Tsakos Energy Navigation Limited
Q4 2017 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

Hello, everyone, and welcome to the Tenneco Inc. Fourth Quarter and Full Year 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, Vice President, Investor Relations. Please go ahead.

[Linae Golla:]

Thank you. Good morning. This morning, we released our fourth quarter and full year 2017 earnings and related financial information. On our call today to take you through the results are Brian Kesseler, Chief Executive Officer; Ken Trammell, Chief Financial Officer; and Jason Hollar, Senior Vice President, Finance. 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. Turning first to the fourth quarter highlights on Slide 3. You can see we delivered strong organic growth, higher earnings and an outstanding cash performance, all contributing to record results for the quarter and full year. These results reflect the strength of our diversified portfolio, with sustainable growth drivers in multiple revenue streams. In the fourth quarter, we also returned $51 million to our shareholders in the form of share repurchases and dividends. These shareholder returns are a good indication of the confidence we have in Tenneco's long-term growth and in the earnings power of our business. Taking a closer look at fourth quarter revenue on Slide 4. Value-add revenue was up 7% in constant currency, with solid increases in both product lines and in all regions. Our revenue significantly outpaced the industry with stronger-than-expected volumes on CTOH programs in North America and Europe; and on light vehicle platforms, mainly in Europe and China. Revenue highlights this quarter include, a 60% increase in off-highway revenue due to our position with leading off-highway customers in North America, Europe and Japan, as those markets continue to recover; a 24% increase in commercial truck revenue, driven by volume and content growth on platforms in Europe and South America; and in India, where the Bharat Stage IV regulations are ramping up. We also had a 4% increase in light vehicle revenue, outpacing flat global industry production. Light vehicle growth was driven by new program launches, our light truck platform mix in North America and a 17% increase in Monroe Intelligent Suspension revenue from 6 new launches during the year. In addition, we had a slight increase in global aftermarket revenue with growth in most regions except North America, where the market remains soft. Now turning to fourth quarter earnings on Slide 5. Adjusted EBIT was up 10% on revenue growth from light vehicle, commercial truck and off-highway programs. Adjusted EBIT margin for the quarter was in line with the year ago and reflects strong top line growth, a shift in the percentage of aftermarket-generated revenue versus OE revenue, Ride Performance footprint activities in China and North America, and steel headwinds improved by a couple million dollars versus last quarter due to progress on recoveries and steps to reduce our exposure. We expect to have 50% of our exposure formally indexed by the end of 2018 with new agreements in place and new programs in North America and Europe Ride Performance OE. And we continue to work on the remaining exposure. This year, we do expect continued carbon steel headwinds, but at roughly half the impact we had in 2017 based on what we see in the market today. Our adjusted net income was also a record for the fourth quarter, up 8%, and adjusted EPS was up 16% to $1.89 on the conversion of revenue growth and share repurchases. In summary, thanks to our global team, we delivered a quarter with record revenue, increased earnings and a strong cash performance. Our team is aligned and focused on the right things to drive continuous improvement, and I appreciate their efforts every day. With that, I'll turn it over to Jason Hollar, who many of you have already met at recent investor conferences. Jason joined Tenneco last summer as Senior Vice President of Finance. We're very happy to have him onboard. And today, he's going to walk through more detail on our reporting segments.

[Jason Hollar:]

Thanks, Brian. It's great to be here. As we turn to segment results, a reminder that the revenue numbers are all value-add, with year-over-year performance calculated in constant currency. Beginning with Ride Performance on Slide 6. Revenue in the quarter was up 9%. In OE light vehicle, we delivered growth that outpaced production in each of our 3 geographic segments driven by new platforms, stronger volumes, Monroe Intelligent Suspension content growth and higher NVH revenue. Although industry production was down in North America, we outperformed the market and delivered growth driven in part by higher revenue on new programs with VW and FCA, and NVH content on a new battery electric vehicle. The Europe and South America segment delivered an outstanding quarter with higher revenue on new platforms with Land Rover, Ford and PSA, and Monroe Intelligent Suspension content growth with VW. We also continued to grow in Asia Pacific as we outpaced production in China and India with current programs and recently launched business with FCA and VW. CTOH revenue increased by double digits, led by growth with Paccar, Hendrickson and Daimler in North America; and Volvo Truck, Scania, Paccar and Daimler in Europe. Improving economic conditions and higher production volumes also drove year-over-year truck revenue gains in South America. As Brian mentioned, global aftermarket revenue was slightly up in the quarter. Lower sales in North America were more than offset by strong growth in Europe and South America. We also had a significant increase in Asia Pacific aftermarket revenue as we begin to see results from the investments we're making to build our brands and distribution networks in China and India. Ride Performance adjusted EBIT was $60 million and EBIT margin was 8.6%. The margin performance this quarter was primarily driven by top line growth, the North America aftermarket OE revenue mix and steel headwinds. Turning now to Clean Air results in Slide 7. Clean Air revenue was up 5%, with increases in all 3 geographic segments powered by consistent and effective growth drivers. More on the last quarter, our strong platform position, including a North America mix more heavily weighted toward SUVs, crossovers and light pickup trucks, helped to outpace industry production. North America results were driven by higher revenues in existing programs, including the Ford F-150 and Super Duty trucks, Jeep Wrangler SUV, Dodge, ProMaster light commercial van, as well as the ramp-up of an SUV program for VW. In Europe and South America, light vehicle revenue was up 6%, mainly due to higher volumes on recently launched SUV platforms with Land Rover, BMW and Volvo; and on sedan programs with VW and GM. In the Asia Pacific region, light vehicle revenue was flat, although we outpaced an industry decline in China due to growth in programs with leading OEMs, including SGM, diameter and SVW. For the second consecutive quarter, we continued to see strong Clean Air CTOH growth in all regions. Commercial truck revenue was driven by higher volumes, new program launches and regulatory-driven content. Growth in current platforms and programs ramping up with Scania and MAN in Europe; and stronger volumes in a recovering South America, also contributed to revenue gains. The new content on programs to meet in the Bharat Stage IV regulations in India drove Asia Pacific growth. And in the North America, revenue from our medium-duty on-road business was also up versus last year. In Clean Air off-highway, revenue grew by over 50%, driven by higher production volumes from our large off-highway customers. Caterpillar and John Deere drove revenue growth in North America and Europe, and the incremental business with Deutz also added to our Europe results. In Japan, higher volumes with Kubota contributed to year-over-year growth in the Asia Pacific segment. Clean Air adjusted EBIT was $130 million in the quarter and EBIT margin was 11.6%. These results were driven by light vehicle growth, higher volumes on CTOH programs launched last quarter in Europe and, to a lesser extent, we had some impact from the timing of engineering recoveries. With that, I'll turn the call over to Ken.

[Kenneth Trammell:]

Thanks, Jason. I'll start with the adjustments on Slide 9 affecting year-over-year comparability. We recorded restructuring and related expenses of $20 million, including costs we talked about to move our Ride Performance Beijing plant, as well as other cost-improvement initiatives. We expect to complete the transition into the new facility by the end of the year. The accounting requirement to test goodwill resulted in a charge of $11 million related to our Ride Performance product line in Europe and in South America. The remaining goodwill on Tenneco's books is $49 million, and we do not foresee a similar charge based on the accounting requirement. We also recorded pension settlement charges of $2 million in the quarter. We booked a net tax benefit of $11 million for the release of a foreign tax valuation allowance and adjustments to prior year estimates. Separately, charges related to tax reform were $15 million, and I'll come back to that in just a minute. First, let's turn to more details on tax expense on Slide 10. Before the adjustments, fourth quarter tax expense was $31 million for an effective tax rate of 21% in the quarter. The benefit from the high-tech designation in a China entity was resolved favorably in the fourth quarter, bringing our full year tax rate to 24.5%, in line with what we said earlier this year. Cash tax payments in the quarter were $21 million. And for the full year, we made payments of $95 million at the low end of our expected range. Now turning to the U.S. tax reform impact on Slide 11. In the quarter, the net impact of the tax reform bill was expense of $15 million. The onetime repatriation charge and the write-down of our U.S. net deferred tax asset as a result of the lower U.S. corporate tax rate were partially offset by a tax planning action we were able to undertake that generated new foreign tax credits that otherwise could have been lost as a result of the new tax rules. We expect U.S. tax reform to benefit our global effective tax rate by about 200 basis points in 2018. Offsetting this is a potential impact related to tax rates for 2 of our high-tech designations in China. So overall, for 2018, we expect an effective tax rate between 23% and 25%. If we can sustain the China high-tech designation requirements, our global effective tax rate would improve by between 100 and 150 basis points. We expect 2018 cash taxes in the range of $105 million to $125 million. Turning to cash flow on Slide 12. The fourth quarter showed strong cash flow with record cash from operations of $466 million. That's up $215 million compared to last year. That comparison includes a new receivables sales program in the U.S. that had a $107 million cash flow benefit in the fourth quarter. The new program allows us to take advantage of lower cost of capital of these programs. Capital expenditures for the quarter were $117 million and for the year were $385 million, consistent with the recent guidance. In the fourth quarter, we bought back 627,000 shares for $38 million, bringing the full year repurchases to 2.9 million shares for $169 million. Fourth quarter dividend payments of $13 million bring full year dividend payments to $53 million. We have $231 million left on the buyback authorization that we announced about a year ago. Our debt and cash positions are on Slide 13. Interest expense in the quarter was $19 million and full year adjusted interest expense was $72 million, consistent with our previous outlook. And with that, I'll turn the call back to Brian.

[Brian Kesseler:]

Thanks, Ken. Before I get into a recap of the full year and our outlook for 2018, I want to remind everyone of our consistent track record of growth on Slide 14. Since 2000, we have delivered value-add revenue growth outpacing industry production by 2x. We absolutely believe that will not only continue, but will accelerate through 2020 with growth 3x higher than industry production volumes. I would also like to highlight our return on invested capital, which is a good measure of how well we're driving growth while also being good stewards of invested dollars. We believe our five-year average of 22.8% is a benchmarkable performance and puts us near the top in comparison to our peer group. As we look ahead, we are focusing on accelerating core growth with a solid foundation and diversified portfolio that allows us to outperform the market, and which creates growth opportunities in multiple revenue streams. As you can see on Slide 15, with our diversified portfolio, we serve more than 600 OE and aftermarket customers spread across all regions and different product applications. Turning now to Slide 16 and a quick summary of our 2017 results. We are executing well to deliver consistent top line growth, higher earnings and cash generation. In a record year performance, our results include Tenneco's highest-ever revenue, up 7% in constant currency, and outperforming industry production by 5 percentage points, with solid growth in both product lines. Record adjusted EBIT, net income and earnings per share, which includes a 14% increase in adjusted EPS, driven by top line growth and improved tax rate and share repurchases, a 30% increase in cash from operations and we returned $222 million to our shareholders. Looking forward, we are well-positioned with long-term growth drivers that will accelerate our core growth and continue to diversify Tenneco's portfolio. As you can see on Slide 18, those drivers include opportunities in Ride Performance, Clean Air and aftermarket. The first driver is technology-driven growth primarily on the Ride Performance side with Monroe Intelligent Suspension technologies. We are launching 10 new platforms of this year and have development programs underway. An example is our CVSA2/Kinetic system, which is in production on several models of a well-known British superpower. We're now working on developing programs with three additional customers to introduce this technology on a sports car, a premium SUV and a battery electric vehicle. The second driver is new market growth, where we have tremendous potential in the China aftermarket. The China car parc is growing and aging and, by 2025, is expected to be the largest aftermarket in the world. We are investing and leveraging our experience from our mature markets to make sure we are well positioned to capture that growth. The third driver is content growth in our Clean Air business. Tightening emissions regulations globally and light vehicle hybridization of the fleet continue to drive higher content on platforms. And finally, the fourth driver is market expansion growth. We're already seeing the benefit from the ramp-up on Bharat IV Clean Air programs in India, as well as incremental content on commercial truck programs in China as tighter regulations are enforced. We have tremendous opportunities in CTOH when you consider that between now and 2030, the market will dramatically expand with the number of regulated powertrains more than doubling in that time. Looking at the chart on the right side of the slide, you can see the projected shift in our revenue profile in just 3 years as we deliver on this growth, with Ride Performance, the aftermarket and CTOH all gaining a larger share of our total revenue. Turning now to our 3-year outlook on Slide 19. As we announced in Detroit last month, for full year 2018, we expect organic growth of 5%, outpacing industry light vehicle production by 3%. The key drivers will be content growth on both light and commercial vehicle platforms, and we expect continued recovery in regulated off-highway regions with higher volumes, particularly in the first half of the year. Looking further ahead the same underlying drivers will continue fueling revenue growth that consistently outpaces industry production. In 2019, we expect organic growth of 6% to 8% and 5% to 7% growth in 2020. Turning now to the first quarter on Slide 20. We expect revenue growth of 5%, or 3% in constant currency. That will outpace global light vehicle production, which is expected to be flat. This forecast includes double-digit CTOH growth, light vehicle revenue roughly in line with the industry production and a steady contribution from our global aftermarket business. And to reiterate, the full year, we anticipate 5% top line growth, which is a strong outlook given production growth of just 2%. With that growth, we expect to continue converting on the incremental revenues. At the same time, we are increasing our investments to make sure we capture future opportunities, including investments in the advanced suspension technology; manufacturing footprint changes, primarily in China and North America Ride Performance OE that will continue to improve our competitive position; a new dedicated global organization for our Clean Air CTOH business; and investments to continue building our aftermarket position in China. With these investments and conversion on our top line growth, we expect margins for full year 2018 to be roughly in line with last year. Transformative trends in our industry are creating new growth opportunities, and it's our responsibility to make sure Tenneco is prepared and leading in capturing those growth opportunities. In summary, we delivered a strong performance in the fourth quarter and full year, including returns to our shareholders. We have multiple long-term drivers that will accelerate our revenue growth and continue to diversify Tenneco's portfolio, and we are investing in the business and expect revenue growth through 2020 that will continue to outpace the industry. With that, we're very happy to take your questions.

[Operator:]

[Operator Instructions]. And our first question comes from Joe Spak with RBC Capital Markets.

[Joseph Spak:]

I guess just the first question on the quarter. So inorganic growth came in 7%, I think you guided 3%, and then the value added margins flat year-over-year, which is also what your guidance suggested. So you didn't really get the flow-through on the better organic growth. It looks like maybe that sort of ride control came in softer than expected. But I was just wondering if you could walk through what was different versus your original guidance on the cost side.

[Brian Kesseler:]

Yes, primarily, the largest contributor to the fourth quarter increase was the light vehicle market in Europe and China. That's where we saw the overwhelming majority of the increase from what we talked about in the previous quarter.

[Joseph Spak:]

I'm sorry. So the cost came in higher in Europe than you anticipated?

[Brian Kesseler:]

No, the revenue growth in light vehicle. The biggest contributor on the revenue growth was, in Europe and China, light vehicle.

[Joseph Spak:]

Right. So I guess my question is, if the growth came in stronger, I guess, why didn't you get sort of the incremental leverage on the margins than sort of what you originally pointed to? It would seem like something must have come in a little bit softer?

[Kenneth Trammell:]

Joe, it's Ken. Obviously, mix of revenue has an impact on that as well. I think Brian pointed out that with the strength in Europe, where generally the margins are a bit lower, that obviously didn't flow through at as greater rate as we expected. And we also referenced the fact that we saw a change in the North American aftermarket revenue in the fourth quarter. As you know, of course, aftermarket is a pretty high-margin product line for us.

[Joseph Spak:]

So it is just mix in this one?

[Brian Kesseler:]

Yes. That's right.

[Kenneth Trammell:]

At the end of the day, we're very happy with the flat year-over-year margins. So again, that's what we said to expect and that's what we're happy to see come out of the results.

[Joseph Spak:]

Okay. And then on steel, it's great to hear about the progress there that you're making. And I think you said half the impact in '18. Just to level set everyone. Can you give us what the total headwind was in 2017?

[Brian Kesseler:]

Well, when we were -- last year, we talked about a Q2 impact of about $12 million, a similar impact in Q3, highlighting a couple of million dollars better in Q4. So call it, 10-ish. And we did have some impact in the first quarter year-on-year. It just wasn't to the extent. So think about the overall somewhere in the $40 million range, that's what we experienced in 2017.

[Joseph Spak:]

Okay, that's very helpful. And then last one just on China. Commercial vehicles expect -- that market is expected to be down a lot, but I think off-highway stuff is expected to be still holding. So can you remind us of your mix in China? And then can you still outperform that region on content?

[Kenneth Trammell:]

So no regulation in the off-highway units yet in China, Joe.

[Brian Kesseler:]

So it's all commercial vehicles.

[Joseph Spak:]

So the lower expected volumes are sort of an offset to some other regions of the world, which should still be positive?

[Kenneth Trammell:]

Right.

[Brian Kesseler:]

Yes, the commercial truck space in China ranges of down year-over-year between 10% and 20%, we were kind of in the middle there.

[Operator:]

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

[Richard Kwas:]

Just Brian, on the index. So the 50% number for this year, what was the relevant number for '17?

[Brian Kesseler:]

Overall, we were lower than that. We're in the 40% range. And that was an improvement from '16, which was maybe 1/3. So good improvement through the year. And we continue to work with the remaining customers with the remaining exposures. But commercial teams are making good progress. And remember, that the -- that was on the ride control North America and Europe carbon steel exposure is where we saw that.

[Richard Kwas:]

Okay. So is that 50% of the ride control exposure, that 50% for the entire company?

[Brian Kesseler:]

That's 50% for the ride control North America and Europe.

[Kenneth Trammell:]

Remember, on the Clean Air side, Rich, like we said for a long time, the LA surcharges are pretty much indexed.

[Brian Kesseler:]

With the exception on China.

[Kenneth Trammell:]

Yes.

[Brian Kesseler:]

And then the aftermarket, we price it in.

[Richard Kwas:]

Right, right. And then my recollection also, just back on China, was on carbon, there's -- it's still evolving market with regards to indexing. So that would -- 50% would exclude China, correct?

[Brian Kesseler:]

Yes. Yes. And we haven't seen or the market hasn't seen carbon steel market behavior like we are seeing in North America and Europe, but it seems to be managed pretty tightly to a tight range.

[Kenneth Trammell:]

And remember, it's the alloy surcharges, which -- that's due to factors outside of China that's called the -- caused the alloy surcharges to spike in China. And those are the ones that we mentioned a few minutes ago, right? That's not indexed yet, either.

[Brian Kesseler:]

Yes. It's China Clean Air.

[Kenneth Trammell:]

Yes.

[Richard Kwas:]

Right, right. Okay. But China was a little bit of a headwind within that $40 million or so, right?

[Kenneth Trammell:]

Yes. Yes, it was.

[Richard Kwas:]

Okay. All right. Okay. And then just as we think about the overall market for commercial. So flat production, correct, is the underlying assumption globally? So we should really watch for North America, Europe on-road and off-road as kind of the key drivers of what happens or some offsets that you just referenced with regards to Asia and your ongoing exposure there.

[Brian Kesseler:]

Yes. Our off-highway is pretty -- in the regulated regions, we've got pretty good content there. In the commercial truck, we're better positioned in Europe and South America than we are in North America from the Class 8 perspective. And then, obviously, the market in China on the commercial truck is down or projected to be down like we talked about.

[Kenneth Trammell:]

In North America, you want to watch the medium duty production rates.

[Richard Kwas:]

Right, right, 5% to 7%, right? And then real quick on CapEx. So CapEx increasing this year. How do you think -- I mean, with the growth rate here improving organically in '19 and going to be pretty good in '20 as well. I mean, how should we think about capital requirements for the next couple of years? That's been increasing as you've prepared for these launches and for the higher growth rate. But just curious on capital efficiency and how you're thinking about this in ways to manage CapEx going forward?

[Kenneth Trammell:]

Yes, I mean, obviously -- Rich, great point, right, an intense focus of ours, and I think one that shows up in the ROIC numbers that Brian referenced near the end of the remarks he had earlier. But -- so we're very focused on being as efficient as possible. That being said, we've been running in the vicinity of around 4% of current year revenues. And I think looking in that sort of ZIP code gives you the right viewpoint for the next couple of years here.

[Richard Kwas:]

Okay. So closer to 4% of sales rather than the 3% to 3.5% range that you've typically talked about.

[Kenneth Trammell:]

Yes, we've been talking 3.5% to 4% for the recent -- probably the last 2 or 3 years simply because of the fact that we've seen the acceleration in the growth. So...

[Operator:]

Our next question comes from Colin Langan with UBS.

[Colin Langan:]

Can we go through -- you indicated margins are flat, but it feel -- it sounds like there's maybe a $20 million relative tailwind, I think, you said it's the half of the $40 million. And then volumes are up. So what are the major offsets that keep margins flat when you should have incrementals on higher volume and, hopefully, a little less steel tailwind?

[Brian Kesseler:]

So the tailwind is not -- there's incremental tailwind of about half, so markets in carbon steel are still going up. So we're saying we won't see as stiff a tailwind year-on-year as we did in '17.

[Kenneth Trammell:]

A stiffer headwind.

[Brian Kesseler:]

A stiffer headwind, sorry.

[Colin Langan:]

So the $20 million headwind, are there any other offsets? I mean, you also mentioned in your comments about plant relocations in Asia Pac and North America, and any color there on how it impacts the margin and how long it might take?

[Brian Kesseler:]

Ken highlighted or we highlighted in our announce -- in our release comments on the Beijing plant, we talked about that kind of breaking news as we were doing third quarter announcement. In North America ride control, we're relocating a large truck platform into two new plants that was previously in another. But the bigger moves were the investments in the aftermarket in China and the investments inside our MIS portfolio from an intelligent suspension perspective.

[Colin Langan:]

Got it. And when do those headwinds from that relocation -- are they through the whole year? Or do they just last a couple more quarters or...

[Brian Kesseler:]

Well, it'll go a couple of more quarters, but then dwindle down as we go through the year.

[Kenneth Trammell:]

Yes. Beijing relocation really won't be complete until later this year, probably late this year, Colin. The launch of that large platform, the two new plants that Brian mentioned, the launch occurs late summer. So we'll kind of head into that and see how that particular program ramps up.

[Colin Langan:]

Got it. Just looking at cash flow. Can you clarify what you were talking about on factoring? Is that an increase of the $107 million? Or is that new to this year? Or is that -- was this a number in the last year?

[Kenneth Trammell:]

Yes, you bet, Colin. We were able to institute -- it's really a receivable sales program that we were able to do in the fourth quarter of this year. It saves us somewhere north of 50 basis points on the cost of capital on that particular program and that head of $107 million cash flow benefit on the accounts receivable line in the fourth quarter.

[Colin Langan:]

Got it. So I mean, that's the most -- if I look at the year-over-year, increase of about $100 million. So without that, the cash would have been about flat year-over-year? Is that the right way to think about it for next year?

[Kenneth Trammell:]

Yes, so the year-over-year -- yes, I mean, the year-over-year increase is really on the neighborhood of $200 million in operating cash flow. So it was about half of it.

[Colin Langan:]

Okay. And how should we think about cash conversion going forward? I mean, is that -- I guess, at the end of this year, around 60, about 2/3 of net income was converted. Are there still opportunities? And should we be concerned about his factoring going away as the year-over-year tailwind into next year?

[Kenneth Trammell:]

No, I don't think the factoring will go away. I mean, the way we look at the receivable sales program is an opportunity to save cost of capital, which is one we're going to be very transparent about what the impact of that is on our operating cash flows. And if we can do more of that cheaper, we will. And when we do it, we'll let you know. When you think about cash conversion, the things that have an impact on us, obviously, CapEx. We continue to spend CapEx at a greater rate than it gets depreciated. And that's because of the growth of the company. And that's that -- what we just mentioned when we were talking with Rich, think around 4% of sales, current year sales for our CapEx requirements. Inventory is an opportunity in sort of you're doing about in our working capital. But that will take us a while to get to. We've got the plant relocations that we talked about. Those actually will require us to increase inventory before we can decrease it. But we'll continue to focus on reducing our days on hand. And we're fairly efficient when you think about it just in terms of the management of our overall working capital position. I'd say we're probably pretty close to benchmarkable on all those. So those are the items that would differ from earnings, right? And so as we grow, we'll have to make investments in working capital and investments in CapEx that will be a little bit of a headwind.

[Colin Langan:]

So we should think about the current conversion ratio as being steady in the near term?

[Kenneth Trammell:]

Yes, so that's right. And I think it's also a point that we should make that we're still resolving prior antitrust requirements. We made, if you recall, the same payment in 2017 in the neighborhood of $45 million. We still have a bit in the neighborhood of probably $80 million to $90 million of the reserve that remains. And so that hopefully gets resolved by the end of this year.

[Operator:]

Our next question comes from Brian Johnson with Barclays.

[Brian Johnson:]

Yes, a couple of questions. You gave helpful commodity cadence. Can you maybe kind of just bring it up to the overall margin cadence and what you're particularly looking at throughout the year? Are there other kind of timing differences other than the commodities we should be aware of?

[Brian Kesseler:]

I think when we're looking at it, Brian, we're talking about relatively even margin rates. There'll be some movement quarter-to-quarter as we go launch loads and like that. But I guess at the end of the year, we'll get back to even.

[Brian Johnson:]

Okay. Second question is just around the minus 10% in North America and ride control margins down as well. Do you have a kind of line of sight -- you mentioned the inventory, but just to the end demand in the market, your market share or the pricing trends? And is that just -- are there structural things going on or is it just kind of timing of inventories in your channels?

[Brian Kesseler:]

Yes, it's a little bit of the two issues you highlighted there, Brian. The market overall is soft. Our share position is still pretty strong. Pricing pressure is no different than normal. And then there are a couple of major customers who are strategically repositioning their long-term inventory positions. So it's a little bit of all of those things. At the beginning of the fourth quarter, we also did -- there were some still hangovers coming from the weather events in the Southeast, where a couple of our customers are strong and one of them is very strong in Puerto Rico, and obviously, we all know the struggles of that particular part of the world is still wrestling with.

[Kenneth Trammell:]

As far as the structure of the market right now, Bryan, one thing to keep in mind, right, we're sort right in the sweet spot right now in terms of the age of the vehicles that did not get sold during the Great Recession. So I think that from the market perspective, some of the market softness we're seeing is sort of the evolution of those kind of through the sweet spot of replacement parts. And that'll start to reverse as we kind of get out over the next several quarters here, we think.

[Brian Kesseler:]

And if you listen to some of our customer commentaries in their dialogue, they do talk about '19 beginning to be better in the marketplace.

[Brian Johnson:]

Okay. So if I just ask kind of basics, inventory change, it was just the same question. So aftermarket's down 10% in North America, as we see healthy increases in China and Europe. What do you think the end market, sort of Monroe shock absorbers leaving shelves and warehouses, were the retail sales in each year?

[Brian Kesseler:]

Yes, out-the-door sales, we--

[Brian Johnson:]

Just trying to get my head around the inventory impact on all those three areas.

[Brian Kesseler:]

Yes. So the out-the-door sales from the visibility that we have from certain customers is around 4% to 5% down in the overall marketplace.

[Brian Johnson:]

And then when it goes down and if they're strategically repositioning there inventory, they pull it, pull that down.

[Brian Kesseler:]

Yes.

[Brian Johnson:]

And in Europe and China, was there stock build? Or do you think that was retail [indiscernible]?

[Brian Kesseler:]

China is still relatively small. We're happy with the increases we're getting. In Europe, there doesn't seem to be any abnormal behavior from positioning of inventories.

[Kenneth Trammell:]

I think that's just -- again, seeing some market recovery in Europe. And point out to South America, right, where, again, the economy is recovering and saw some very nice increases in the aftermarket in South America.

[Operator:]

Our next question comes from Brian Sponheimer with Gabelli & Company.

[Brian Sponheimer:]

My questions are around capital allocation. We've seen some of your peers in the auto space on the supply side make some acquisitions that position themselves fairly well for potential electrification down the road. You noted that hybridization is a positive for you. But I'm wondering what could potentially be down your pipe from an M&A perspective that could also help you maybe change the narrative on what you're able to speak about as far as the internal combustion engine and how you are best positioned?

[Brian Kesseler:]

Yes, great question. So we've been pretty consistent, I think, since our Investor Day last March. In the long term, when we look at our revenue profile moving over time towards kind of a 1/3, 1/3, 1/3 look in Ride Performance, aftermarket and Clean Air is the way we think about it. To get there then, it's obviously overweighting opportunities in Ride Performance, which the technology side from an internal -- from an intelligent suspension capability standpoint and the growth rate that we see in -- not only in installation rate, but also the content per vehicle, so that would be an attractive space for us. Anything in the aftermarket from a regional improvement, maybe potentially in China, or incremental adjacent product lines where we can leverage very, very strong position and access to channels and customers is also attractive to us. And then our noise, vibration and harshness elastomers business, NVH business, we're seeing nice growth, and still primarily a North America market. We've got good capacity installed in China, so we can turn that -- which mostly comes back on export, we can turn that to the domestic market in China. And then really looking where -- maybe the right opportunity to get a presence in Europe, where we really don't have that today. So those 3 would probably be the major focus areas for us. From a pure electrification play, there's a lot -- we look at it in the standpoint that there's a lot of people right under in the same space. And we're really good on the chassis side and we're really good on the aftermarket side, and those are all going to be great growth drivers, agnostic of how ever you believe how fast the shifts are or the transitions are from internal conversion engine to full battery electric vehicle. As you mentioned, hybridization is a good thing for us, too.

[Brian Sponheimer:]

Okay, great. And Brian and Ken, if I'm thinking about your balance sheet and where your net leverage is right now and, obviously, where share is traded, [indiscernible] times earnings, what would it take for you to become more aggressive and opportunistic from a buyback perspective? I mean, you could buy back 15% of your shares right now and not really dang your leverage all that much.

[Kenneth Trammell:]

Yes, I mean, Brian, we've been pretty aggressive on share buybacks since we began that here probably about 3, 3.5 years ago. And obviously, we've said that we expect to continue to do that. It's certainly a balance to make sure that we don't do anything that prevents us from taking advantage of opportunities that Brian has talked about. So we'll continue to weigh all of that. But yes, we've been fairly aggressive when we reduced our outstanding shares from somewhere north of $60 million to $50 million in just a very short period of time. So certainly, going to continue to use that capital allocation priorities that we've talked about to make sure that we take advantage of kind of what's in the market.

[Operator:]

Our next question comes from John Sykes with Nomura.

[John Sykes:]

Just going back to Monroe in the aftermarket. What's really driving kind of the softness in North America? I know we talked a little bit about the stock levels and that type of thing. But what's really happening with the consumer of that product? Why is it down so much?

[Brian Kesseler:]

Well, I'll go back a little bit to what we talked about in the script. So we saw in the quarter down 10% year-on-year. When we are looking at the out-the-door sales from the views of the major customers that we get that from, they're down about 4% to 5% in the same period. And then we have a couple of customers who are dramatically shifting their views on inventory positioning. So they -- you see them deleveraging their inventory position to much different levels, much lower levels. So that's the makeup of, primarily, if you think about half from the overall market, half from the inventory repositioning. From an overall market perspective, I think Ken was sitting on, if you listen to the dialogue from many of our customers, there's a belief in the marketplace that we're near the bottom of the trough from the '08, '09 production levels coming down, which is kind of in that sweet spot of the vehicle aging in that 7- to 8-, 9-year level. And that there's an expectation in the North American market that, that will start to recover as we get closer to 2019. Now Europe is -- got great growth potential for us, we mentioned South America and then the investments we're obviously making in China and in India.

[John Sykes:]

Okay. So I guess, on the consumer end, it's really just the fact that the cars haven't aged enough yet and it's a sweet spot?

[Brian Kesseler:]

Yes, at the end of the day, if you boil it down, it's kind of just the car parc and just where it's at, and how that kind of bubble up from that dramatic shift down for a couple of years just moves through the market.

[Kenneth Trammell:]

Yes. And I mean, don't forget, right, we're not just in North America, all right? Our overall aftermarket revenue was up 1% in the fourth quarter even in the face of the North America decline. So feel pretty good about that.

[John Sykes:]

Just another question would be is investment grade a target for you? An opportunity for you? I know you look at return on capital, so probably the answer is no. But I'm just curious because you're getting close, obviously, that could be a plus in the long term. So how do you think about that?

[Kenneth Trammell:]

Well, certainly in the existing market today, the difference between investment grade and non-investment grade doesn't really prevent us from doing anything we need to do. We've always said we want to have a strong balance sheet given the fact that we're a cyclical business. And so we operate the business through the cycle. We certainly intend on maintaining that. When you look at our capital allocation priorities, they are what they are. I agree with you that the statistics look good. I would also point out that I think the rating agencies are somewhat reluctant to grant investment grade to many auto suppliers simply because of the cyclicality of the business. So for those reasons, it's not something that we're striving to achieve. We tend to look at how our investors view our balance sheet, which is a very strong balance sheet. Our bondholders seem to be very pleased with how we manage the balance sheet. And really, that's the key for us, a little less of what the rating agencies have to say.

[John Sykes:]

Yes, okay. And then just what is the total pension obligation and OPEB in general?

[Kenneth Trammell:]

I haven't looked, to be honest with you. We've been fairly active for the last -- so I don't know the year and number. We'll file the 10-K here shortly, we can certainly get it to you. I believe it's less than $200 million. I'm pretty certain it's less than $200 million. We've been fairly active at reducing that overall exposure through opportunities to -- the buyout pension obligations to -- for both active folks who have or -- remind you, we froze the pension plan in 2006, the U.S. one. So we bought out actives who had a liability there. We've also done the same with folks who've left the company. So we're very focused on trying to get out of the pension management business. It's just not a big number for us to have to deal with anymore.

[Operator:]

[Operator Instructions]. And our next question comes from David Tamberrino with Goldman Sachs.

[David Tamberrino:]

I think for full year 2018, you're kind of guiding to flat margins year-over-year. Should the cadence of margins improve throughout the year? Or are we going to start off down sequentially or down year-over-year again in the first quarter or the first half of the year, and then should that improve as we exit the year? Or are we just thinking flat for the entirety of the year?

[Kenneth Trammell:]

Yes. I mean, David, we generally don't -- actually not generally, we don't give margin guidance. We felt like it was important to kind of talk about what we see for the full year. I mean, Brian said a little bit earlier, in answer to Rich's question, that we'll see some pluses and minuses on when cost come in. But we're -- our point was when we get to the full year, right, we'll see roughly flat on a year-over-year basis.

[David Tamberrino:]

Okay. Well, maybe then just near-term since we do have revenue guidance for 2018. And you've got a little bit better of a position, starting the year from a steel recovery. I mean, should we be looking for better margins to come out of the gate for the first quarter? Is that quick of a recovery?

[Kenneth Trammell:]

Again we -- yes, David, David, I hear you, right, but I'm -- we're not giving earnings guidance, margins guidance for the quarter. Like we said, roughly flat for the year. There'll be certainly puts and takes, steel changes are going to be one of those. We've also talked about the relocation costs related to some of the footprint moves. Launch costs and things like that. But again, we're trying to kind of point out to you that we're giving you some qualitative information for the year, but not trying to guide to what's going to happen on a quarterly basis.

[David Tamberrino:]

Point taken. And just my last question. What is your 2018 guidance imply for a constant currency value-add revenue growth for 2018?

[Kenneth Trammell:]

So that is the 3% in excess of the market. I'm sorry, ask me again. I misunderstood your question.

[David Tamberrino:]

Yes. Well, I'm just trying to bifurcate the growth in value-added revenue versus the substrate revenue, which I think has been creeping up a little bit.

[Kenneth Trammell:]

Oh, I'm sorry, the mix of the two, yes. So certainly, substrate revenue will grow as a percentage of the total. I think we said that in the slides that we had attached because we're seeing the mix grow as we continue to add content.

[David Tamberrino:]

Okay. So it should outpace what that 3% constant currency, call it, above market growth is?

[Brian Kesseler:]

I think maybe a different way of thinking about it is substrate revenue as a percentage of total revenue goes up slightly, value-add revenue as a percent of revenue will go down. So a little bit, little bit.

[Kenneth Trammell:]

It's 1% or 2% change in the mix there. Is that what you're trying to get to, David, I'm sorry?

[David Tamberrino:]

Yes, that's helpful.

[Operator:]

And this concludes our question-and-answer session. I'd 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, the playback information is available in the 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.