Tsakos Energy Navigation Limited
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Good morning and welcome to the Tenneco's Third Quarter 2016 Earnings Release Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your lines have been placed on the listen-only mode until the question-and-answer segment of today's call. Now I would like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

[Linae Golla:]

Thank you. Good morning and welcome. This morning we released our third quarter earnings and related financial information. On our call today to take you through the results, are Gregg Sherrill, Chairman and CEO; Brian Kesseler, Chief Operating Officer and Ken Trammell, Chief Financial Officer. The slides related to our prepared comments are available on the Investor Section of our website. After our comments, we will open up the call for questions. So 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 can be found 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 Gregg.

[Gregg Sherrill:]

Thank you, Linae, and good morning, everyone. By now you've had a chance to review our third quarter earnings release and can see that we delivered another excellent quarter including our highest ever third quarter revenue, EBIT, net income, earnings per share, and cash performance on both a reported and adjusted basis. We also delivered another quarter of margin improvement. First, taking a look at revenue on Slide 5. In constant currency revenue was up 5% to $2.1 billion and on a value add basis, revenue increased 6%. When we break it down, the highlight this quarter was the outstanding growth in our light vehicle business. Light vehicle revenues were up 9% almost doubling industry production, so a very strong performance for what makes up 75% of Tenneco's total revenue. This growth was driven by new program launches and higher volumes as we continue to benefit from having content on many of the strongest selling vehicles globally. Commercial truck and off-highway revenue which made up 10% of total revenue in the quarter declined year-over-year primarily as a result of weaker than expected off-highway market conditions in North America. And the global aftermarket revenue was down slightly on a year-over-year comparison due to the low-end of the Carquest business last year. The aftermarket accounts for about 15% of our total revenue. All in all with a strong balance we have across end markets, regions, and platforms, we delivered excellent top-line growth on the strength of both Clean Air and Ride Performance light vehicle growth. And with another record revenue quarter, we're on track to meet our full year revenue expectations. This growth illustrates the effectiveness of our structural growth drivers including our outstanding light vehicle platform positions which I just mentioned, as well as regulatory driven Clean Air content growth, greater demand for electronic suspension systems, and Tenneco's leadership in the global aftermarket. Turning now to earnings on Slide 6, which were also third quarter records, adjusted EBIT was up 5% over last year on the strength of light vehicle revenue growth in Clean Air and Ride Performance as both product lines outpaced industry production. We also improved profitability with 20 basis points margin improvement as we capitalized on the light vehicle growth. I also want to call your attention to our cash performance which was outstanding. We generated $139 million in cash from operations as we continue to do a good job of converting earnings into cash and managing our working capital. And lastly, I want to thank our global team, all of these results represent the hard work, innovation, and commitment I see everyday throughout our operations. I firmly believe, we have one of the best teams in the industry and our performance this quarter is proof of just that. And now I will turn it over to Brian for more detail on our results.

[Brian Kesseler:]

Thanks, Gregg, and good morning. I also want to recognize the great effort from the entire Tenneco team for delivering on the quarter. On Slide 7, I'll begin with what the overall production environment looked like in the third quarter. Global light vehicle industry production increased 5% led by China and India and with positive growth in North America as well. On-road commercial truck industry production was down 1% globally including declines in North America, Europe, and Brazil which more than offset that growth in China and India. And finally as Gregg already mentioned, we saw much weaker off-highway production in North America. Turning to our revenue and EBIT results, keeping in mind that I'm referencing value add revenue and at constant currency. Beginning with Clean Air on Slides 9 and 10, the team delivered a good revenue quarter outpacing industry production with 7% increase. Clean Air light vehicle revenue was up 10% with year-over-year improvements in all three reporting segments. In North America, light vehicle revenue was up 5% driven by higher volumes on GM platforms including recent launches of the Acadia, Enclave, and Traverse, and the Malibu, Impala and LaCrosse models as well as new launches with Lexus and Nissan. In the Europe, South America, and India segment, light vehicle revenue increased 12% driven by new platforms including the Mercedes E-Class in Europe and higher volumes on the Renault X82, Chevy Cruze, Opel Astra, and several Jaguar models. India also contributed with volume growth on programs with Nissan, Ford, BMW, and Mahindra. In China, volume strength on existing platforms and new launches with Beijing Hyundai and SGM drove a 20% increase in Asia-Pacific light vehicle revenue. Turning to Clean Air commercial truck and off-highway, revenue was down 7% driven by 22% revenue decline in North America due to further deterioration in off-highway market conditions. The impact of weaker than expected volumes with off-highway customers in North America overshadowed some positives in the quarter from other regions. Commercial truck and off-highway revenue was up in the 5% in Europe, South America, and India segment as we continue to benefit from incremental content on Stage IV off-highway programs in Europe. We also saw an increase in commercial truck revenue in India as we ramp up on programs to meet new broad Stage IV standards and the Asia-Pacific segment was also up with a 10% revenue gain driven by commercial truck programs in China. Now turning to Clean Air earnings and margins performance, adjusted EBIT was up 6% to $113 million and value added adjusted EBIT margin improved 10 basis points to 11.6%. All the light vehicle growth I just highlighted including new programs and operational cost improvements in Europe and China were positive drivers and more than offset weak off-highway market conditions and slower than expected ramp-ups on two new light truck programs in North America. These items in North America, particularly the operating inefficiencies created by inconsistent launch schedules on the two new programs reduced our North America Clean Air margins in the quarter. So to summarize Clean Air another quarter of year-over-year margin improvement and mixed feature in Clean Air commercial truck and off-highway with significantly weaker off-highway market conditions in North America impacting revenue and offsetting gains in other regions and the strong light vehicle revenue growth that delivered a good quarter for Clean Air. Turning now to Ride Performance results on Slide 11 and 12. Revenue was up 5% in the quarter driven by 12% increase in light vehicle revenue. In the Europe, South America, and India segment light vehicle revenue increased 18% on constant growth in Europe was launched and ramp-up on MONROE Intelligent Suspension Programs with Volkswagen, Renault, and Ford. We also had stronger volumes on new programs with Jaguar, VW, and Renault. In the Asia-Pacific segment light vehicle revenue was up 64% which shows the progress we're making in growing our conventional shock business in China where revenue increased on stronger volumes and new program launches with Beijing Hyundai, SGM and Chery. In North America Ride Performance light vehicle revenue was down 8% versus last year due to retired programs. Turning to Ride Performance commercial truck & off-highway revenues were down 18%. We're still seeing weak truck production in North America and Brazil and revenues were lower this quarter in Europe on a year-over-year comparison due to the sale of the Marzocchi business at the end of last year. And finally overall we had a good quarter for the Ride Performance aftermarket with revenue up 1% including increases in Europe and South America. In North America the year-over-year comparison was still impacted by the Carquest business that was loading in last year and ended in the first quarter of this current year. Now turning to our Ride Performance earnings and margin performance, adjusted EBIT was up 17% to $68 million and Ride Performance adjusted EBIT margin improved 130 basis points to 10.7%. Number of factors drove our margins this quarter beginning with stronger light vehicle volumes and higher aftermarket sales in Europe and South America. We also had positive contributions from our overall operational cost improvements and as I mentioned last quarter the cost related to recently launched MONROE Intelligent Suspension programs are continuing to improve. All in all a good quarter for Ride Performance with continued growth from advanced technologies in Europe, expanding conventional shock business in China, a solid contribution from the global aftermarket, and all this while continuing to improve margins. In summary, it was another strong quarter of executing on our growth strategies, while delivering record earnings and we still have plenty of opportunities ahead of us. We're aligned and focused on our processes to drive revenue growth, deliver flawless launches, continuously improve utilization and efficiency down to the manufacturing and sell level, and cascade those improvements in best practices around the world. All of this underpins that 2016 will mark our seventh consecutive year of margin improvement and give us confidence that this annual margin improvement will continue in future years. With that, I'll turn it over to Ken.

[Ken Trammell:]

Thanks, Brian. I'll start by taking you through the adjustments in the quarter on Slide 14. Now let's start with the largest. We recorded $105 million tax benefit, primarily related to how we handle foreign taxes on our U.S. tax returns. We could not utilize foreign tax credits during the years when our U.S. operations were generating a net operating loss. The $105 million benefit reflects our ability to carry-forward foreign tax payments from earlier years to offset a portion of our future U.S. taxes. As a result, we estimate that we will see at least a $10 million reduction in our U.S. cash taxes for each of the next several years. This quarter we also recorded restructuring and related expense of $7 million primarily for manufacturing footprint improvements in North America Ride Performance as well as headcount reduction and cost improvement initiatives in Europe and China Clean Air. Additionally, as we told you last quarter, we recorded $8 million in debt refinancing cost in July to complete the redemption of the remaining outstanding 6 7/8% notes that were not tendered in June. As a reminder, we took advantage of favorable interest rate conditions in the second quarter and refinanced our $500 million notes with 5% notes due in 2026 for an annual expense reduction of about $9 million. Moving to taxes on Slide 15, this quarter our effective tax rate is 28% before adjustments, year-to-date it's 29%. We still expect our full year effective tax rate will be between 29% and 30%. Cash tax payments were $30 million in the quarter and we now expect that our full year cash tax payments will be lower at between $120 million and $130 million. Net income attributable to non-controlling interest this quarter was $17 million that's up $3 million from last year. This line item is driven by growth in our China joint ventures and historically has sequentially increased in the fourth quarter when China light vehicle production is at its seasonal high. Turning to Slide 16, you can see a summary of our debt and cash positions. I will point out that our leverage ratio was 1.3 times at quarter end, that's improved from a year ago level of 1.4 times. And additionally for the full year, we still expect interest expense will be about $70 million. Now moving on to Slide 17, we delivered good cash flow this quarter. Cash generated from operations was up 31% in the quarter at $139 million driven by higher earnings and continued strong working capital management as reflected in our working capital metrics. As of quarter end, our accounts receivable days sales outstanding was even with last year at 65 days. Days inventory on hand was up 1 day to 39 days and days payable outstanding was better by 3 days at 75 days. Capital investments in the quarter were $90 million as we stepped up our level of investment starting in the second half as I mentioned in the last quarter. The investments are for our new or expanded business in North America and increased capacity in China to support a significant launch in 2017. For the full year, we still expect capital expenditures of about $360 million. Additionally in the third quarter, we repurchased 1.7 million shares of common stock for $89 million. Since we started the program in early 2015; we have repurchased 7 million shares for $359 million or a 11% of the shares outstanding at that time. We have $191 million remaining on the share repurchase authorization which we expect to complete at a free cash flow during 2017. With that, I will turn the call back to Gregg.

[Gregg Sherrill:]

Thank you, Ken. Before I get to our outlook just a quick summary of our performance through the first three quarters. Year-to-date we have delivered a 7% increase in revenue at constant currency, a 9% increase in adjusted EBIT, a 20% increase in adjusted net income, and a 29% increase in earnings per share, a 50 basis point improvement in value added adjusted EBIT margin, and a 27% improvement in cash flow from our operations. We've also repurchased 2.8 million shares under our share repurchase program. We've reduced annual interest expense by $9 million with our refinancing of the notes that Ken mentioned, and we continue to make structural improvements to our effective tax rate. We've had three record quarters and we're on track to finish the year strong. As we look at the fourth quarter, we expect continued growth with a 3% increase in total revenue excluding currency. Just as we saw this quarter, light vehicle would be the growth engine in the fourth quarter with revenues outpacing the industry and again all driven by those underlying structural growth drivers. Turning to our outlook for commercial truck and our highway revenue in the fourth quarter, on-road commercial truck industry production is forecasted to decline about 1% and we expect our on-road commercial truck revenue to be in line with the industry. In off-highway we anticipate lower revenues due to further deterioration in the North America off-highway market and weakness in Europe as well. As a result of these market conditions, we expect our total commercial truck and off-highway revenue will be comparable with the third quarter which would be about a 10% decrease versus a year ago. And finally we expect a solid contribution to revenue from the global aftermarket. With this fourth quarter outlook we fully expect to exceed aggregate industry production by 3% for the full year and deliver 6% revenue growth in 2016 which is on target with our previous guidance. As we look ahead, we are very confident about the future and our ability to accelerate growth based on the underlying drivers in Clean Air and Ride Performance and the intense focus we have on capturing additional opportunities in both product lines. While 2016 is relatively quite regulatory year as we said before, new light vehicle emissions requirements due begin to phase-in starting next year. Tier 3 final in the U.S. and Euro 6C in Europe will support Clean Air revenue growth in both regions. In the U.S. additional content will be required to meet NOx reduction and tighter coaster requirements. And in Europe the regulations will require efficient systems to meet real driving emissions and specter of particular standards. Emissions regulations will also continue driving our commercial truck and off-highway Clean Air revenues with new requirements in China and India coming into effect over the next two years. Also in regard to our overall regulatory timeline, I would note that India has now confirmed it is pulling for requirements for commercial truck emissions by finalizing the Bharat VI regulations. This new mandate will require commercial trucks beginning in 2020 to move to Bharat VI standards from Bharat IV and skipping Bharat V altogether. Tenneco has a very strong commercial truck and off-highway custom delays as you can see on Slide 19. In this quarter were announcing two new truck customers in India VE commercial vehicles and Volvo trucks. Additionally we have won a new truck customer in North America which will identify as soon as our customer allows us to do so. While we are still seeing weakness in many of the truck and off-highway markets our business and the required content with these customers remains very strong and we're well-positioned for the eventual recovery in these cyclical markets. On the Ride Performance side we're seeing double-digit growth of our MONROE Intelligent Suspension technologies as customers continue to look for products that offer a unique and superior driving experience. This year we launched four programs and were awarded four additional new programs. The greatest adoption has been with the European OEMs and we continue to work with customers on expanding these technologies outside of Europe. So that's a snapshot of the future and where we're focused. All of it supports our 2017 and 2018 revenue guidance and our expectations for outpacing the industry in those years. Now along with our board of directors I was just in our Clean Air Engineering Center in Edenkoben in Germany to see firsthand the technology and capabilities we have to not only meet our customers' expectations but we anticipate their needs and work together on cutting edge solutions. That's what we are doing a around the world in both our Ride and Clean Air operations and it bodes very well for our future. In closing, we intend to deliver a strong 2016 and carry that momentum into next year. I'm excited about our prospectus as we look forward we have proven strategies for growth, balance across many dimensions, our global footprint, and a solid foundation for success built on operational excellence, financial strength, and a values based culture. All the pieces were in place for continued success. So thank you for joining our call this morning and we can open the line up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question is from the line of Colin Langan from UBS. Your line is now open.

[Colin Langan:]

Great. Thanks for taking my question.

[Gregg Sherrill:]

Good morning.

[Colin Langan:]

Any color on the off-highway segment in terms of how it's trending, I'm not sure for the numbers, I'm looking at North America global but I think it's down 22% in North America in Q3 down 10% year-over-year in Q4 but it's flat, I don't know if it's North America global. Are we starting to see then if it's flattish from Q3 to Q4 finds that the off-highway is starting to bottom-out here or are you expecting continued weakness?

[Gregg Sherrill:]

Yes, first off, I think just to make sure we're clear on the numbers. We are seeing that 22%, where it was 22%, 23% down in North America in the off-road segment. The 10% number I think that we gave going forward was the combined commercial truck and off-road. We will see a similar if not slightly worse downward trend in fourth quarter in just the off-road portion of that, where in North America is a lot of our revenues come from. So although you know kind of this past summer we thought we were seeing a bottom then on the off-highway markets and I'm talking off-highway which really is only North America and Europe, we see now in the back half of the year those production schedules come down, I mean I don't think it's any new news to anybody, I mean it was a bit of a surprise from the summer but if you know, you're following the proxies for that market cat and bear in some of their guidance, they did come down at the back half of the year and so that's what we're seeing. Is it a market bottom? I still believe we got to be right there because those markets are at historical lows. But all in all overcoming that not making excuses for that, we still feel really good about the quarter. And we will certainly weather easily that cycle and in anticipation of its eventual recovery.

[Colin Langan:]

Got it. Any color doesn't seem like there is any impact from the weakness in European seasonal mix obviously that can be a big experience so to speak, dollar content there looks quite a bit higher, any color on why we're not seeing an impact and any color on the value added content gas versus diesel I think some of your competitors are saying that value added is actually pretty similar even if the dollar is a bit different?

[Ken Trammell:]

So, Colin we are not seeing any shift in the mix of diesel and gasoline on our vehicles we build in Europe. I know that you guys have heard from others that they are seeing it but whether it's our platform mix or our customer mix, I couldn't tell you for sure but we're seeing really no shift at all in the diesel mix, the diesel continues to be very strong. As we move into the regulations that Gregg mentioned the content does begin to get closer and closer for example the new Euro 6C regulations are going to tighten as Gregg mentioned some particular standards. That's going to recover especially for some of the larger engine gasoline vehicles like gasoline particular filter. So as we sort of move forward that gap in terms of what it takes to meet the regulations closes anyway.

[Colin Langan:]

Got it. And just my last question as you mentioned the standard, how does the phase-in work, I mean is that something mostly benefiting Q1 or is that going to be mid-year; I mean when do you start actually seeing phase-in start resulting in economy?

[Gregg Sherrill:]

Yes, it starts to first ramp in; we probably are building a little bit of it here in the fourth quarter, so it starts to ramp in, in early 2017 as well. But remember that benefit goes all the way through; I mean it's a very long phase, it goes all the way through 2022 in Europe and 2025 in the U.S. So it will be platform changeovers and model changeovers, it's designed really to allow the OEs not to have to make mid-cycle refresh in their product wins.

[Operator:]

Thank you. And our next question is from the line of Brian Johnson from Barclays. Your line is now open.

[Brian Johnson:]

Two questions one more strategic. First you enjoyed very high margins in Asia-Pacific relative to the rest of the world yet every week we read about price pressures in the showrooms in China. Can you may be talk about how it is you are able to achieve those higher margins in those regions, what kind of pressure you're expecting from your customers, what kind of productivity improvements that you have and just where you expect those margins to go?

[Brian Kesseler:]

I think a couple of things are contributing to our ability to maintain and expand margins there. One we're still on a good growth phase, so we continue to leverage fixed cost base that we've got on the ground. Our team has done a great job of partnering up with new content, you can see in a couple of different phases where our growth on the shock business has been very good as we continue to gain share on the conventional side, we would expect that to continue and leverage the fixed cost off of that business. And our Clean Air business continues to be able to capture some of the content per unit, trends that we see there and leverage the operational improvements not only just leveraging the fixed but we continue to make that, make great strides in that region from a productivity improvement. So we see our ability to maintain those for sure and we'll always be working on expansion of those over time.

[Ken Trammell:]

Brian, I do want to mention it because Brian just mentioned it from leveraging the fixed base, don't forget that, we just talked about the fact we're adding some significant new capacity for a very large platform that launches next year. So wouldn't be surprised to see the margin growth moderate a bit may be even little bit of a dip early next year as we sort of do that just in Asia-Pac and sort of add that capacity.

[Brian Kesseler:]

We've done that before.

[Ken Trammell:]

Yes don't forget that that has happened to us a number of times.

[Brian Kesseler:]

And it just matures right back to where the standard module levels are when we fill that capacity.

[Ken Trammell:]

And that's a significant platform, so that should happen fairly quickly.

[Brian Johnson:]

Okay. Second question on Intelligent Suspension, we certainly understand it's better sports car like handling its higher content for you but if we go into a tougher again competitive environment, what is the business case from the point of the view of the OEM to go with Intelligent Suspension is it just sort of a delay to customer feature or their cost takeouts or fuel economy taking into other parts of the vehicle?

[Brian Kesseler:]

Primarily what we see them putting them on programs and remember we're -- as we've talked about this before, we're seeing it being put across a broad spectrum of vehicle types and mostly as an opportunity to differentiate particular vehicles or within a platform from a base vehicle which will be more conventional to even a dual mode set of activities on our B or C car level to bring that sport type feel to the drive. That is then allowing us to move up and down the segments and obviously much higher content, much more selectivity on customizing that ride in the luxury side. So we're seeing the opportunities to leverage it up and down vehicle segments. But also within segments, they're differentiated striving to continue to differentiate from a base to luxury to a sport on common platforms.

[Brian Johnson:]

Okay. So --

[Gregg Sherrill:]

And that's probably directly answers your question there Brian because at the end of the day because it's in an option package that's where I think that probably directly answers your question.

[Brian Johnson:]

Yes, so they would be OEMs feel they can up-charge especially in Europe where people rallies packages.

[Brian Kesseler:]

Exactly.

[Brian Johnson:]

Okay, got it. Thanks.

[Operator:]

Thank you. And our next question is from the line of Patrick Nolan from Deutsche Bank. Your line is now open.

[Patrick Nolan:]

Two questions one modeling but first Gregg I just want to follow-up on Colin's earlier question about diesel mix just in the context of the multi-year guidance, are you guys factoring in any and what's your view frankly on the European light vehicle diesel mix, do you anticipate any industry headwind from that as far as your revenue growth over the next several years?

[Gregg Sherrill:]

Yes we have been looking for some time at outlooks, I just outlook et cetera that the diesel mix is moderating in Europe over time, it's that's kind of been a fact that we've been dealing with for some time. The specific answer to your question kind of gets into then our mix of vehicles and what we're producing in Europe et cetera and I can't remember now exactly, I think we pretty well modeled the present diesel versus gasoline there. So yes we do anticipate over time remembering you still got a huge installed base of diesel versus gasoline over there, so this thing can't switch overnight. But over time gasoline increasing its mix versus diesel, I think that's probably pretty fair, I don't see a short change just that affecting it over time. And the offsetting factors are these 6C regulations that affect both gasoline and diesel engines and are bringing more content now into gasoline engines. So we're not really concerned about that mix shift, we're well aware of it, and it's that it will happen over time. But the overall momentum of the regulations is pretty much offsetting that from our point of view.

[Ken Trammell:]

And the other thing, I would point out to Patrick is if you think about the mix of our revenues and we've given you this number is still -- is now couple of years old but really unchanged like we said a minute ago. On the passenger car side, 11% of our passenger car revenues are diesel. Obviously the commercial truck and off-highways all diesel, we recorded 10 pick-up trucks in the U.S. is all diesel but that's out of that number. So if it does moderate, it's not likely to have a significant impact on us anyway.

[Patrick Nolan:]

It's very helpful color and just one just modeling question, Ken, I don't may be I'm reading a little too much into that comment but in reference to the buyback when you say the remaining is executed in 2017 that should we not expect any buyback in Q4 or?

[Ken Trammell:]

Wasn't trying to signal a change in the pattern or anything, so no I mean we aren't trying to say we are saving it all for next year.

[Operator:]

Thank you. And our next question is from the line of Joe Spak from RBC Capital Markets. Your line is now open.

[Joe Spak:]

First question is so Deere mentioned about how obviously we saw the North America, he also mentioned there were some inventory build in Brazil ahead of the Tier 3. So changes it was that benefit for you guys over the past couple of quarters and are you planning on little bit of reversal for that as you think about 2017?

[Ken Trammell:]

Brazil wouldn't affect us at all.

[Joe Spak:]

On the off-highway side, okay.

[Ken Trammell:]

The Tier 3 doesn't require the after-treatment down there.

[Joe Spak:]

Okay, okay. And then so on the Slide in the back, I think it with the customers I think it's 19, is there any more color you can add on the new commercial truck customer North America like what type of product it is, what segment when it starts may be how you want winning that business because historically you've been underrepresented there?

[Gregg Sherrill:]

Yes, it's a platform that we're expecting to launch in 2018, so we're still a couple of years away from the launch. So obviously very new win for us and it's a medium duty truck and as soon as we can name the customer we definitely will.

[Joe Spak:]

Okay. And then final one it looks like there is some reports say Calsonic maybe might be taken private. I know they have a lot of Nissan business but I believe you compete with them in part on the emission side in North America and any thoughts as to what that means for the industry there or for you if that happens?

[Gregg Sherrill:]

Yes, we've heard rumors about that, I would say probably for the last couple of years. So we're still waiting to see what happens there. They do-do, they are essentially a Tier 2 supplier in the Nissan group and that will have some impact probably on the availability of that business if it goes away. So it could even be upside for us.

[Operator:]

Thank you. And our next question is from the line of Brian Sponheimer from Gabelli & Company. Your line is now open.

[Brian Sponheimer:]

Just one on the commercial truck and off-highway obviously the markets haven't necessarily cooperated with you over the last couple of years and but the performance has been very good. As these markets do recover and Ag probably becomes worse, what sort of incremental margins are your factories essentially aligned for as we start to see these volumes come back?

[Gregg Sherrill:]

Yes, so Brian great question and we haven't given specific percentages but what we pointed out now, I'll kind of reiterated it because I think it's an important point to make. You've seen our incremental margins average mid-teens over the last number of years plus or minus. Obviously if this starts to come back that's on the plus side because we've got capacity in place we're using may be little bit more than 50% of the capacity that's there, so it's just really a question of adding the personnel and acquiring the materials to build the units. And don't forget that we pointed out that -- cautious is probably three or four quarters ago that a rough estimate of the missing revenue as result of the cycle down is probably $600 million for us on the top-line.

[Brian Sponheimer:]

So $600 million at 20% incremental is $120 million of EBIT, okay. All right, thank you very much.

[Gregg Sherrill:]

The only thing I didn't say it was 20%, Brian.

[Brian Sponheimer:]

I got it, you didn't say. Okay, thank you.

[Operator:]

Thank you. And our next question is from the line of Rich Kwas from Wells Fargo Securities. Your line is now open.

[Rich Kwas:]

On just talking about Brian's question around Brian Johnson question on Intelligent suspension, I guess Brian do you have any sense for what the take rates are from your customers at this point since then it is an option package, it's been broadened out a bit, any sense for what that's trending at, at this juncture?

[Brian Kesseler:]

Actually probably our most sure platform that we launched early in last year, we've actually invested up to take rates. So the take rates have been very, very strong on the programs that we're on today and in fact the programs we've been awarded they are in development. And now it's been done to see what it takes to up those take rates also.

[Rich Kwas:]

Is there any frame or numbers on that around take rate?

[Brian Kesseler:]

We had some.

[Ken Trammell:]

It's a pretty wide range depending on platform; we have one platform that is probably up in the 80% and 90% range.

[Rich Kwas:]

Okay.

[Ken Trammell:]

And we have others that are probably down in the 10% to 15% range. So it's obviously a pretty good mix.

[Rich Kwas:]

I assume the 80% to 90% is going to be the more expensive sport of your luxury vehicles?

[Gregg Sherrill:]

Right. The take rates on say may be a C segment vehicle that we're seeing started out in the 10% take rate and more than doubled as we continue to see that vehicle to be successful in the marketplace.

[Ken Trammell:]

That is actually sort of a very positive trend that we're seeing. I mean a few years ago we were talking about 4%, 5%, 6% take rates and it still varies widely which is why it's kind of difficult to give you a number that makes sense. But the range instead of being 4% to 10% is more like 10% in some cases 80% now. So it's been a very positive trend.

[Rich Kwas:]

Right. So I mean like you put couple of hundred thousand unit platforms and you get 10% to 20%, I mean that's meaningful.

[Gregg Sherrill:]

It's pretty meaningful.

[Brian Kesseler:]

But Rich we said for a long time that it was initially it was us needing to push it and in fact even in some cases working with the OEs on how to train to dealers to increase the take rates and we truly believe that at some point, it would switch around from a push to a pull and we're really thinking we are starting to see that pull demand change where people are actually interested on it and it's not selling and it's people coming and saying that's what we want.

[Gregg Sherrill:]

I think another positive trend wise as we listen to our customers talk about their vehicle platforms and their plans in the future, they are trying to get a lot more differentiation on the one platform and inside so cut instead of maybe two or three levels of differentiation to four to five levels differentiation and inside those where we can see a lot of opportunity in the take rates even down to the B and C segment vehicles.

[Rich Kwas:]

All right, okay. That's helpful. And then in terms of the launches I think last quarter you talked that in terms of number of launches going to be similar in 2017 as it has been in 2016 within the Intelligent Suspension is that increase as a percentage of the launches or is there a stable year-over-year in 2017?

[Kenneth Trammell:]

A little bit of an uptick but nothing meaningful at this point, so about the same type of launch that we see going in.

[Rich Kwas:]

Okay, all right. And then Gregg just on your comments around India, I assume that's in terms of base revenues right now, just looking at the math and the numbers and the mix it's probably low-to-mid-single-digits as a percentage of your total revenue. When we think about the regulation for 2020, do we think of this kind of a stair step function similar to what happened with Tier 4 interim, Tier 4 final in North America a few years ago, is it that substantial similar to that less or more?

[Gregg Sherrill:]

No, I think it is going to be more similar obviously it's coming of a much smaller base right, you just mentioned that. But from a increased point of view, I think it's more of a step function. The only thing I want to check on because these things are finalized so recently is what sort of phase-in they may have. And so I just like to and we get back to you on that, okay. But at least on a per unit basis, it's definitely fairly significant chunk of content going in and just let us check the sort of phase-in requirements to that regulation.

[Rich Kwas:]

Okay. And then just quick last one from me in terms of the 3% to 5% outgrowth as you think about 2017 and 2018, I think at the beginning of the year you said commercial down, off-road down was the assumption, I don't recall seeing any number -- specific numbers in terms of what you thought the market was going to do over the multi-year period. But would you say at this point that the commercial markets at this juncture coming in a little worse than what you thought in January and then we should consider that from an underlying production standpoint as we think about 2017 and 2018. I mean it doesn't seem like that would have any meaningful impact on your spread but just any color around that would be helpful?

[Ken Trammell:]

I'm going to break the commercial markets into the two, the on-road and the off-road for this answer, right. I think the on-road is probably closer to what we anticipated in January but the off-road here in the back half of the year is worse than what we anticipated. So how that plays out in 2017 this is all market volume stuff, it's not really our outgrowth stuff right, it's just purely how many units are they going to sell and produce and how many we're going to ship. We will give more color on that when we come back with our more specific 2017 guidance. But definitely I would say on-road pretty much as anticipated but the back half of the off-road weaker than what we anticipated.

[Operator:]

[Operator Instructions]. And our next question is from the line of Matt Stover from SIG. Your line is now open.

[Matt Stover:]

Thank you very much. I was called off and you might have addressed this. But I wanted to look at the margin in North America Clean Air and I'm wondering if you could kind of bracket those variables that resulted in a negative year-over-year compare. And then, if you could kind of give us a sense of how we should think about the evolution of that margin into next year as we kind of consider your macro backdrop?

[Gregg Sherrill:]

So when we look at the Clean Air North America margins, two major impacts in the quarter on the year-on-year compares. One is the off-highway down pretty significantly in that business and then kind of the inconsistent launch ramp activities on the two like truck platforms in the quarter causing some pretty good inefficiencies in the span. For the fourth quarter, I would say we're still receiving mixed messages on the two truck platform, the off-highway pretty much talked about where we think that's going to be, it's going to be similar to what we saw in Q3. From a two light truck platforms very mixed messages on those recoveries, it's week to week variation in the communication. So I think we'll know so it's kind of that week to week look into Q4, we would fully expect that whatever is holding that up, whatever those factors are will be cleared up as we jump into the New Year. But that's -- it's little hard to tell right now on those just because of the mixed messages we're hearing.

[Matt Stover:]

As we think about that, one of those is in ramp mode and so I would assume that we should be taking the over on that? The other --

[Gregg Sherrill:]

One would thank but like I said that's part of my coaching of the mixed messages.

[Matt Stover:]

The other one of those is in inventory reduction mode. Are you in a position right now where you can add anything?

[Gregg Sherrill:]

Well they both launch ramp-ups.

[Ken Trammell:]

We're probably from a couple of different platforms here.

[Matt Stover:]

Okay, okay.

[Gregg Sherrill:]

Yes, they both launch ramp-ups.

[Ken Trammell:]

Well both start to launch in the probably late second, early third quarter and we saw some inconsistency.

[Gregg Sherrill:]

Some of the inventory adjustments schedule changes, you've seen out there we contemplate in our forecast that's not a part of this that we're discussing.

[Matt Stover:]

Okay. Thanks guys.

[Gregg Sherrill:]

Yes. So I think just to wrap that up though fourth quarter is too early to tell, we would expect first quarter, second quarter for that to start coming back.

[Operator:]

Thank you. And at this time, we do not have any questions on queue. Ms. Golla, I will hand it back to you.

[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 [phone]. For those outside North America, the number is [phone]. This playback information is found in our press release. Thank you for joining us today.

[Operator:]

Thank you everyone. And that concludes today's conference call. Thank you all for joining and you may now all disconnect.