Tsakos Energy Navigation Limited
Q3 2014 Earnings Call Transcript

Published: 27 Oct 2014

[Operator:]

Good morning and welcome to Tenneco's Third Quarter 2014 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 a 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:]

Good morning and welcome. This morning, we issued our earnings release and related financial information. On our call today, Gregg Sherrill, Chairman and CEO; Hari Nair, Chief Operating Officer and Ken Trammell, our Chief Financial Officer, will take 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. After our comments, we'll 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 attachment. 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. And with that, I will turn the call over to Gregg.

[Gregg Sherrill:]

Thank you, Linae, and good morning everyone. As you saw in our results released today, Tenneco continued its growth and earnings improvement with record highs in the third quarter for revenue, EBIT, adjusted net income, and adjusted earnings per share. I am very pleased with our progress and the strong focus within each of our product divisions on executing strategies to drive profitable growth. Revenue increased in both the Clean Air and Ride Performance product lines, with growth in the light vehicle and commercial truck and off-highway businesses. The global aftermarket was roughly flat versus last year, and total revenue of $2.1 billion represents our highest ever for our third quarter. On Slide 4, you can see total OE light vehicle revenue increased 6%. Higher industry production and our strong platform mix with OEs worldwide helped Tenneco outpace overall light vehicle industry production by three percentage points. Our commercial truck and off-highway business continued significant year-over-year revenue growth with an increase of 15% to $272 million. New content and higher volumes in Europe, China, and Japan contributed the strong revenue growth against softer than expected global market conditions. In our aftermarket business, we saw significantly higher sales in both Clean Air and Ride Performance product lines in North America. We also had a strong aftermarket sales in South America, while Europe aftermarket sales remained relatively weak, particularly on the Clean Air side. So in total, our global aftermarket delivered a solid performance about even with the strong third quarter last year. Taking a look at earnings on Slide 5, adjusted EBIT was $152 million. This was a 17% increase and a record high for a third quarter. Both product lines contributed to the increase with Clean Air up 6% and Ride Performance up 16% versus last year. Overall, our EBIT performance improved on higher light vehicle volumes and increased in commercial truck and off-highway revenue and cost savings from our Ride Performance product cost leadership initiative. I am also very pleased that our profitability continued to improve this quarter with value-added adjusted EBIT margin increasing 100 basis points to 9.5%. As always, our results were made possible by the hard work of Tenneco employees around the world. At the end of the day, our success is determined by the relentless efforts of our global team, aligned and executing on distinct strategies for our Clean Air and Ride Performance product lines. I thank them for the focus and perseverance they demonstrated during the quarter, as we continue to win new business, launch programs, and improve operations, all of which helped deliver another great quarter. And with that I’ll turn it over to Hari.

[Hari Nair:]

Thanks Greg. Beginning on Slide 6 with Clean Air, total value-add revenue was up 6% to with higher year-over-year revenue in all three geographic segments. In North America, Clean Air value-add revenue rose 9%, primarily driven by our strong platform position on existing light vehicle programs. Some of the major contributors to the revenue increase were GM pickups, including the New Colorado and Canyon ramp trucks and the new Jeep Cherokee. The aftermarket also contributed to higher revenue with an increase in Clean Air product sales. In commercial truck and off highway, incremental revenue from Tier 4 final content was more than offset by unanticipated lower production volumes overall, and the decline in our revenue from Navistar as the ramp down in our business accelerated. Taking a look at the Clean Air Europe, South America and India segment, value-add revenue rose 1%. Excluding the impact of currency, value-add revenue was up 4%. Higher commercial truck and off-highway revenue in Europe drove the increase for the region with higher volumes and incremental content on programs with Scania and Caterpillar. In light vehicle, our content on leading models including Daimler A&B class vehicles and the VW Golf helped us outpace relatively weak industry production in Europe. In South America, significantly lower light and commercial vehicle production volumes negatively impacted revenues in the region. In the Asia-Pacific Clean Air segment, we delivered another strong quarter with 9% higher value-add revenue versus last year. China drove the segment results mainly due to higher light vehicle production and our strong platform position on top selling models. Commercial truck and off-highway revenues were also higher in the Asia Pacific region as orders from commercial truck customers and China increased, and we benefitted from higher volumes and recently launched off-highway programs in Japan. Now looking at Clean Air EBIT on Slide 8. Adjusted EBIT increased 6% to $102 million, including $4 million in negative currency. The improvement was driven by stronger light vehicle volumes in China and North America and an increase in our commercial truck and off-highway revenue in Europe, China, and Japan. Clean Air value add adjusted EBIT margin for the quarter was 10.7%. Now let's turn to Ride Performance starting on Slide 9. For the third quarter, global Ride Performance revenue increased 2%. In North America, revenue was up 7%. Higher OE light vehicle production on new and existing platforms, OE commercial truck revenue growth, and strong aftermarket sales, all contributed to the increase. The Europe, South America, and India segment revenue in the third quarter was down 2% versus last year. Excluding currency, revenue increased 3%. Stronger OE revenues in Europe and India were offset by lower volumes in South America and weaker aftermarket sales in Europe. In the Asia Pacific Ride Performance segment, revenues were flat versus last year. Positive drivers included higher revenues year-over-year in China and Thailand, which were offset by volume declines in Australia due to lower levels of OE industry production. Turning now to Ride Performance EBIT on Slide 11. Ride Performance adjusted EBIT increased 16% to $64 million with North America and Asia Pacific segments improving versus last year. Ride Performance EBIT includes $1 million in negative currency. The main positive drivers were stronger light vehicle volumes in China, higher commercial truck revenue in North America, strong after-market sales in North and South America, and the benefit we're seeing from our global product cost leadership initiative. Ride Performance adjusted EBIT margin rose to 9.8%. I want to recognize our entire global team for delivering another strong quarter and for their passion in continuing to improve our operations. Meeting our customers’ expectations is a job that never ends, and I am proud of how our employees come to work every day and find ways to eliminate waste, reduce costs, improve quality, and enhance the safety of our operations. Hard work and continuous improvement is fundamental to our culture. It drives our growth and profitability and is what will make our customers and Tenneco successful for the long term. With that, I'll turn it over to Ken.

[Ken Trammell:]

Thanks, Hari. I'll start on Slide 12. In the third quarter, we recorded $8 million of restructuring and related costs, of which $4 million was in our Europe Ride Performance business. To-date, we recorded $98 million in costs, related to the European cost reduction initiative. This quarter, we realized $8 million of savings related to these projects. We're on track to reach an annual savings rate of approximately $60 million during 2016. We also recorded $1 million of restructuring expense in Australia for headcount reductions, in response to declining production levels in the region, and included in restructuring was a $3 million loss from disposing of a closed manufacturing facility in North America. In addition, we incurred a charge of $4 million, resulting from the bankruptcy of a Clean Air aftermarket customer in the U.K. Before I move on to taxes, let's go over some items in selling, general and administrative expense. This quarter SG&A included $9 million related to stock indexed compensation. Related to the ongoing anti-trust investigation, we incurred $5 million of legal and related cost in the quarter. Moving on to tax expense on Slide 14, tax expense in the quarter was $31 million. Before adjustments, our effective tax rate was 33% in the quarter and 34% year-to-date. The third quarter tax rate benefited from receiving a high tech designation from one of our China joint ventures, which reduces the tax rate. For the fourth quarter, we're expecting our effective tax rate before adjustments should be in the range of 35% to 37% with the potential for a lower rate if the U.S. R&D tax credit is renewed. Year-to-date cash taxes paid are $98 million. For the full year, we're expecting cash taxes of about $140 million, down from our prior estimate of $190 million to $210 million. Now let’s go over to cash flow on Slide 15. In the third quarter, we generated $115 million in cash from operations up significantly from $15 million last year. The improvement was driven by earnings as well as key components of our working capital as you can see in our working capital metrics. Days sales outstanding and accounts receivable, excluding factoring, improved two days from 62 days -- 262 days from 64 days last year. Inventory days on-hand was 39 days, a two day increase from a year ago. Days payable outstanding at quarter end improved four days to 73 days, that’s a net improvement of four days in our working capital metrics. Capital investments in the third quarter were $95 million. Our capital spending supports our strategic imperatives in both business lines including future growth in OE Clean Air and Ride Performance programs in North America, Europe and China, Clean Air engineering requirements especially in rapidly growing regions and our product cost leadership initiative for Ride Performance. With the addition of incremental new programs and the timing of expenditures we now expect our capital investments for the full year will be about $330 million. Turning to Slide 16, in the third quarter, we launched a voluntary program we told you about on the last earnings call, offering to buyout former employees in the U.S. pension plan. We will complete the process before the end of this quarter and take a non-cash charge. Based on participant responses through last Friday’s deadline, more than 60% of the former employees who are eligible to participate will receive a buyout. This will result in a non-cash charge in the fourth quarter of between $20 million and $22 million. Pension plan assets will be used to make the payments and the program will reduce the outstanding U.S. pension liability by about $50 million. Turning to debt on Slide 17, at quarter end debt, net of cash balances was $1,018 million, down $58 million from the quarter end balance a year ago. Our net leverage ratio improved to 1.3 times compared with 1.6 times a year ago on lower debt levels and increased earnings. And with that, I'll turn the call back to Gregg.

[Gregg Sherrill:]

Thank you, Ken. Let me close today with our outlook on the fourth quarter and a few comments on our progress this year. Overall, we expect that higher light vehicle unit volumes, incremental revenue from increased content on commercial truck and off-highway equipment programs and a strong year-over-year increase in North America aftermarket revenue will continue to be positive drivers in the fourth quarter. These drivers will be help counter expected fourth quarter headwinds including currency estimated at 3% of total revenue and weaker than anticipated production level in the commercial truck and off-highway markets. Additionally we expect the revenue impact from lower industry light pick-up truck production in North America where we also have a change over a large customer platform. With the currency in these temporary new term factors, we anticipate that our light vehicle, commercial truck and off-highway and global aftermarket revenues will all be in line with or slightly higher than the fourth quarter of last year. So looking at our performance through three quarters I see Tenneco positioned to finish 2014 strong with full year total OE revenue growth within 2014 OE revenue guidance. When we consider the softer that anticipated industry conditions in the off-highway markets and in the light vehicle and commercial truck markets in South America, I believe this demonstrates the strength of Tennoco’s balance across regions and end markets. Tenneco’s growth is driven by the effectiveness of our strategies. Our disciplined approach to controlling costs while investing in future growth and our ability to leverage our operational expertise to drive profitability improvements in both product divisions. In Ride Performance, we're benefiting from product cost leadership initiatives. We're continuously working to optimize our footprint globally to improve Tenneco’s competitiveness and support future growth. In Europe the cost reduction initiatives we first announced earlier last year for our Ride Performance business remain on track. We've also been hard at work in North America where we're taking a number of actions to better balance our Ride Performance production capacity to get the best performance out of each plant in the region. On our Clean Air side emissions regulations remain the primary growth driver and cost effective global market solutions are the key to competing and winning. We continue to invest in the core sciences, engineering and global manufacturing capabilities that position Tenneco to capture that growth with our light vehicle, commercial truck and off-highway and large engine customers around the world. In the quarter we announced plans to add two new Clean Air plants including the first new U.S. manufacturing sight we've opened in more than a decade. In addition, we announced a new plant in Wales, which will support growth including recent new business wins with Jaguar, Land Rover and Renault. In our commercial truck and off-highway businesses, we continue to add new programs, new continent and new customers. On Slide 20, we're pleased to name AGCO as an off-highway customer in Europe and we have added Daimler truck as a new customer in India. Additionally, we recently celebrated the opening of a new wholly owned Clean Air engineering center in Kunshan, near Shanghai, to develop China specific solutions for commercial trucks and large engines. This state-of-art engineering center is already developing a number of new large engine programs for on-road, off-road, stationery and marine applications as well as SCR systems specifically designed to accommodate the Chinese market. In summary, we delivered higher revenue and excellent earnings this quarter. We will finish 2014 strong and we're well positioned for continued growth next year and beyond. Tenneco’s performance year-to-date reinforces the confidence that I have in our future, which comes down to three key drivers. First, clear and effective strategic imperatives to achieve profitable growth in each of our businesses. Second, our culture of operational excellence and the well established tools we use to continuously improve our performance and third, the commitment and passion of our people to work tirelessly for the success of our customers and for Tenneco. Thank you for joining us this morning and with that we can open the call for questions.

[Operator:]

Thank you. (Operator instructions) The first question is from Colin Langan with UBS.

[Colin Langan:]

Great, thanks for taking my questions. Can you give any color on what you're expecting in the commercial segment for Q4? And could you also provide a little color on your 12% commercial exposure? How much is really Ag, construction, and on-road, any color on that as well?

[Ken Trammell:]

I don’t know that I have an exact percentage for you on the split between those markets. If you kind of look at North America, it's very heavily weighted to the off-road equipment, both construction and Ag. I don't have the slipt between the two. You know, the on-road in North America is declining with the ramp down of the Navistar business that we talked about for two years now, I think. South America's on road truck, Europe it’s split between on-road and off-road, and China will be on-road, just to kind of walk around the regions there.

[Gregg Sherrill:]

Colin from the question of the agriculture versus construction, obviously when we build content, we build it for an engine rather than for an end unit. So we couldn’t tell you which engines go into which, but if you look at our largest off-highway customers being Cat and Deere, obviously Cat is going to skew towards the construction side and Deere toward the agricultural side with some mix especially in the Deere side that still goes into construction.

[Colin Langan:]

And other than Deere, are there any other major Ag customers out there or is that -- you just announced AGCO. Is that a large customer right now?

[Gregg Sherrill:]

AGCO is a new customer.

[Collin Langan:]

Okay. And then you just mentioned the Nav roll-off, is that occurring this quarter or did that already start earlier in the year?

[Gregg Sherrill:]

It had been started. We just saw an acceleration in it. I don’t know if it’s a mixed thing going on at Navistar or what as they shift between whichever engines they're using, and we will see it continuing sort of ramp down in the fourth quarter on that as well.

[Collin Langan:]

And that will be…

[Gregg Sherrill:]

We’ve just got to kind of get that behind us and that’s going on right now.

[Colin Langan:]

And then I guess just a last question, any update on the emissions adoption in China?

[Gregg Sherrill:]

Well, we've certainly been pleased that there's been an uptick in it this year that our revenues are ramping up. We've seen that I think a little bit throughout the year, and we still anticipate further increase in the take rate and the enforcement of the regulations in 2015.

[Collin Langan:]

Okay. Thank you very much.

[Gregg Sherrill:]

Thank you.

[Operator:]

Thank you. The next question is from Brian Johnson with Barclays.

[Brian Johnson:]

Yes, good morning, Gregg.

[Gregg Sherrill:]

Good morning.

[Brian Johnson:]

I just want to drill down on two issues, North American Clean Air margin and then European Ride Performance. The North American Clean Air margin, down year-over-year. We've had good three-quarter ton pickup truck sales while commercial is challenged certainly, the contents rolling in. What's the driver of a weak incremental margin there?

[Ken Trammell:]

Yeah Brian, the North America Clean Air business, the bulk of that engineering investment that we talked about the $4 million in script occurs in North America Clean Air. There is a piece of China as well. For some of the things that Greg talked about on the call just a minute ago, but the bulk of it is the engineering, and then we also do a fair amount of business both in OE and aftermarket in Canada, and we saw a fairly significant year-over-year decline in the Canadian exchange rate and that hit us probably $3 million or so in the quarter. So if you took those out, that would really explain the difference. We would be roughly flat year-over-year in the margins there.

[Ryan Brinkman:]

Okay. And are those engineering investments for new commercial pilot programs?

[Gregg Sherrill:]

It's for all of our programs, but certainly commercial truck and off-highway in particular is important, but it's also for future regulatory changes and things like large engine and other areas as well.

[Ken Trammell:]

We are seeing some incremental program workload coming in since the beginning of the year, and it's all very positive. Hence, we've seen an increase in engineering expense, and it's also related to an increase in CapEx expense, so our capital spending.

[Ryan Brinkman:]

Okay. And over in Europe on the Ride Performance, you mentioned that the customer went bankrupt, I mean A, what is the character of the European aftermarket right now and always seems to be -- aftermarket always seems to be hit as the consumer gets nervous and economy slows down, which seems to be Europe now. And B, if it is indeed slowing further, do you need to accelerate things or take a different tack on your Europe ride control restructuring program?

[Gregg Sherrill:]

Okay. So Ryan, this was actually Clean Air. What we said in the script was this was Clean Air, not the Ride Performance side and it was in the U.K., not on the continent.

[Ryan Brinkman:]

Okay.

[Gregg Sherrill:]

And it was just an unusual event. The customer had actually received a fairly significant equity infusion just two months before they declared an unexpected bankruptcy. So, it's not I don't think indicative of conditions on the continent. It's simply an unusual event that occurred, and ultimately we had to take a charge for.

[Ryan Brinkman:]

Okay. And in general across both aftermarket businesses in Europe, is there any impact of the last month or so of economic uncertainty?

[Gregg Sherrill:]

I mean it's…

[Hari Nair:]

Yes, I think it has yes. That aftermarket you’ve heard me describe really all of Europe almost is kind of bouncing along the bottom, and if anything, it took a little bit of a downward bounce . I don't see it being a downward trajectory. We're just going to see the sort of muddling until things, the economies improve, growth gets back up a little bit in Europe. Aftermarket seem to be hit early as you said, and there is just this whole sort of wave of consumer and business lack of confidence there right now, but I don't see it deteriorating necessarily all that much further, so it’s just going to stay fairly weak for a while.

[Ryan Brinkman:]

Okay. Thank you.

[Operator:]

Thank you. The next question is from Patrick Nolan with Deutsche Bank.

[Patrick Nolan:]

Good morning, everyone.

[Gregg Sherrill:]

Good morning, Patrick.

[Ken Trammell:]

Good morning.

[Patrick Nolan:]

Gregg, I just wanted -- from I heard you right, so you think CV and off-highway is basically going to be flattish in Q4 year-over-year?

[Gregg Sherrill:]

Overall, I think we'll probably see that. What we've seen is a couple of things. Now it's started going down a little bit quicker than normal, but that's like I said, that's as to some is going to get behind us. We've all known that was coming. We've also seen in North America sort of further weakening in production schedules and I think there are some out there talking about some dealer inventory and destocking going on again in the third quarter and carrying into the fourth quarter that's impacting production level. So we're going to see a little bit weaker here. And then of course South America is going to stay relatively weak. We should still see continued where we're at in China and we'll be pretty happy with that I think and Europe performed reasonably well in the third quarter on a commercial stuff. So…

[Patrick Nolan:]

And I know it's early, but could you maybe just talk -- give some color about the ability to grow the topline of that business going into next year. It looks like, as you scrap the off-highway markets if anything getting tougher, not getting easier…

[Gregg Sherrill:]

Remember we are -- we're still growing and 15% in the face of the pretty soft markets is pretty indicative of how much content we've got going in right because this really that's where the growth is coming from this year. It's certainly not coming from help on the markets out there. So we should -- we got continued rolling in regulations next year. I am not -- I am not at all concerned about the content growth whatsoever and we just need a little volume help and you're going to see a quarter like we're going to have here in the fourth quarter maybe, but then continued growth for sure. The content is there and is launching.

[Ken Trammell:]

Remember that 2015 is Tier 4 final for the second series of engines both in North America and equivalent of that regulation in Europe. So the content adds happen regardless of what happens from a volume perspective.

[Gregg Sherrill:]

And we're anticipating a continued improvement in China next year.

[Patrick Nolan:]

Okay. Can I just ask one housekeeping, the legal cost flows completely through the SG&A line item of the P&L?

[Ken Trammell:]

Yes it is.

[Patrick Nolan:]

Got it. Thanks very much.

[Ken Trammell:]

Thank you.

[Operator:]

Thank you. The next question is from Matt Stover with SIG.

[Matt Stover:]

Thank you very much for taking the question. A couple of questions, I wanted to follow on to Brian's questions about first on the European Ride Control business, if you could just kind of talk about the negative year-over-year comp, you’ve been comping positively the last few quarters and I just wanted to put that into perspective and how we should think about that going into next year? And then the second question is the North American Clean Air business, the implications of a higher spending going forward. Should we think of this -- this is obviously a high class problem. Should we think about this incremental investment burdening fourth quarter and into the first part of next year, how should we frame that for the margin outlook.

[Gregg Sherrill:]

Certainly, let me address your first question on the European Ride Performance, that's actually got South America and India entered as well. South America OE markets are very weak, down in the range of 15%, 20%, 25% depending on which metric you want to take. So that obviously is impacting it. The European OE market in itself has been both up and down I think in the quarter that was probably roughly flat to slightly up. So it's not just the European piece. South America is the one that's probably dragging the year-over-year comp down just a little bit.

[Matt Stover:]

Okay.

[Gregg Sherrill:]

So your second question was on the engineering expense and will certainly continue -- we're not going to sacrifice future growth based on the current spending rate, but will also work very hard to try and manage that as tightly as we can as we move forward.

[Ken Trammell:]

But I do think it's fair to say there is this margin increase in engineering expense going on. There has been some incremental programs and it is a good problem. We're not concerned about that at all.

[Gregg Sherrill:]

Nice to have a lot of business that we need to spend some money on.

[Matt Stover:]

Actually one more question if I could. My phone went in and out when you were going through the outlook statement on Slide 19, could you sort of give us some more detail in terms of how you're thinking about the year-over-year comp because in the couple questions. You seem to have set the stage for a tricky comp for the fourth quarter and the text relative to what you said in Slide 19 doesn’t necessarily describe that. So I was just was wondering if you give some clarity on that.

[Ken Trammell:]

I guess I am not exactly what you're after there. Here's the way I'll just kind of -- I am on Slide 19, I assume that's what you're looking at right.

[Matt Stover:]

Yes.

[Ken Trammell:]

We know that we're going to have a pretty hefty currency headwind right. That's roughly 3% of total revenues. That's our estimate right now, but I think that's not a surprise to anybody. We're also seeing kind of this continued weakness in the commercial truck and off-highway markets. We've all seen that. It's just not really in the recovery phrase yet and we're going to have this lower pick-up production, which is also I don't think a surprise to anyone. There is a large platform and changeover going on in the third and the fourth quarter right and the other thing is we should have our North American aftermarket revenues up a little bit, but globally because the offset of Europe, they're probably going to be about even. Light vehicle is probably going to be roughly in line year-over-year and even though we've got the content offsetting the volume weakness particular with some of this near term kind of destocking going on here in North America in the off-highway business, we should see that coming out even to slightly up as well. Not sure what more we can tell you there right. We still should come in, our current forecast or estimate would be to come in within our original guidance for total OE revenue growth for the quarter.

[Matt Stover:]

Perfect. Thanks very much.

[Ken Trammell:]

All right.

[Operator:]

Thank you. The next question is from Joe Spak with RBC Capital Markets.

[Joe Spak:]

Good morning. Thanks for taking my question. Just to close the loop on the Navistar business a little bit, I know this is known for a little bit, but do you have a better sense of when that should completely run its course. Is it -- you saw the acceleration here this quarter, so do we get another two three quarters of that now before it's completely at the new rate lower level?

[Gregg Sherrill:]

I think based on what we believe we understand that business is essentially going by around the end of this year or first quarter next year.

[Joe Spak:]

Okay. That's helpful and then I appreciate some of the reminders on '15 in terms of -- on the commercial vehicle and off-highway front in terms of new regs coming in, I think you also still have a couple of new business launches, can you remind us what those are for 2015?

[Gregg Sherrill:]

So sertainly -- I am really not sure, Joe, what you're going to, but certainly we're in the process of launching the Scania business that regulation the Euro 6 regulatory change happened this year and for that particular platform and that's been ramping up as we're going through the year this year. So we'll see next year some good business there and I am sure if I am addressing your question Joe. You mentioned Slide 15.

[Joe Spak:]

Well no, I thought you still had some new business wins aside from regulatory ads at launch in '15.

[Gregg Sherrill:]

Sure we've got a number of light vehicle platform at launch during 2015 and we've got the Tier 4 final, the content change that we've talked about.

[Joe Spak:]

Right.

[Hari Nair:]

We've also got the business that we mentioned earlier today in India with Daimler okay. So nut a huge region, but that will continue to ramp up.

[Joe Spak:]

Kubota in Japan.

[Gregg Sherrill:]

Good point, Hari. Hari is mentioning the Kubota business in Japan that will continue to ramp up. So there is quite a bit of activity that's still kind of going on under the water line there.

[Joe Spak:]

Okay. And then…

[Hari Nair:]

2015 will be a pretty significant launch year against 2014 yes.

[Joe Spak:]

Okay. And then the last question is -- and you talked a little bit more about the cost leadership progress on the Ride Control business. And I think in the past, you’ve mentioned -- I don't know if this is as an official target, but you would like to sort of be almost be able to take like a $1 out of every shock or strut and can you update us on some of the progress you're making towards that cost leadership and how much more do you think you can pull there?

[Ken Trammell:]

The product cost leadership initiative is obviously very significant for that particular division of the company. You’ve seen a very good improvement in the EBIT margin of that business over the course of the last several quarters and it continued this quarter. So it obviously made a lot of progress. We're working on things like standardization, both of product and manufacturing processes. It's going well, but we're not done. We've still got some opportunities to go there.

[Gregg Sherrill:]

So far we've done a lot of work and you’ve seen it roll right through to the bottom lime obviously. In manufacturing some footprint realignment definitely in Europe, rebalancing of plants here in North America that's ongoing, those types of things are yielding the early savings here. What Ken just mentioned as we start really and we've already started, but as we roll into year-over-year over years, it's going to take several years, the design standardizations and even some of the process standardizations, we still feel like we've got ways to go there and several years worth of activity to help us improve on that cost leadership. But the design stuff and all that obviously kind of roll in as we get the opportunity with new programs and things like that out there, but the early stuff you’ve seen it has come in quite well and there is even still some more to go on it. So…

[Ken Trammell:]

And we announced that the split of the two divisions and the realignment and the strategic change that we said that we though there was as much near term turnover value in the Ride Performance business that wasn’t recognized as it was long-term in the Clean Air business and that's what you're seeing flow through.

[Joe Spak:]

So if you -- can you help us size that product cost leadership business -- is it as large as some of the footprint rationalization savings you’ve seen?

[Ken Trammell:]

Again like Gregg said, a number that those opportunities will begin to roll in over time as platforms roll over. So no, I don't think that there is a percentage or a number that we have to give you other than to point out that we're not yet complete with what we think the opportunities are on the right side of the business.

[Joe Spak:]

Okay. Thanks a lot guys.

[Operator:]

Thank you. The next question is from Rich Kwas with Wells Fargo Securities.

[Rich Kwas:]

Hi. Good morning. Just following up on Joe's question, so with regards to -- I understand the content ads with the regulations, but could you just clarify which programs are additive to next year where you're not fully anniversarying the launch in 2014. I assume that's Scania, Kubota are there others that are additive on a year-over-year basis in '15 from a program standpoint?

[Gregg Sherrill:]

Well clearly all of the Tier 4 final on the class of engines is launching next year in both Europe and North America's incremental and you’ve also got the base business in there, but you got the incremental content going to Tier 4 final, which is basically SCR systems being added to those products.

[Rich Kwas:]

Right, but I mean there is other programs -- there's new programs that are just launched -- they launched this year that didn't reach a full run rate?

[Gregg Sherrill:]

Oh I see what you're…

[Rich Kwas:]

That's what I mean…

[Ken Trammell:]

Tier 4 interim this year right, I am sorry Tier 4 final this year on this year's class of engines…

[Gregg Sherrill:]

…is still ramping.

[Ken Trammell:]

Will continue to ramp, so there is that for next year plus the additional content on the class engines for next year. So both of those will be additive to next year's business if that's what you're asking.

[Rich Kwas:]

Yes, I was usually just looking like Scania for example does that -- is that fully anniversaried this year? I was under the assumption there is some benefit because you didn't reach full run rate.

[Ken Trammell:]

Scania will be another one.

[Gregg Sherrill:]

Yes, that's right.

[Rich Kwas:]

Okay. And then -- when did AGCO launch?

[Ken Trammell:]

I believe we'll launch AGCO in 2015.

[Rich Kwas:]

Okay.

[Ken Trammell:]

Second half of 2015.

[Rich Kwas:]

Okay. So then that will slip over into '16 from a volume standpoint, the benefit.

[Ken Trammell:]

That's right.

[Rich Kwas:]

Okay. And then CapEx Ken, $330 million for this year, so you're running above 3.5% level, is there going to be -- is this stuff that was pulled forward and then next year we should think of that being more rational in terms of -- as a percentage of sales.

[Ken Trammell:]

Yes, we're going to run a bit above 3.5%, which is consistent if you remember we said that, 3.5% over the long term is a good assumption to make, but it may see periods when we're both above and below that depending on opportunities and launch activity. I mean this is somebody mentioned it a few minutes ago it's sort of a high class problem to have. We've got a lot of opportunity and we're launching some more business and frankly making investments in our engineering capabilities as well.

[Rich Kwas:]

But knowing what you know now, do you see that level continuing in '15 above that 3.5% rate or is this just kind of a I guess at a pull forward that you get back in the range next year.

[Ken Trammell:]

As we get a better view on 2015 as we roll up our plans, we'll certainly give you some numbers on the fourth quarter, but again like I have said, for years I think long-term somewhere in that 3.5% range could be plus or minus in particular years that's still a good assumption to make.

[Rich Kwas:]

Okay. And then on other that number was relatively low, I know you had the stock comp benefit and then the legal cost were an offset, did the legal cost continue into the fourth quarter at the same level or is that going to be a net benefit to that line?

[Ken Trammell:]

Remember that we said when we first talked about the legal cost, we expected to be in that range probably at least through the end of the year this year.

[Rich Kwas:]

Okay. So when we're thinking about modeling, we should think about that as being a benefit as we get in the first quarter next year.

[Ken Trammell:]

As we get more visibility and there is more activity there, we'll certainly give you some better information, but our assumption was in fact what we said was in the range of $3 million to $5 million of increased legal and related cost probably through the end of this year and then hopefully ramping down after that.

[Rich Kwas:]

Okay. Final question of FX, what are you benchmark the Canadian dollar and the Euro to for the balance of the year.

[Ken Trammell:]

The Canadian dollar is somewhere I think around 94 and the euro has been running around 126, 127.

[Rich Kwas:]

So those are the assumptions built in the guidance.

[Ken Trammell:]

When we talk about the 3% currency headwind, maybe to put a fine point on it Rich, we used the currency rates that we closed September at.

[Rich Kwas:]

Okay. All right. Great. Thank you.

[Ken Trammell:]

Thank you.

[Operator:]

Thank you. The next question is from Brett Hoselton with KeyBanc.

[Brett Hoselton:]

Good morning.

[Gregg Sherrill:]

Good morning.

[Ken Trammell:]

Good morning.

[Brett Hoselton:]

On the commercial vehicle and off-highway side, I guess just to begin with, at the beginning of the year, you had forecast or had thought that you might be growing that revenue in the range of 20% to 30%. If I made the calculations correct, kind of on flat revenue year-over-year in the fourth quarter it implies that your full year is going to be growing somewhere in that high teens range, around 17%. So my question is, relative to where you were, your expectations in the full year, what specifically has changed? And obviously, the FX is somewhat of a headwind and that catches us in the tail end of the year. I would presume that you would have anticipated the launch of the F-Series and so you would have incorporated that, but…

[Gregg Sherrill:]

Not even -- that was part of the commercial vehicle.

[Brett Hoselton:]

That's fair; I apologize. And then -- but it sounds like, other than the FX, you're just seeing significantly incremental end markets. Is that a fair statement, no loss of content?

[Gregg Sherrill:]

No loss of content, no. In fact our investments are ramping up as more content is coming in. That's kind of what we've been saying here, but it's really I think China has been positive; Europe has been about what we expected to maybe a little bit positive. North America has not. That's where we're seeing the production volume softening, particularly in the off-road. The Ag segments are pretty weak this year even though we've got a lot of content coming in. Let's remember we're talking about a rate of growth here. The content is really helping offset some really soft markets out there and in the back half of the year, we've seen other production cuts come through that's -- they were kind of unanticipated quite frankly even since July. So that's kind of where we see and those are really the things that have changed since the beginning of the year or even since July if you will on us and South America stand probably weaker longer than what we originally though.

[Ken Trammell:]

And absolutely South America has been a big contributor there as well.

[Brett Hoselton:]

Okay. So I think the question that people are asking here is maybe how do you think about the implications for your five-year revenue growth trajectory of 10%. I know you're going to provide us guidance here in the fourth quarter, but this is a fairly material step down as a result of weaker-than-expected production. Based on your interaction with your customers and so forth, do you see this as being a one-time unusual event here in the fourth quarter and then things are going to pick up a little bit in the first quarter or do you see this weaker level of production sustaining for some period of time that we just don't know.

[Gregg Sherrill:]

I would separate it into two things. I think there is some sort of one time-ish things going on in North America here in the third quarter and the fourth quarter. With inventory adjustments going on that's reduced production. So those should clear through right. But then you still have to look at sort of the overall weakness in that market and when does it cycle back and it will cycle back a very cyclical markets right and that's probably the difficult part to forecast, but if you look at just the overall trend line through the cycle, we're still holding the growth story, growth projections, absolutely.

[Ken Trammell:]

I think the key for us Brett is the content is there. Every engine that they build that requires the content, gets the content that we've talked about and the question comes down to not what is happening within Tenneco, but what's happening within the end markets.

[Gregg Sherrill:]

And I would just add one more thing here. We still believe that we're going to hit that overall OE revenue growth within which was the original projections on commercial vehicle and we're driving our margins. In spite of all that stuff, we're not going to make excuses on the markets. We're going to find ways to if we can to work around them and that's what we're doing.

[Brett Hoselton:]

Excellent. And then just switching gears slightly over to the light vehicle on the OE side of the business in Europe, are you seeing any changes, material changes, positive or negative, in terms of the OE light vehicle business production wise particularly in Europe?

[Hari Nair:]

Yes Brett, I don't think we've seen anything significant. There is always ups and downs on platforms and customer changes, but I don't think there is a particular trend that we've seen so far this quarter.

[Brett Hoselton:]

Excellent. Thank you very much gentlemen.

[Gregg Sherrill:]

Thank you.

[Operator:]

Thank you. The next question is from Ryan Brinkman with JPMorgan.

[Ryan Brinkman:]

Hi. Good morning. Thanks for taking my call. Ride Performance had another really strong quarter; I guess 9.8% versus 8.7% margin a year ago. Can you talk about again the biggest drivers of that, whether they've changed quarter-over-quarter and maybe what the margins would have been at that division if not for the lower stock-based -- stock indexed comp? Just trying to understand whether the margin traction of recent quarters has sort of continued at the same rate in 3Q or maybe accelerated ex the comp issue.

[Ken Trammell:]

Almost all of the stock indexed compensation is in the other category. So it doesn’t really affect what you're seeing in the Ride Performance or the Clean Air margin story.

[Ryan Brinkman:]

Okay, so it did get a lot better then. I mean it's up 100 bps versus...

[Ken Trammell:]

Yes.

[Ryan Brinkman:]

So what was the recent inflection -- you've been talking about like increased scale on platform, commonization, but did something accelerate this quarter?

[Ken Trammell:]

Continued restructuring progress in Europe is driving margins, particularly in the Ride Performance business. It's also in the Clean Air, but particularly in the Ride Performance business. We also said in the script that we saw strong aftermarket sales in North America, which are helping the margins. You'll see that the North American Ride Performance margins look particularly good and some continued strength and production levels and manufacturing performance in China, which shows up in the Asia Pacific margins.

[Ryan Brinkman:]

Okay. And then I guess just a last question on Slide 7. I was looking at the trends in commercial and you talked about strength in Europe CV and off-highway and we've been hearing from other manufacturers that actually those markets have been soft. So this is obviously Tenneco-specific or is it emission content-specific or what's been driving your business in some of those tougher markets over there?

[Gregg Sherrill:]

I think it's the content driver absolutely. That's again even at a growth rate which branded wasn’t quite what we first saw at the beginning of the year, still 15% this quarter and Europe was pretty positive in that as well, but it's content rolling in and these new programs such as Scania etcetera which is content if you will right.

[Ryan Brinkman:]

Okay. I appreciate it. Thanks a lot.

[Operator:]

Thank you. The next question is from Richard Hilgert with Morningstar.

[Richard Hilgert:]

Good morning, everyone. Thanks for taking my questions.

[Gregg Sherrill:]

Good morning.

[Richard Hilgert:]

Just curious on the Europe, South America, India side of the business, both those areas are down more so on the heavy and medium truck side of their markets and given Tenneco's penetration into those markets overall. If we were to see those markets recover better than the new car market, would we see that line improve much better than it would have with just new car improvement? In other words, are you getting more penetration in the commercial side of those markets than you are on the new car side?

[Hari Nair:]

Yes, we've got great penetration on the light vehicle side as well Richard, but I think the quick answer to your question is yes, we certainly would have seen improvement. South America commercial truck and again only on highway units are regulated in South America right now. The off-highway regulation comes later this decade. The on-highway production has been down significant double-digits in the 15%, 20%, 25% range. So those volumes have certainly hit our South American business pretty strongly and we have a very good -- you can see from the slide that we've got in the script, a very good penetration in the South American market. What we've got in Brazil probably accounts for more than half of the market down there. In Europe, our presence is growing in the on-highway side. We've got Daimler business we've had for a number of years. We're launching Scania, but it's really again what happens in the off-highway business that's going to be the bigger driver in Europe as well.

[Richard Hilgert:]

Okay. And then looking at the individual EBIT margins, Asia-Pacific 7.2 percentage points higher than a year ago; on a value-add basis, 17.9 -- I'm sorry -- this is on the Ride Performance Asia-Pacific side. So I'm curious; what was the big driver of that huge increase in margin year-over-year?

[Hari Nair:]

That is predominantly China and that business continues to show improvement in manufacturing. It's sort of leading the way in some outsourcing arrangements too because of the unique supplier situation that we're able to get in china. So that is probably the biggest driver. I do want to point out that we're opening a new plant next year in China because of the growth that we've seen on the Ride Performance side and so we will probably see some challenge from absorbing the cost that new plant for two or three quarters here, but again it's a great problem to have.

[Richard Hilgert:]

Exactly. Last question is more not necessarily related to the quarter, but just an overall business question for you on product on the ride control side. One of the ways that active safety works is by, in particular, in lane-keeping. Instead of adjusting steering, one of the things that it can do is utilize the antilock brake system to pull the car one direction or another. Does ride control get any kind of an effect or impact? Especially on your electronic side of the business, are there algorithmic changes or is there anything that you participate in, in any way with active safety on ride control?

[Hari Nair:]

Richard, like you said, that's more of an annual lock brake impact from a lane keeping perspective than it would be from the perspective of what happens with our electronic shocks. Our electronic shocks really address the trade-off between ride and handling, but it's not directly impacted by what you see on the ABS side.

[Richard Hilgert:]

Okay, great. Thank you.

[Operator:]

Thank you. The next question is from John Murphy with Bank of America Merrill Lynch.

[John Murphy:]

Good morning. I just had two follow-ups. First, on the CapEx bump up, it sounded like it was timing in the press release, but you also seem to be indicating it might be elevated or a little bit elevated for longer than just the rest of this year. I'm just curious where that capacity is going in and what business it's for specifically because obviously this will have a much faster impact than R&D in the longer term.

[Ken Trammell:]

Yes, so I think we mentioned in the script that we're for example opening our first new plant in the U.S. that we've opened for more than a decade and that's a significant impact. We've also just recently -- we've mentioned in the script just recently opened our engineering facility in China that obviously was significant, certainly part of our plan, but that's a significant near term expenditure on capital and it will have a benefit for a much longer period of time than just the next -- even the next production cycle.

[John Murphy:]

So those weren't comprehended in the original plan? Or are they just -- the investments are just higher than what you thought?

[Ken Trammell:]

No I just told you that the Kunshan obviously was in the original plan. The timing of when we open the plants is obviously driven on what our customers need. So that can change over the short term for certainly a period of time, but as we go in through the year, we've also been awarded some programs, none individually significant, but collectively enough and it's driven our CapEx up a bit. It's about a 10% change from what expected at the beginning of the year, but it has driven it up just a little bit from where we anticipated it would be at the beginning of the year.

[John Murphy:]

Okay. And then, Gregg, not to parse words, but to kind of parse words, you indicated when you were talking about the fourth-quarter revenue outlook that your revenue would be in line or slightly higher than year-over-year. In the press release, it was in line. I'm just curious where you're seeing that potential for slightly higher? Is that more around the North American aftermarket and the light vehicle business or where might there be opportunities slightly to the upside?

[Gregg Sherrill:]

It's just there is a lot of moving pieces there right and the currency can have an effect on that. We're not exactly sure where these schedules are coming out in North America, but we think we've captured it on the bottom side. We believe we have on that and kind of where China would come in because we don't always have good visibility out there. It's held pretty good, but as we head into 2015, there could be a little bit more there. So we do, it's going to be in line to slightly up is what we think as our best view of our view of the world right now and there is just a lot of moving pieces out there.

[Ken Trammell:]

If you take out the currency, our revenue is going to move about with light vehicle production. If you will remember on the second quarter, we had expected that our currency, the revenue would move about with light vehicle production as well -- I am sorry, the third quarter when we had the second quarter call and we actually came up just a little bit better. So again like Gregg said, there is a number of things that can impact it and that's where we're saying flat to slightly up.

[John Murphy:]

Okay. Very helpful. Thank you.

[Operator:]

Thank you. The next question is from Ravi Shanker with Morgan Stanley.

[Ravi Shanker:]

Thanks. Good morning, everyone. Just one question from me. Your corporate costs were a nice step down in the quarter even accounting for the stock comp expense. Can you just add a little more color there as to any other driver of that and how flexible that is just given where you're seeing the macro? Do you have more room to hold back on discretionary spending?

[Gregg Sherrill:]

So the Other segment, which is what you're talking about, what we label as Other, was primarily impacted by two things in the quarter. it was the change in the stock price that drove lower stock indexed compensation and that was somewhat offset by the legal and related cost for the investigation. Those are really the two big drivers. That is basically the cost of running the company from a public perspective and will vary as much with what happens on the stock indexed comp and other incentive compensation accruals as anything else.

[Ravi Shanker:]

So if you were to, just for assumption, just hold the stock price where it is today, what's a good run rate for that line? Is it in the low 20%s or is it in the teens?

[Ken Trammell:]

Yes, I think if you adjust it for the deferred comp, deferred the stock indexed comp, you would probably get to something what we've seen over the course of the last several quarters.

[Ravi Shanker:]

Got it. And just going forward, if the macro continues to remain choppy like this, do you have more room to hold back on discretionary spending?

[Ken Trammell:]

We do that very intensely not just within the corporate group, but certainly across all the business units around the world.

[Ravi Shanker:]

Understood. Thank you.

[Operator:]

Thank you. Our final question today is from Brian Sponheimer with Gabelli & Company.

[Brian Sponheimer:]

Hi, good morning. Thanks for fitting me in here. Just thinking about 2015 with some of the launch cadences you were talking about, should we be thinking about it a little bit like it was for 2013 for you where maybe you pulled forward some costs into '15 ahead of what should be a pretty significant ramp from an earnings perspective for '16 or am I thinking about this incorrectly?

[Gregg Sherrill:]

Brian we haven’t obviously gotten to the point yet where we're prepared to give guidance on what our revenues are going to look like next year. Certainly we've talked about on the call here on what the key drivers are going to be. We do expect the content to continue to roll in on Tier 4 final. That will be the continued ramp up of what we launched this year plus the launches for the other class of engines next year. All those items will certainly be significant. I think again we've talked probably more about the volume in the commercial truck and off-highway business, which is not just North America, but also what's happening in South America on the on-highway side being as much of an impact as anything else and that's something that we just don't have -- aren’t prepared yet to give you revenue guidance on 2015.

[Brian Sponheimer:]

Understood. I appreciate the color that you guys give regardless. Thank you very much. I'll see you next weekend.

[Gregg Sherrill:]

Okay. Thank you.

[Ken Trammell:]

Thank you, Brian.

[Operator:]

Thank you. I would now like to turn the call over to speakers for closing comments.

[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 800-568-0480. For those outside North America, the number is 203-369-3676. This playback information is also found in our press release. Thank you for joining us today.

[Operator:]

Thank you. This concludes today’s conference. Thank you for joining. You may disconnect at this time.