle Clean Air revenue mix evolve lower and lower in our portfolio.

[Kenneth Trammell:]

But just to be clear Colin, we are also still going to see growth on light vehicle Clean Air simply because of growth in vehicles and growth in regulations over the course of the next 10 to 15 years.

[Operator:]

Our next question comes from Rich Kwas with Wells Fargo Securities. Please go ahead.

[Rich Kwas:]

So commercial really strong growth, just trying to delineate the leverage there and how much deal impacted that part of the business versus light vehicle. It seems lot of this is light vehicle related in terms of steel recovery but can you just delineate your leverage in the commercial vehicle growth this quarter versus what you saw in the Light Vehicle side anyway to quantify that at least essentially think about it?

[Brian Kesseler:]

Let me tackle the steel question first. The steel headwind we are facing they are all Light Vehicle related, they are not Commercial Truck related. And then the question on, you can see the 31% and 29% improvement year-on-year in the Commercial Truck and then the Off-Highway segments starting coming through. One of the things that is impacting the Euro launch, so we got three major Commercial Truck programs launching in Europe as we speak. And so that’s some of the impact that we are seeing on our launch load in Europe.

[Kenneth Trammell:]

I would hesitate to tell you to take this as straight line on this but I would point that North America will really sort of got the Highway stuff behind us. So very strong increase in Commercial Truck and Off-Highway production in North America Clean Air. Then you saw pretty strong incremental there as well.

[Rich Kwas:]

So really on the Commercial Truck side, incrementals in general sound like they were better than Light Vehicle. This is a little bit of drag in Europe. North America they have performed fairly well. That’s a good summary of that?

[Kenneth Trammell:]

That’s a fair way to think about it.

[Rich Kwas:]

And then on Chinese Aftermarket, is there any meaningful sales right now for you there and then how do we think about this adding to the growth rate over the next few years. Just curious on infrastructure distribution channels et cetera. Where you are positioning? I know you talked two investments there. But just how do we think about the progression and - certainly is there, huge opportunity there but just differs where from, you know the opportunity actually translates into something. So just trying to think about timing for you.

[Kenneth Trammell:]

If you think about the average age of the car park in China right now being somewhere between 4.5 and 4.8 years, our sweet spot for replacement on our major product line in the construct category from the Monroe brand is somewhere between 6 years and 9 years, is where that comes. The age of the car park by the time 2025 comes around will be closer to the 8 to 9 years. And then obviously the car park continues to grow. Meaningful sales in China aftermarket right now for us is that they are not meaningful at this point. And that’s why, but what as you see us doing is investing n coverage, manufacturing, supply chain, distribution, distributor alignment, distributor development focusing first in the Tier 1 cities, where the vehicles are going to age faster, but also making sure we got the right coverage in the Tier 2 and Tier 3 cities. And as we talked about in the Investor Day and in some of our subsequent conversations, product coverage is also very important. Getting to between 90% and 95% coverage of our product in the vehicles in the market is one of the core needs and winning in the aftermarket. We are currently in the high 70s.By time we get to 2019 we will be into that 90% to 95% range. So that’s really about fortifying the brand, building the coverage, building the supply chain and getting the distributors lined up.

[Brian Kesseler:]

2019- 2020 time period is key, because between 2020 and 2025 is when that China car part really ages very rapid.

[Rich Kwas:]

Right, okay. And then just last one for me Ken on the inventory. So it looks like sequentially, I going to be off on this in terms of the sequential increase, but something in that order for $60 million increase sequentially. Normally your inventory kind of, it doesn’t really move that much from Q2 to Q3.Should we think that $60 million is entirely related to the facility move in China is that most or at least most of it?

[Kenneth Trammell:]

Revenues, I wish they would at high in China, but our revenues aren't high enough. Overall, we're at, there is always sort of thing couple of things, right. We got like you mentioned we've got some increases in inventory that protect some customer within China. But day sales outstanding year-over-year will only up a couple of days. We did have the decline in sales nearly into the third quarter related to the aftermarket here because of the because of the Hurricanes. And as that while it carries bit more inventory through the end of the third quarter than we would have expected. So there is a number of contributing factors but always trying to sort of a little bit the day sales outstanding, They're up couple of days, but that something that we’ll get in an around and get back. So we will continue to carry the additional inventory for the China move, all the way through the first quarter.

[Operator:]

Our next question comes from Joseph Spak with RBC. Please go ahead.

[Joseph Spak:]

Just first on the Clean Air Europe launches. I guess I am assuming those been sort of just spring up and surprise you. So just to be clear, was there something in the execution of those launches that sort of became a little bit differently than you anticipated?

[Brian Kesseler:]

You are right, Joe, it doesn’t come up and get the surprise. We’ve look that roughly double than our launches in the second half of this year that we had last year. Launch expenses been a little higher the expected and the ramps have been a little slower. And so that kind of contribute into. And that's really kind of came into our discussions about Q3 and margins now be in as strong as prior year. And that contributed to that discussion we had in Q2 earnings call.

[Joseph Spak:]

And then I guess on the flip side, if we look at North America Clean Air, we had basically the $5 million increase in profit and $11 million increase in the value added revenue, so really strong incremental margins. I mean I'm assuming that’s finally some of that commercially on off-highway stuff getting that better utilization .Is that the right level of incremental margin we should think about as commercially gone up higher it continues to perform?

[Brian Kesseler:]

A little bit, a lot of that. And the majority of that was the off-highway business coming in. As you remember Q3 last year there were some pretty significant launches there with on two truck program that weren't going as well as everybody wanted to including the customers at that point. So we are a little bit of lift from the year-on-year perspective, but we still have some strong launch activity in North America also. So little bit on the launch difference between Q3 to Q3 this year versus last, but then good portion of that was the off-highways revenue coming in and driving utilization.

[Joseph Spak:]

And Ken on free cash flow, I know you had some items in there like the $45 million antitrust. And I know the fourth quarter seasonally is a pretty good cash from ops number, but it still seems like it needs to be a pretty good number just the sort of get to free cash flow breakeven. Is there anything that’s specifically we should be thinking about in that fourth quarter free cash flow walk?

[Kenneth Trammell:]

Joe, you absolutely right, I mean the fourth quarter is always our strongest quarter. There is nothing that changed in the trends, where that should not be the case. We’ve again taking out anything that we might think related to antitrust. I still expect the pretty good fourth quarter and it should some strong improvement.

[Joseph Spak:]

So free cash flow is positive for the year buying any additional unforeseen settlements?

[Kenneth Trammell:]

Since I don’t have the forecast to give you, I am not going to say you specifically positive or negative, but certainly we will see a strong fourth quarter, just like we do traditionally. If I look at, working capital metrics, again like we were talking about to reach, days on hand or off a couple of days in the third quarter, we should get some of that back and turn that back. Our day sales outstanding are up a little bit, we should get that back in the fourth quarter as well.

[Joseph Spak:]

And then lastly, I know just on the commodity volatility. You mentioned you are looking at some actions to reduce that, is there anything specific you could point us to? I mean, I imagine that sort of a contractual thing or there is something you could do on aside from the way the contract are?

[Kenneth Trammell:]

So there are probably a couple of different instances here. And on the right performance side, in Europe moving more toward indexing in that region and North America teams made good progress to getting the indexing. There is a couple of customers who have not traditionally indexed the steel commodity on this product line in the right performance product line, and we continue to work there. Obviously if that’s not the preferred method then the price reductions get lot less as we met those off of that. In China Clean Air, there is really not an index that the industry runs to on steel over there. We are working with all the major customers there, we do see an index around body steel that we’re working with the individual customers to correlate to and continue to drive those discussions.

[Operator:]

Our next question comes from Brian Johnson with Barclays. Please go ahead.

[Brian Johnson:]

I know its early for 2018 guidance, but I just want to get a sense of how some of these launch costs as well as the steel that's used could roll into 2018?And in terms of what dissipates [indiscernible] and were there other cost pressures on horizon? And just how should we began to start thinking about that?

[Brian Kesseler:]

Well we guided our '19 or '18 and '19 revenue to the 3% to 5% above the industry production, the light vehicle industry production. We'll update that as part of our Detroit, we'll give guidance at the Detroit Show. So we still staying with our consistency. From a steel perspective, as we mentioned we are starting to see that come out of our cost pressure and right performance beginning in the fourth quarter and normalizing into the first quarter for margin ranges and right performance in Clean Air. The alloy steel which was a big deal for us coming into the first quarter is hanging about the same level, alloy surcharges for the industry. And so at this point and looks like that will be neutral coming into the year, but there is some volatility that of course. And obviously those are all under contractual indexing arrangement in North America and in Europe. So lapping of those things and then the launch costs, filling in the capacity and the ramp on our customer should be good news for us.

[Brian Johnson:]

So there are. So are you saying that the launch costs issue should dissipate during 4Q in what linger? Another major launches in 1H '18 that when you just start worrying about?

[Brian Kesseler:]

Usually our launch will happen in the back half beginning in this Q2 and the Q3 area. But as I mentioned earlier, we have got 10 new launches Monroe Intelligent Suspension technologies next year which is heavier than normal and that will come into effect as we look at our planning through 2018.

[Operator:]

Our next question comes from Andrew Crespo with SIG. Please go ahead.

[Matt Stover:]

This is Matt Stover. Just a question about the Beijing changes, should we expect for that to be a meaningful impact in the second half or fourth quarter rather and in the first part of next year and then I had a follow on?

[Brian Kesseler:]

We’re expecting to complete the move out of the Beijing plant and into this new location and be up and running in the first part of Q2. So from a lingering standpoint as Ken mentioned will have inventory position in place to protect supply to all the customers from that move. And then we’ll obviously be costs as we pick up and move and thankfully we're going to be close enough that we don't anticipate a high turnover. We anticipate bringing a large majority of our team member base with us as part of that. So it’s a really around the inventory and the positions to move and obviously our intent is to protect the supply to our customers and the quality to our customers.

[Kenneth Trammell:]

Matt as you think about the fourth quarter is the first quarter right we will have some increase cost but because its accelerated, its difficult to predict for sure how much that will be but will give you perfect clearing on that one and we sure we call it out and you guys can see what - what the impact is of the Beijing move.

[Brian Kesseler:]

And as Ken mentioned earlier we moved to the high-end of our capital guidance because that move in Q4 and there will be some more carry – there will some other capital expenditures that occur related to that move in Q1.

[Matt Stover:]

And then just follow on to that just if I look at just sort of the mathematical impact of the profitability of China it’s very high and it's down a lot year-over-year. But it's still absolutely very high, so you suffer from the challenge of the year-to-year comp. If we think about that market maturing how would you encourage us to think about the relative profitability of that business?

[Brian Kesseler:]

Let’s take a quick look between Ride performance and Clean Air. Clean Air from a quarter-to-quarter comparison last couple of quarters have been impacted by that - by the steel commodity issue that we’ve been discussing. The Ride Performance business as you look Q3 to Q3 that’s under a $1 million of difference to be equivalent margins there. So that's get into - its not necessary I wouldn’t call it rounding air but it's to get it back to that to Q3 of last year what doesn’t take much. From an overall perspective when we look into our business there, we still have great opportunities from a conversion cost side. We have great relationships from a joint venture perspective, so I think we’re going to be expanding the margins there greatly. I don’t think that's probably a right way of looking at it but we think we've got enough room there from the cost side and recognize that mature market the pricing pressures get a little more competitive. But we don’t see - our intent is to hold those margins and opportunistically grow as we go.

[Operator:]

[Operator Instructions] And our next question comes from [indiscernible] with KeyBanc. Please go ahead.

[Unidentified Analyst:]

Question for you on the actions and the progress there and to recoup the steel cost, you were considering a number of different venues to do this SG&A reductions was one, it looks like there were some also adjustments in SG&A so just wondering how you are in that progress also potentially some cost recoveries from negotiations with customers if we were to gauge success rate of this endeavor into 2018. Can you tell us where you are in the progress and your confidence level compared to where were three months ago.

[Brian Kesseler:]

Well from a confidence level starting to see the incremental improvement we believe we’re going to see that in Q4 and then still believe that it will come through in Q1. Obviously, we look at all cost levers to drive improvement in the business regardless of we’re dealing with the commodity costs or not. SG&A opportunities exist, we will continue to look at those and implement those added there as they're ready and planned out. Operational costs at the plant and transportation level we continue to look at and from a commercial negotiation with our customers we’ll make good progress on a lot of different fronts in Europe, in North America where we’re gotten to indexing and we continue to have typical discussions around expectations on the customer side for year-on-year improvement versus expectations on our side to recover commodity cost that everybody in the market is faced with. So we're making progress on all fronts.

[Unidentified Analyst:]

And relative to your prior expectations you figured most of that would start to begin maybe in 4Q but mainly in the first half of 2018 is that still the cadence?

[Brian Kesseler:]

Yes.

[Unidentified Analyst:]

And last question on the commercial vehicle exposure we are hearing a lot from other competitors or players in the space increases well into the double digits above 50% year-over-year. Is that similar to what you’re seeing in the off-highway segment and what does that kind of growth imply in terms of efficiencies within plans is there a headwind or tailwind?

[Brian Kesseler:]

It will be a tailwind, I mean we’re running again with some of the new launches that we're incurring right now, we’re covering about a 60%, 65% maybe a little bit higher capacity utilization on our commercial truck our highway space, and we were 31% and 29% up in Q3 and in Q4 we continue to see strong double-digit increases in full rates from our customers for Q4.

[Kenneth Trammell:]

Just as a reminder on the off-highway business for us you can look at Caterpillar, Deere and [indiscernible] in North America Europe and both their sales are come out in Japan as they’re really strong indicator of what we’re seeing on our business as well.

[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. 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 number is 412-317-0088. The replay access code is 10112867. This 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.