Tsakos Energy Navigation Limited
Q3 2013 Earnings Call Transcript

Published: 28 Oct 2013

[Operator:]

Good morning, and welcome to Tenneco's Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect. I'd now like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

[Linae Golla:]

Good morning, and welcome. Early this morning, we released our earnings release and related financial information. Today, Gregg Sherrill, our Chairman and CEO; Hari Nair, our Chief Operating Officer; and Ken Trammell, our Chief Financial Officer, will spend the first half of our call taking you through our quarterly results. The slides related to our prepared comments are available on the Investors section of our website at www.tenneco.com. We will then open up the call for questions. Before we begin, I need to let you know 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 also be found on our website. In addition, some of our comments today 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. With that, I will turn the call over to Gregg.

[Gregg M. Sherrill:]

Thank you, Linae. Good morning, everyone, and thank you for joining us. We're pleased today to report a strong third quarter with both our Clean Air and Ride Performance divisions delivering revenue growth, higher adjusted EBIT and improved margins. These results reflect strong execution on our strategic growth initiatives and excellent operational performance, which drove increased profitability in each division. Underpinning this performance is our focus on consistently executing on our business fundamentals, including winning and launching new programs, delivering the highest-quality products, driving continuous operational improvement and supporting growth with the right technologies and global capabilities. Now let's take a closer look at the numbers, beginning with revenue on Slide 4. For the quarter, Tenneco delivered nearly $2 billion in total revenue, which represents a 10% improvement and a record for the third quarter. This includes higher Clean Air and Ride Performance revenues versus last year. And when we look at end markets, light vehicle, commercial vehicle and the aftermarket all increased compared with the year ago. Total light vehicle revenue for the quarter increased 10% year-over-year, outpacing a 5% increase in global industry light vehicle production. We capitalized on higher volumes in North America and China, and new platform launches in Europe, North America and China to drive revenue growth. Our commercial vehicle revenues rose 28% to $236 million despite the overall continuing weakness in the commercial vehicle market. Our strong performance reflects higher year-over-year revenue in all of the major geographic markets. We also had a 3% increase in global aftermarket revenue. The North American aftermarket was about even with last year's strong performance, and the European aftermarket revenue increased on higher Ride Performance sales. Taking a look at earnings now on Slide 5. On an adjusted basis, EBIT for the quarter rose to $130 million, an increase of 15% versus last year with both divisions delivering solid improvements. Clean Air increased 22% primarily driven by stronger light vehicle volumes, new platforms and higher commercial vehicle revenues globally. Ride Performance rose 20% on stronger light vehicle production, new programs and higher European aftermarket revenue. I'm also pleased that our adjusted EBIT margin, as a percent of value-add revenue, rose 40 basis points to 8.5%. We did a good job improving margins in both divisions with strong operational performance on higher light and commercial vehicle revenues. This was an excellent quarter for Tenneco, one that highlighted our fundamental strengths including the great balance across our business in terms of end markets, customers, geographic regions and platforms. Regardless of the market or economic conditions we faced as a global company, our approach remains consistent. We focus on what we can control and move the business forward by continuously driving better performance. And now I'd like to turn it over to Hari for more details on our division results.

[Hari N. Nair:]

Thanks, Gregg. Starting with the Clean Air division on Slide 6. Value-added revenue increased 12% to $897 million. Now looking at the value-add revenue in each Clean Air geographic segment, North America rose 10%, driven primarily by higher light vehicle production, stronger volumes on Ford pickup trucks and new after-treatment content on Ram heavy duty trucks helped us outpace industry light vehicle production. Commercial vehicle revenue increased, driven by higher revenues with Caterpillar and John Deere. The North America aftermarket also performed well with sales about even with last year. For the Europe, South America and India segment, value-add Clean Air revenue improved 16%. Growth was driven by higher light vehicle revenue in Europe due to the launch and ramp-up of platforms at Daimler, Volkswagen and Jaguar Land Rover. Higher commercial vehicle revenue in Europe and South America also contributed to the increase, while Clean Air aftermarket sales were roughly flat year-over-year. Value-add revenue increased 11% in our Clean Air Asia-Pacific segment with China driving the improvement. We leveraged stronger industry light vehicle production in China with our position on some of the best-selling platforms and also benefited from higher commercial vehicle revenues. Now looking at Clean Air earnings, adjusted EBIT increased 22% year-over-year to $96 million with double-digit growth in each geographic segment. Overall, the main driver of our earnings performance was our ability to leverage higher light and commercial vehicle volumes and deliver strong operational performance at our plants. In North America, Clean Air adjusted EBIT was up 19%, driven by higher light and commercial vehicle volumes on existing platforms and new programs, including the truck platforms I mentioned earlier. Adjusted EBIT for Europe, South America and India increased 55% versus a year ago. Positive drivers include the continued ramp-up of new light vehicle platforms in Europe and commercial vehicle revenue growth in both Europe and South America. Asia-Pacific adjusted EBIT rose 10% year-over-year. Strong performance in China drove earnings growth for the segment with higher volumes on current light vehicle platforms, the ramp-up of new business and higher commercial vehicle revenues. This performance helped deliver overall Clean Air value-add adjusted EBIT margin of 10.7%, which is an 8% improvement over last year. Now turning to Ride Performance results starting on Slide 9. Total Ride Performance revenue was $635 million, up 7% versus last year. Looking at Ride Performance revenue by segment, North America rose 7%. Light vehicle volume growth and new programs at BMW, Nissan and GM all contributed to higher revenues. In the aftermarket, Ride Performance revenue was about even with last year. Europe, South America and India revenue increased 5%, driven by stronger aftermarket sales and commercial vehicle revenue in Europe and higher light and commercial vehicle volumes in South America. Ride Performance revenue was up 14% in our Asia-Pacific region on stronger light vehicle production in China, including higher volumes with Ford, GM and Volkswagen. Looking now at Ride Performance EBIT. Higher light vehicle production in most regions and the benefit from new platform launches drove our earnings growth with adjusted EBIT improving 20% to $55 million. In North America, adjusted EBIT increased 13%, driven by overall volume strength and incremental revenues from several new platforms. Adjusted EBIT for Europe, South America and India rose 15%. The positive drivers in the quarter included higher aftermarket sales in Europe and volumes on new platforms in Europe and South America. Adjusted EBIT doubled versus last year in the Asia-Pacific region, driven by higher light vehicle volumes in China. Overall, Ride Performance delivered a 12% increase in adjusted EBIT margin to 8.7%. Before I turn the call over to Ken, I'd like to mention a few other highlights from the quarter. First, at the Frankfurt Motor Show in September, we showcased a number of new Clean Air and Ride Performance technologies, including our electronic exhaust valves that recently launched on the new Corvette C7; the Tenneco signature sound system, a unique acoustic technology to deliver customized vehicle exhaust tones; a scalable electronic suspension architecture that allows customers to migrate from our semi-active CES system to our a fully automatic kinetic and up to our fully active ACOCAR suspension technology; and a thermoelectric generator, which improves vehicle performance by converting wasted engine heat into electricity. A second item was just a couple of weeks ago when we inaugurated our new manufacturing operation located in Chakan, India. This modern facility will produce Clean Air and Ride Performance products on a just-in-time basis for customers in the Pune region, including Volkswagen, GM, Tata and Mahindra and positions Tenneco to efficiently serve this dynamic market for both automotive and commercial vehicle customers. And last, during the quarter, we entered into an agreement with our joint venture partner in Dalian to acquire the remaining 20% of that joint venture. This facility is an important hub for our China Clean Air operations. To briefly summarize the quarter, the global Tenneco team did an excellent job executing on our plans and delivered revenue growth and improved profitability in both divisions. With that, I'll turn it over to Ken.

[Kenneth R. Trammell:]

Thanks, Hari. First, let's to go to restructuring charges in the quarter. In September, we announced several actions related to our European cost-reduction initiative, including our intent to close a plant in Spain and to reduce the workforce at our facility in Belgium. These actions are part of the effort to ensure our long-term competitiveness in Europe by reducing our structural costs and aligning our operations with the realities of the market. This quarter, we recorded $55 million of restructuring costs in our European Ride Performance business related to the these actions. As we first announced in January, the structural cost-reduction initiatives are expected to generate $60 million in annual savings by 2016 with related costs of approximately $120 million. We have announced $80 million of these restructuring costs to date. Additionally, we recorded $3 million in restructuring and related costs in other segments this quarter primarily related to headcount reduction. Many of these restructuring actions are taking place in regions where we cannot record a tax benefit on the restructuring charges. Additionally, taxes on these restructuring charges include a tax asset valuation allowance in Belgium. The net impact of these tax entries related to restructuring resulted in a $1 million tax expense and the $59 million net income impact from restructuring actions this quarter. Our results also reflect the tax adjustment of $9 million that is mostly from truing up prior year estimates to tax returns that were completed and filed in the quarter. Our third quarter tax expense before adjustments was $38 million. Earnings and lower tax rate jurisdictions drove our effective rate down to 35% for the quarter and 36% for the year to date. We still estimate that the effective tax rate for the full year will be in the range of 36% to 38%. We continue to expect cash taxes for the year of about $110 million. Interest expense this quarter was $20 million compared to $21 million in the third quarter last year. We continue to expect interest expense for the year will be about $80 million. Turning to cash flow on Slide 15. We generated cash from operations of $50 million in the third quarter compared to $125 million last year. This change is primarily attributable to our growth in the quarter as our key working capital days metrics stayed the same overall. Additionally, the timing of certain customer receivable -- or certain customer accounts receivable collections impacted us. Days sales outstanding, excluding factoring, were even with last year at 64 days. Our inventory days on hand were 37 days, an improvement of 3 days, and our days payable outstanding at the end of the quarter were 69 days, down 3 days from last year's metric. Capital expenditures in the quarter were $57 million, mostly for Clean Air programs in North America, Europe and China. This compares to $65 million on expenditures a year ago. As a result of the timing of some of our expenditures, we now expect capital spending in 2013 will be about $250 million. Also, let me give you a quick update on the share repurchase plan. By the end of the third quarter, we had repurchased approximately 375,000 shares of common stock for $18 million. We expect to complete the program in the fourth quarter. Now let's go over debt and available liquidity starting on Slide 16. At quarter end, debt net of cash balances was $1,076,000,000, an improvement of $62 million from year-ago levels, and our leverage ratio improved to 1.6x compared to 1.8x a year ago. In terms of available liquidity, we had $550 million in unused borrowing capacity under our revolving credit facility, cash on hand of $281 million and the capacity to sell another $50 million of receivables under our credit agreement. Now moving to Slide 17. As Hari mentioned earlier, this quarter, we finalized an agreement with our joint venture partner to acquire the remaining 20% of the Dalian joint venture. We will pay the partner $69 million for the equity interest and $9 million in pro rata dividends the partner was owed. The closing of that transaction is occurring in 2 stages. The first stage closed in October when we acquired 7% ownership for $27 million, and the second stage is expected to be complete by January. And with that, I'll turn the call back to Gregg.

[Gregg M. Sherrill:]

Thank you, Ken. All in all, we had an excellent third quarter that was well balanced across all our business segments. And in addition to our financial performance you can see we continue to strengthen our portfolio of advanced technologies and our many innovative products continue to create growth opportunities with our global customers. We progressed with our manufacturing footprint in emerging markets with the inauguration of our state-of-the-art facility in Chakan, India and greatly improved our flexibility in our manufacturing capabilities in China through the acquisition of the remaining shares of our Dalian joint venture resulting in this critical hub facility becoming wholly owned. And lastly, we announced several critical actions that are an integral part of our overall European structural cost-reduction initiative. So now as we look to the end of the year, let's wrap up with our outlook for the fourth quarter. The latest third-party forecast for the fourth quarter on Slide 18. Global light vehicle production is expected to rise 3% compared with last year. This includes a 6% rise in North America, 8% in China. India's expected to be down 11% and South America down 5%, while Europe production is expected to be flat with last year. Tenneco is well positioned in both our Clean Air and Ride Performance divisions to capitalize on the higher production volumes in North America and China, including content on strong selling light vehicle models and a number of new product launches. In Europe, we expect to benefit from the continued ramp-up on several large volume programs. Our commercial vehicle outlook remains unchanged from last quarter. We expect commercial vehicle revenue in the fourth quarter to be about even with the third quarter, representing a significant year-over-year increase. For the full year, our commercial vehicle revenue is expected to be at the lower end of our 2013 revenue guidance, which would show strong year-over-year revenue growth despite continuing weakness in industry volumes. Additionally, we are focused on launching new programs to help our customers comply with U.S. Tier 4 final and Europe Stage 4 off-road emissions regulations, which begin to take effect in 2014. These programs add significant new content and will drive incremental revenue growth next year. Regarding the global aftermarket, we expect it to be relatively flat year-over-year in the fourth quarter with solid contributions from North America and continued stabilization in Europe. In summary, for the fourth quarter and beyond, Tenneco has outstanding growth opportunities, a foundation of financial strength and operational excellence, and balance across our operations. Our results this quarter also demonstrate we have the right strategies to drive top line growth and improved profitability. So let me close by thanking our 25,000 employees worldwide for their efforts. By focusing on what we can control and working to meet the expectations of our stakeholders and the even higher expectations we set for ourselves, we delivered an excellent third quarter and are on track for another strong year in 2013. And with that, we could open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Brian Johnson.

[Brian Arthur Johnson:]

Brian Johnson on Barclays. Just want to talk a little bit about CVS as -- CV&S as we transition from this year into next year. A few questions. How is your capacity utilization going? Where is kind of the volume coming in, especially given some of the warnings we've heard from Cat through the remainder of the year? And then how do you think that rolls forward into next year, recognizing, of course, that China mining equipment isn't something that's noted for its emissions content?

[Gregg M. Sherrill:]

I think if you look at the base capacity that we've been discussing with you over the last several quarters, that utilization is marginally improving. I -- it's not a great deal yet. We're seeing that in the numbers. We're going to be flat on our revenues fourth quarter over the third quarter. And in addition, we are putting in the required capacity right now for Tier 4 final and in the Stage 4 emissions regulations in Europe. So there's incremental capacity for incremental content. It's separate capacity and parallel with the capacity we've been talking about going in right now. We simply see for Tenneco this relatively stable outlook through the end of the year. And right now, primarily the benefits that we will see next year, we're certainly counting on the incremental content. We're not really going to comment today on the volumes looking forward into 2014. We'll have that update at the next call in 3 months. But right now we're just -- we're not seeing things change a lot differently than what we've been talking about over the last couple of quarters. We see it -- still see South America is doing reasonably well in commercial vehicle volumes. There's been an uptick in China quite frankly, but we're still at very low revenues over there. And it still remains to be seen, and hopefully, we could comment more on that when we get to February.

[Brian Arthur Johnson:]

Just maybe a follow-on, on China, a lot of confusion in the press, including the various Chinese state organs on the state of commercial vehicle diesel emissions control. What's required, what's enforced, where are the fields available? Could you guys have a quick recap on that and the timing you expect to come in?

[Gregg M. Sherrill:]

Well, virtually all of the customers that we deal with in China, and you've seen the list, have SCR confident to meet the Euro 4, the equivalent of the Euro 4 regulations, which are essentially going into effect, albeit very, very slowly, over there. And that's what we will be continuing to ramp up and launch on. It's also a fact that the fuel -- and I'm not sure maybe Ken or Hari can give us a little bit more color on that -- is still more towards the end of 2014 when they truly have the 50 part per million sulfur content fuel more widely available, what we still have been informed by our sources in China. And that's still a critical date. I mean, it is an important date to follow when that fuel becomes available. So we should probably -- we'll probably see relatively minor improvements going forward until we do see that fuel come in.

[Brian Arthur Johnson:]

So that will be consistent with the regulations are there but not enforced due to lack of fuel.

[Gregg M. Sherrill:]

Yes, exactly.

[Kenneth R. Trammell:]

Yes, we're -- Brian, we're seeing some cities, and I think this kind of gets under your point about confusion, some cities and a range of 20 cities that are attempting to enforce the regulations, and that's boiling down to where they have direct ability, right, in terms of municipal fleets and that sort of stuff. But clearly, like we've always said, this is going to be a slow transition, so this is entirely consistent with the way we've been calling it, I think, for the last several years. But we do think that it's a move that's gotten started like we expected. It's just going to take a little bit while for it to fully ramp in.

[Operator:]

Our next question comes from Ravi Shanker.

[Ravi Shanker:]

Morgan Stanley. So just a follow-up on that capacity utilization, I think you said in the past that your manned capacity utilization is closer to full capacity. Can you just talk about what we can think of in terms of incrementals or additional costs that need to come in as you ramp up volumes in the next couple of years?

[Kenneth R. Trammell:]

So Ravi, it's a bit of a complicated answer because don't forget we're also implementing a regulatory change, right? So right now on the content that we have for the off-road equipment, you're talking about a diesel oxidation catalyst and a diesel particulate filter. And that's the capacity utilization discussion we've been talking about for the last few quarters. Beginning January 1, 2014, there's a regulatory change to address NOx emissions, and predominantly that is adding content in selective catalytic reduction, right? So that equation you're talking about will change for 2014 as we ramp in that additional content. So we'll continue to provide DPFs and DOCs. That's just the content we've been talking about. And we'll add content for SCR next year. So we certainly expect to see margin improvement. It will ramp in slowly as the volumes ramp in. But we don't have a percentage that we've given, and so there's really not a direct answer to your question about the incrementals.

[Ravi Shanker:]

Got it. I can follow up later on with some more details as well. Also, you guys have done a good job with costs in the last couple of quarters. Can you talk about -- you obviously laid out a restructuring program through 2016, but can you talk about any specific actions or steps you're taking right now to keep costs down, which may be more temporary in nature as you wait for this volume to inflect?

[Kenneth R. Trammell:]

Well, there's really nothing temporary, Ravi. I mean, what we do on a quarter-on-quarter op basis, obviously, is focused on costs. That's what the Tenneco manufacturing system is really all about, right, how we handle the cost base of the business. Well -- and we'll continue to do that. The restructuring, of course, will be incremental. That will ramp in slowly. You'll -- Like we said, we'll get to run rate in 2016 on the restructuring actions in Europe. But all that's going to continue to add to the performance of the business.

[Operator:]

Our next question comes from Rich Kwas.

[Richard Michael Kwas:]

Wells Fargo Securities. Ken, I might have missed this. On the SG&A this quarter, so as a percentage of sales, it rose a bit. I know there's some incentive comp that -- or stock comp that hits there. Is there anything else that impacted the number on a year-over-year basis?

[Kenneth R. Trammell:]

Yes, really, that's the primary difference is sort of compensation-related accruals. Like we said in the second quarter, Rich, probably the best way to look at it because there is quarter-on-quarter out differences in terms of recoveries and accruals and everything else is on an LTM basis where it was just roughly flat year-over-year.

[Richard Michael Kwas:]

Okay. And then just on the commercial piece, Gregg, when you look at capacity utilization, I mean, the new programs that are coming online here, from a mix standpoint or from a volume leverage standpoint, I know that the forecast assumes -- the revenue forecast assumes content growth but -- and that's a major driver, the increase on a year-over-year basis. But is there any reason to believe that the leverage on the new business coming online either is not quite as good to start when it launches or that the mix is going to be much better and that you'll get incremental benefits from that? Is it -- I guess, how should we think about that as just broadly speaking as we move into next year?

[Gregg M. Sherrill:]

Even at the low volumes and sort of the slow ramp-up that we've seen on the existing regulations, we have managed to continually improve our margins literally from the launch of the stuff, which isn't to say it's matured because, clearly, you've got to put the cost in. There are certain levels of fixed cost in, and we've talked about the utilization on the existing level of -- that will leverage up as volumes come back. There's no question about that. I mean, there was a question a moment ago about that. If you take out the content that we are launching next year and just look at the existing content, we're simply manned right now. The fixed cost is in. The machinery, the equipment is there, and we're manned to, what, 50-odd percent. I'm not sure exactly what the number is today, maybe a little bit better than that right now but still quite substantially underutilized to what we would put. Everything that it takes on that part of the content that we're shipping is a variable cost add as volumes come back. Now clearly, what Ken was saying complicating a little bit this year is as we go into 2014, we're now adding content. Maybe you think of it a little bit in parallel to that other continent because it separate stuff, right, that we're investing in, and there will be a ramp-up on it. In fact, as you know, there's a 2-year phase-in on those programs. So I think it's the large engines that launch this coming year, followed by the middle-size engines the year after that. So there's a ramp-up by design, and then there'll be ramp-up by whatever the market is actually demanding from us as well, which I said we don't really want to try to get into that forecasting today. Hopefully, things are a little more clear when we come back to you at the end of the current quarter. But you kind of almost have to start thinking about a little bit in 2 pieces from utilization point of view, the content that we've got today and that's installed. All that fixed cost is in our base. We've continued to improve margins even with it there. There's a pure variable cost add to get it back, and then we're putting in, obviously, more fixed cost to address the Tier 4 final regulations. And as I said, we'll talk about those volumes and how they're looking at ramping up next quarter.

[Richard Michael Kwas:]

Great. And just a follow-up on that, just as you launch Tier 4 final, is it fair to assume that relative to where you are today on the incremental margins, it could be slightly below that at least the start and then it ramps up?

[Gregg M. Sherrill:]

Exactly. Sure, you've got to put the cost in first, and obviously, there's a ramp up, yes.

[Kenneth R. Trammell:]

Yes. And the volumes will start low and begin to build. So there'll probably be phase-ins and inventory and bunkering arrangements, all the same kind of deal -- things that we've dealt with as we phased into the 2011 regulation change.

[Richard Michael Kwas:]

And you'd factor that in at the beginning -- when you gave the guidance at the beginning of the year, right, the phase-in?

[Kenneth R. Trammell:]

Yes, certainly, based on what the expectations were at the time.

[Operator:]

Our next question comes from Brett Hoselton.

[Brett D. Hoselton:]

KeyBanc. You, Ken, mentioned you had about $600 million -- or $6 million, excuse me, $6 million of FX impacting your EBIT. Can you talk about the impact on your revenue?

[Kenneth R. Trammell:]

Brett, we'll have to look that number up for your real quick. It was fairly substantial in the quarter. And Linae is actually trying to help all right now look it up, so...

[Brett D. Hoselton:]

So let me move on then. I think...

[Kenneth R. Trammell:]

Here we go. It's -- Brett, it's $9 million on a quarter-over-quarter basis on the revenue line.

[Brett D. Hoselton:]

And then on the -- I think what people are grappling with or what I found people are grappling with is Caterpillar, one of your major customers, just cut their expectations fairly significantly, not the first time they've done so this year, and yet your expectations remain stable. And I guess what I'm wondering is can you kind of talk about some of the maybe offsets or reasons why Caterpillar could maybe reduce their expectations and yet your expeditions kind of remain stable?

[Gregg M. Sherrill:]

Well, let me just jump in. Caterpillar's not the only customer involved in that number, and I'm not -- I don't actually know the exact mix to be honest with you right now. But clearly, I think though even year-over-year Caterpillar's not having that big of an effect on us, which would be -- have a lot to do with Caterpillar's own mix, okay? And not to get into their details, you heard it in their call, obviously, but I think some of the areas that are probably the most challenging for them were not necessarily taking our content to begin with, all right? So there's a fairly complex mix within Caterpillar or any of our customers that you'd have to look at. But probably more than anything, it's just a broad range of customers that we have. Some are up and some aren't. And all in all, we've managed to stick to our forecast.

[Kenneth R. Trammell:]

And Brett, one other sort of piece of the equation is, don't forget that 2013 is the third year of the phase-in of that 2011 regulatory change. So this year, there are content on the lower horsepower units that all of our customers produce that didn't exist last year. So there's also a regulatory impact as well.

[Brett D. Hoselton:]

And then as we think about your commercial and specialty vehicle outlook into 2014, I know you're not going to update that today, but can you give us a sense of the underlying production assumptions you have there and to give us some indication of kind of how much are the potential increase you're going to see next year as production driven versus how much of it is potentially content driven?

[Kenneth R. Trammell:]

Yes, so Brett, at the beginning of 2013 when we gave you the estimates, we also pointed out that we were relying on, from third-party estimates, Power Systems Research numbers for production of engines over the course of the time frame that we gave the revenue estimates for. I think if you went back and looked at Power Systems Research, their overall estimates for the regulated markets were up a little bit in 2014 over 2013. But remember that the key for us is not just the production in the region but also how much of that production stays in a regulated region, right, because our customers will export their engines to non-regulated regions as well. So the underlying estimates for us are honestly estimates from our customers as to how many units are going to be built with our regulatory content on it.

[Brett D. Hoselton:]

So as I'm thinking about your revenue growth guidance, I mean, this year, the midpoint was originally $1 billion. Next year, the midpoint is $1.45 billion. That's a 45% increase. As we think about kind of maybe the impact of the underlying production a little bit, is that kind of like we might have seen 5% of that production increase being driven by production, therefore, the other 40% would be more content related? How do we think about that?

[Kenneth R. Trammell:]

Yes, Brett, I don't have a percentage to give you, but predominantly it is a content change. Remember that they were going from a diesel particulate filter and a diesel oxidation catalyst designed to address the particulate matter regulations that went into effect in 2011. And we're ramping into the NOx regulations, which is adding for essentially all of our customers selective catalytic reduction content. That's for the off-road business. And don't forget, too, we have a Euro 6 change that's occurring in Europe. And while that's not a significant content change from Euro 5, for us, it's significant because we're adding a new customer for that regulatory change, and that's Scania.

[Brett D. Hoselton:]

And then finally, as we think about this ramp-up, some of the additional content and the Scania launch and so forth, I know launch timing can oftentimes be delayed or changed or something along those lines. So what are your expectations at this point in time? Are you seeing any changes in your expectations there?

[Gregg M. Sherrill:]

From an actual launch timing, no, we're not seeing that. As far as how the volumes ramp, that remains to be seen. But the actual turn on job one, those dates are not changing.

[Operator:]

[Operator Instructions] We have a question from Ryan Brinkman.

[Ryan J. Brinkman:]

Ryan Brinkman from JPMorgan. Globally, it looks like your light vehicle OE revenue was up about 10% versus the industry, 4%, maybe 5% adjusted for your geographic exposure. Can you kind of take us around the world, talk about the outperformance during the quarter versus the change in light vehicle production in the various different regions? What's driving that? How sustainable do you think it is? Is it more regulation-driven, more business win-driven affected by mix, for example, pickups in North America, et cetera?

[Gregg M. Sherrill:]

If you look at our -- we're talking light vehicles now, and Hari, help me out if I misspeak. North America was pretty strong. I mean, the volumes were strong, and the mix was strong for us, just to speak qualitatively. I think the story in China is exactly the same, strong volumes, and the mix was pretty good for us, right? So we had nice performance in China. South America, a little bit flattish, maybe not quite the same. And in Europe, although I'm not so sure that we benefited so much from any overall volume improvement, but we are ramping up some new programs that are pretty high-volume programs. And those were beginning to really benefit us in this quarter and should, going forward as well.

[Ryan J. Brinkman:]

Okay. And it looks like your EBIT contribution margin on value-add revenue was about 11.5% or so in 3Q. Understanding that the answer would be dependent upon the mix between light vehicle OE, commercial vehicle OE, aftermarket, substrates, sort of, what do you see as the normalized contribution margin for your business generally on value-add revenues going forward?

[Kenneth R. Trammell:]

So Ryan, we -- that's not a forecast number that we've given before, so I don't have a direct answer to your question. But if you looked at us historically, we've been between the 10% and 20% range, probably in a number of quarters. That does have a lot of variability depending on where we are in the launch and how rapidly the volumes are moving up. But we've probably stayed somewhere in that range over the course of the last several years.

[Ryan J. Brinkman:]

Okay. And then maybe just going back to what you -- your Analyst Day back in February, has there been any progress or anything to be -- to report since that earnings day on your efforts to grow your non-light or commercial vehicle revenue? For example, you mentioned back then, locomotive, marine power, stationary power. Have there been any regulatory changes since then that are encouraging or business wins that you can report or even allude to?

[Kenneth R. Trammell:]

Well, we continue to work with a number of customers in the large engine segment, maybe is the best way to summarize it. Locomotive, marine, offshore, onshore, stationary power, a number of those customers are current customers, and we have their mobile business. So we expect to have their large engine business as well. So I think we're doing just as well in that segment as we could hope.

[Gregg M. Sherrill:]

There's a lot of work going on. I mean, I would say it hasn't changed a great deal from what we reported at the Analyst Day. We're just in a situation in the timing of a lot of those forward programs where we don't have the ability to announce yet, so we're not making announcements right now. But that's purely a function of customer, their own timing requirements and when we can talk about them specifically. But all of that work is going on. All that opportunity is there unchanged from what we talked about back in February.

[Ryan J. Brinkman:]

Okay, great. Then, just last question, can you remind us of the full run rate of savings that you're looking for from the European restructuring initiative? What does the ramp-up look like to realizing that full run rate of savings?

[Kenneth R. Trammell:]

Yes, so the total that we've said, we talked about at the beginning of the year is $60 million in annualized savings, and we expect to get to the run rate in 2016. It will ramp in certainly a little bit of benefit that we'll see this year, a bit more next year, probably a substantial large -- substantially larger percentage in 2015, and then we'll wrap up, reaching run rate sometime in 2016. We haven't given specific numbers or percentages, and that's, obviously, dependent on the timing of resolution with works council and a number of the other initiatives that we're working through. But we still feel very good about getting to that $60 million run rate during 2016.

[Operator:]

Our next question comes from Joe Spak.

[Joseph Spak:]

It's RBC Capital Markets. Turning to your commercial vehicle business in Europe, can you just help us understand right now the breakout between on and off highway? I think, it's substantially more off highway, but then also give us an idea of what that will look like in a year or so as Euro 6 rolls in and then you have the Scania one.

[Kenneth R. Trammell:]

Yes. So Joe, I mean, we don't break our revenues out in that level of detail. But if you look at the customer list, I mean, obviously, you can see that but we do have Daimler business and the on-road business in Europe. We're launching the Scania business here late this year for the 2014 regulatory change. But most of our customers, Caterpillar, Deere, MAN, several others, are obviously the off-road than on-road customers. And that would be the larger weight of our commercial vehicle revenues in Europe.

[Joseph Spak:]

Okay. And then as we think about the off-road business for next year in the U.S. and Europe going from -- going to Tier 4 final from interim and I guess, to Stage 4 from 3B. Can you help us a little bit with the step-up in content? Is it -- or can it be similar to, maybe as a baseline, what we saw in 2007 and 2010 in the U.S., where the on-road business nearly doubled by adding that SCR?

[Kenneth R. Trammell:]

Well, so it's obviously going to depend on the technology that our customers employ and how they go about meeting the regulations. But the regulatory change is very similar to what you talked about, right? From 2007 when in the on-road business in North America, we were addressing particulate matter emissions. We had a DPF and a DOC from most customers. And again, most customers for 2010 went with something that would relate to like liquid -- the liquid urea SCR. And so yes, it's going to be a very similar regulatory change.

[Joseph Spak:]

But is there any reason to think that the implementation of a step-up, it would be different on the off highway versus the on highway? I mean, I understand there's different engine sizes and such, but on average, is it fair to think that the step-up is similar?

[Kenneth R. Trammell:]

I don't. I mean, again, we -- like what we've always said, I think that the content varies with the horsepower ratings of the engines, right? And that's probably the best sort of way to look at it. And there certainly are horsepower differences between them, but that, yes, that ought to be similar I think. Again, the regulatory change is very similar.

[Joseph Spak:]

Okay, one quick one. There's been some noise or reports about, in the EU, about emission delays backed out in 2020 and I realize that's faraway off, but I just wanted to get your view on that. And is that actually a net positive if that's delayed because I think the regulations got tougher on diesel where you actually have more content? And of course, I'm talking on the light vehicle side here.

[Gregg M. Sherrill:]

Are you talking Europe?

[Joseph Spak:]

Yes. Europe light vehicle out in 2020. I mean, if those are delayed, is that actually a benefit for you because I think it got tougher on diesel versus gas?

[Gregg M. Sherrill:]

Yes, I think we're -- help me here, but I think we're talking about, it was mainly the CO2 regulations, right? Germany kind of lobbied and apparently is one delaying those things. Yes, yes, that's definitely not a negative for us. Let me put it that way because it does support the premium brands where we have quite a bit of Clean Air content, and I'm sure that's why the Germans were lobbying so hard for it. And it may even -- there may be some mix positiveness as you described on diesel as well. But for the most part, I just think it's pretty, pretty favorable because it doesn't do any damage to the bigger luxury brands that we're going to have the most trouble meeting those CO2 regulations.

[Kenneth R. Trammell:]

Yes, and don't forget, Joe, that when we talk about CO2 emissions, what we're really talking about is fuel economy. In Europe, they measure it as CO2 emissions per miler or per kilometer, but in the U.S., we measure it as miles per gallon. And both of those are really the same approach. And so that's not a direct, not anything we do, an after treatment to address that. Like Gregg was saying, that is an indirect change for us.

[Joseph Spak:]

Right, right. And one housekeeping. Is there any meaningful impact for the remainder of this year or next in terms of the financial statements from acquiring the remaining -- the remainder of that JV?

[Kenneth R. Trammell:]

The primary change is the fact that we'll own 100%, so the minority interest reduction that we have in the income statement will go down as a result of owning 100% instead of 80%.

[Joseph Spak:]

And then the order of magnitude there? I realized it seems fairly small at this point.

[Kenneth R. Trammell:]

Yes, we haven't -- again, that's not a number that we've tried to break out for you. We got several joint ventures in China, so this is clearly not the only one. The only thing that I would probably point to is we did point out that the partner would have been owed about $9 million in dividends. That's the cash flow impact of this 20%.

[Operator:]

Our final question comes from Brian Sponheimer.

[Brian Sponheimer:]

Gabelli & Company. Just -- most of my questions have been answered. Just a question on the working capital build. You called out -- you did a nice job calling out the metrics having not really change from a year ago but also said that there were some timing delays that could potentially benefit you in the fourth quarter. Can you talk about magnitude there and maybe where you expect your metrics to be in if you can keep them there?

[Kenneth R. Trammell:]

Yes. So Brian, I mean, remember that the fourth quarter is always our best cash flow quarter. It's just the seasonality of the business both in the aftermarket and frankly, the OE side of the business because the cash comes in, in the latter part of the fourth quarter. What we talked about in terms of timing was some customer collections that moved into early October instead of late September. I would estimate that was probably worth maybe a day or so on the days sales outstanding metric. So not a significant impact but certainly something that we wanted to point out. But generally speaking, if you take a look at what our metrics do, we generally improve inventory in the fourth quarter as we're able to pull that down. And we have collections that occur during the fourth quarter that aren't replaced with new receivables simply because the seasonality of the business. The fourth quarter revenues are lower than the third quarter.

[Brian Sponheimer:]

Okay, that's helpful. So presumably your cash balance will increase in the fourth quarter as will your LTM EBITDA number. With that in mind and given where you have the balance sheet, do you foresee any change to company policy regarding return of cash to shareholders, maybe ramping the buyback, et cetera, as we look out over the next, that we'll call the next 12 months?

[Kenneth R. Trammell:]

Yes. So Brian, I mean, we've tried to hopefully be pretty clear about what our operating leverage target is. We think that in terms of making sure that the company's well prepared for the next downturn, making sure that we have an operating leverage in the range of 1x, is important, before we start to think about further returns. We ended the quarter at 1.6x. We ended last year at 1.5x. We'll certainly be -- like you said, we'll have some earnings improvements, some cash flow improvement in the first -- for fourth quarter. That is usually the quarter when we show our best operating leverage ratio as well. So we -- but our goal is 1x, so I think we've got a bit of time before we get there. We do have, don't forget, a number of calls on our cash as we complete our restructuring actions. We've pointed out that we'll spend about 75% of that $120 million in total restructuring charges in cash over the course of the next couple of years. We've also talked to you a bit on this call and including answering questions about the $69 million that we'll pay to acquire the additional 20% joint venture interest in the Dalian joint venture. So that will certainly be a cash call on us as well in the fourth quarter. And we expect that last piece to close probably not until January. So a bit of that will be in the first quarter as well.

[Operator:]

We have no further questions at this time.

[Linae Golla:]

Thank you. This concludes our call. An audio replay will be available on website in about an hour. You can also access the 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 also found in our press release. If you are an analyst or an investor with additional questions, please follow up with me at [phone]. Reporters with additional questions, you can contact Bill Dawson, Executive Director of Global Communications, at [phone]. Thank you for joining us today.

[Operator:]

That does conclude today's conference. Thank you for participating. You may disconnect at this time.