Tsakos Energy Navigation Limited
Q1 2015 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Welcome and thank for standing by. At this time, all participants will be in a listen-only mode until the question-and-answer session of today's conference. This call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the call over to Ms. Linae Golla. And Ms. Linae Golla is the Director for Investor Relations for Tenneco. You may begin.

[Linae Golla:]

Thank you. Good morning. This morning, we released our earnings and related financial information. On our call today Gregg Sherrill, Chairman and CEO; Brian Kesseler, Chief Operating Officer; and Ken Trammell, 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 tenneco.com. After our comments, we will open the call up for question. Before we begin, I need to tell 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. Additionally, 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 and good morning, everyone. I'm pleased with our start to 2015 with a solid first quarter, including record high EBIT and improved margin performance. Our structural growth drivers and operational performance remained strong and helped us deliver these results against several challenging macroeconomic factors. These results reflect global alignment and good execution on our strategies for growing the top line and improving profitability with our cost leadership initiatives. The focus and momentum we have in operating globally along two product lines, Clean Air and Ride Performance, is also key to our positive results. Having two businesses with unique strengths contributes to our overall performance and to one of Tenneco's underlying advantages of having a business model with strong balance. In addition to two product lines, this balance includes differentiating global footprint, a broad customer base, programs spread across a large number of platforms, and revenue generated in different end markets. Tenneco has long-term and well-established drivers that are creating opportunities regardless of external market factors. The foundation of our business remains constant and positions us for continued growth. Now, first, taking a look at revenue on slide 5. Total revenue excluding the impact of $160 million in negative currency was up 4% versus a year ago. This quarter's total value-add revenue excluding currency increased 5% and includes revenue growth in both product lines with Ride Performance increasing 3% and Clean Air up 5% year-over-year. Taking a closer look at these numbers, our total revenue includes a 5% increase in light vehicle revenue outpacing a 3% rise in global industry production due to the strength of Tenneco's position on top selling vehicles worldwide. We benefited from stronger volumes on current platforms and the ramp-up on new programs in China and Europe. A 1% increase in commercial truck and off-highway equipment revenue despite production weaknesses in these markets, particularly in China and Brazil, where truck production was weaker than anticipated. Nevertheless, we benefited in all three geographic segments from incremental clean air content to meet Tier 4 Final and Stage IV off-highway regulations and from further penetration in China to comply with NS4 requirements. We also had a higher Ride Performance commercial truck revenue in North America, which includes our shock and elastomer products. Lastly, we also had a 4% increase in global aftermarket revenue fueled by stronger Clean Air and Ride Performance sales in North America, including from the new CARQUEST business. All-in, including a 7% currency headwind, our total revenue in the quarter was $2.02 billion. Turning to earnings on slide six, both EBIT and adjusted EBIT were our highest ever first quarter results. Adjusted EBIT rose 2% despite $8 million in negative currency. The improvement was driven by stronger light vehicle volumes and the ramp-up on launches, incremental content on commercial truck and off-highway programs, and a higher aftermarket sales in North America. We also delivered a strong operational performance by managing costs, capturing restructuring savings, and executing on our cost leadership initiatives, all contributing to higher earnings. Turning to profitability this quarter, I'm pleased with our continuing trend of year-over-year margin improvement. Adjusted value-added EBIT margin was 8%, up from 7.6% a year ago, with Clean Air improving 20 basis points and Ride Performance up 60 basis points. And finally, I want to point out our strong first quarter cash performance. Operating cash flow improved $90 million, driven by working capital and lower interest and tax payments. In summary, in the first quarter, we leveraged our strengths and made excellent progress on our program launches, content growth, and market share penetration, while executing on cost initiatives, which altogether are driving our performance. And with that, I'll turn it over to Brian to give more detail on our Clean Air and Ride Performance results.

[Brian J. Kesseler:]

Thanks, Gregg, and good morning. Since Gregg has already covered the currency headwinds in this quarter, I'm going to talk about revenue excluding currency, which gives a better picture of our underlying performance. Beginning with Clean Air on slide 7, we delivered a 5% increase in total value-add revenue. The increase is driven by light vehicle revenue growth that continues to outpace global industry production and an increase in North America aftermarket revenue. In our commercial truck and off-highway business, additional content offset the impact of those – of weaknesses in those markets. So revenue was roughly flat. Breaking down total Clean Air revenue by segment, North America value-add revenue increased 3%. We're pleased with the increase we had in off-highway revenue due to additional content on programs of Caterpillar and John Deere. Aftermarket was up as well. So both were pretty positive. On the light vehicle side, our revenue was tempered by downtime with some of our customers as well as the impact of the Ford F-150 model changeover, which we expect to improve sequentially throughout the year. In the Europe, South America, and India Clean Air segment, value-add revenue increased 7% on light vehicle volumes, including the ramp-up on programs such as the new VW Golf and Mercedes A and B-Class vehicles in Europe. Despite week off-highway market conditions in Europe, revenues were up slightly due to higher content on our off-highway programs. Together, these drivers more than offset ongoing weak markets for aftermarket exhaust products in Europe and further weakening in commercial truck production in South America. In the Asia Pacific segment, Clean Air delivered a very strong quarter with value-add revenue increasing 9%. China was the driving force with strong light vehicle revenue growth driven by our platform mix and the ramp-up of new business with customers such as Audi, BMW, Daimler, and Volkswagen. We continue to penetrate the China truck market this quarter with content for compliance with NS4 regulations; however, truck production volumes declined 30% versus a year ago, so our higher content was in the phase of weak volumes. Looking at Clean Air EBIT on slide 9, adjusted EBIT was even with last year at $93 million, including $2 million in negative currency. Adjusted value-added EBIT margin increased 20 basis points to 9.9%. Now if we switch gears to Ride Performance starting on slide 10, where you can see total revenue up 3% with growth in light vehicle, commercial truck, and the aftermarket. We continue to implement our global cost leadership initiatives to drive costs out of the more than 94 million conventional shocks and struts we produce each year. At the same time, we're making progress on generating growth to our Monroe Intelligent Suspension advanced technology products. First, in North America, revenue was about even with a year ago. While we had strong revenue growth on commercial trucks and higher aftermarket sales, light vehicle revenue was down due to customer downtime on several platforms. In Europe, South America and India, Ride Performance revenue was up 5%. Increase was driven by new light vehicle programs in Europe, including Monroe Intelligent Suspension technologies on the VW Golf, and the Volvo XC90 and stronger volumes in India. Also contributing to the increase was higher South America light vehicle revenue due to new platforms and a positive mix in a very weak production environment. These positive drivers more than offset lower aftermarket sales in Europe, which continue to be impacted by the weak market conditions there. In the Asia Pacific segment, China drove a 15% increase in Ride Performance revenue due to higher light vehicle volumes and our strong platform mix of shock and elastomers programs with customers such as Ford, GM, and Hyundai. On slide 12, Ride Performance adjusted EBIT increased 2% to $56 million, including $6 million in negative currency. Adjusted EBIT margin was up 60 basis points to 9.1%. The improvement this quarter was driven by higher North America aftermarket sales and commercial truck revenue as well as global light vehicle revenue growth, in line with industry production. Additionally, our earnings continue to benefit from all of our cost leadership initiatives. In summary, we delivered a solid quarter and I'm pleased with our operational performance in terms of revenue growth and execution on our cost initiatives. I've just crossed 100 days with the Tenneco team. And in that time, I've been to almost 40 facilities across our global network. Based on what I've seen, it is very evident that we have outstanding people. And whether it's in our plants, engineering centers or the sales and support offices, we have a great team that works hard every day to drive our success. I thank them for the performance this quarter, and I'm even more excited about working with the team to accelerate achieving our objective. With that, I'll turn the call over to Ken.

[Kenneth R. Trammell:]

Thanks, Brian. Now, let's turn to some financial updates. I'm starting on slide 13. This quarter, we recorded $5 million of restructuring and related costs, $4 million relates to European cost – Europe restructuring actions, and $1 million was to close the just-in-time Clean Air facility in Australia. Other than the impact of currency, our run rate on savings from the European cost reduction initiative is essentially the same as the fourth quarter. We're still on track to reach our target annual savings rate of approximately $60 million, although the recent changes in exchange rates will likely have a translation impact on that number. Moving on to tax and interest expense on slide 14. Tax expense was $41 million for an effective tax rate of 38% in the quarter, similar to last year's first quarter rate. We still expect the full year effective tax rate before adjustments in the range of 33% to 36%. The range in the first quarter was above this range due to the mix of our earnings and jurisdictions where we cannot record a tax benefit. We anticipate that the second quarter tax rate before any adjustments should be within the full year range. Our first quarter net tax payments were zero due to a refund of $25 million. And during 2015, we continue to expect cash taxes in the range of $150 million to $175 million. Interest expense improved 16% year-over-year to $16 million in the quarter as a result of the refinancing completed in December when we extended maturities, increased the size of our senior secured credit facility and reduced the rates on both the credit facility and the senior unsecured note. We now expect annual interest expense will be between $70 million and $75 million in 2015. Turning to debt on slide 15. We ended the quarter with debt net of cash balances of $972 million, reflecting our strong cash performance this quarter. Our leverage ratio improved to 1.2 times compared with 1.4 times a year ago. Let me take a minute to point out that we adopted a new accounting standard in the first quarter that required deferred debt issuance cost to be reported as a reduction of debt rather than as an asset. The debt issuance cost that reduced balance sheet debt in the first quarter was $25 million. We also reclassified the prior year debt balances to be consistent, which reduced first quarter 2014 debt by $22 million. Now, let's take a closer look at cash flow on slide 16. As a reminder, the seasonality of our business creates a greater demand for working capital in the first quarter. This quarter, cash used in operations was $50 million, an improvement of $90 million compared with last year. We effectively managed our working capital as reflected in our working capital metrics. Overall, the net working capital days outstanding were flat year-over-year with day sales outstanding in accounts receivable excluding factoring at 64 days, inventory days on hand at 38 days, and days payable outstanding at 74 days. Additionally, lower payments for interest and taxes contributed to our operating cash flow performance. Capital investments to support our structural growth were $70 million in the quarter, similar to last year. We continue to expect capital investments between $300 million and $320 million in 2015. During the first quarter, we repurchased 192,000 shares of common stock for $11 million. And with that, I'll turn the call back over to Gregg.

[Gregg M. Sherrill:]

Thank you, Ken. Just to recap the first quarter from my perspective. I was very pleased with our record EBIT performance, a continuing year-over-year improvement in margins and our cash performance. Our underlying revenue growth was right on plan, and as I said at the outset, I believe much can be attributed to the balance we're achieving across two very strong product lines and our broad platform and customer base as well as geographic balance and in-market diversity. Our entire organization is aligned and has considerable momentum to continue delivering excellent performance, and I'm very proud of all our employees for their dedication and customer focus. Now, turning to our outlook for the second quarter on slide 18. We're confident in our foundation for continued growth built on the strength of our Clean Air and Ride Performance businesses. Our structural growth drivers are firmly established and we continue to improve operationally. In the second quarter, excluding currency, we expect to grow total revenue by 5% compared with a year ago. Based on current exchange rates, we anticipate a second quarter currency headwind of approximately 9%. For the full year, we're still comfortable with our original guidance of 5% to 8% revenue growth excluding currency. Now, taking a closer look at our revenue drivers beginning with Clean Air. In light vehicles, IHS Automotive is expecting a 3% rise in global industry production in the second quarter. We're well-positioned to leverage these stronger volumes with content on strong selling vehicles worldwide and continuing to ramp-up on new launches. In our Clean Air commercial truck and off-highway business, we see no change in our incremental content on programs to meet Tier 4 Final and Stage IV off-highway regulations in North America and Europe. The increased content applies to larger engines launched last year, and new launches this year for medium-sized diesel engines. We're also seeing a positive content contribution in China for NS4 on-road emission requirements. In Japan, we're launching new programs with Kubota for export to Europe and North America. Also in Europe, we're in the ramp-up of our AGCO off-highway business. Finally, in the second quarter, we will begin launching a full US-10 compliant system on a medium duty truck program in North America. As you can see, we have a lot of program activity with both our light vehicle and commercial truck and off-highway customers, and we're totally focused on making each launch successful. In Ride Performance, we're also well positioned to leverage higher global production volumes with our strong platform position and will continue to benefit from our Monroe Intelligent Suspension technologies on an increasing number of vehicle models. We also expect a solid contribution from the aftermarket in the second quarter led by strong North America Ride Performance sales. Aftermarket accounts for nearly 40% of total Ride Performance revenue, and the second quarter is seasonally our strongest quarter. We're also continuing to drive margin improvement with the number of Ride Performance initiatives that leverage the 94 million conventional shocks and struts that we produce each year. In closing, I want to emphasize that our entire organization is energized around our business and our future success. We delivered a solid quarter and we're focused on the second quarter and I'm confident we're on our way to a successful 2015 and a very bright future beyond. And with that, I'll open the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session of today's conference. Our first question comes from Brian Johnson. Sir, your line is now open.

[Brian Arthur Johnson:]

Thank you. I have a broader question. Could you just maybe remind us of the drivers for the second half 2015 acceleration and growth? Is it the production schedules on commercial in China or is it some of the newer technologies that you've talked about like currency, SCR on the emissions control side or on the Ride Performance side, the intelligent adjusting shocks?

[Gregg M. Sherrill:]

I think it's a little bit of all of that. I mean, we do anticipate continuing strength in China, particularly on the light vehicle side. Commercial vehicle is a little weak over there production wise, but our penetration continues to go up to meet the NS4 requirements. So we kind of have to wait and see how that turns out. But all-in-all, the cadence of the launch is, the Tier 4 Final large engine stuff kind of continues to be an incremental improvement, which we started launching last year. Probably the bigger uptick would be on the middle size engines as they ramp up throughout the year where they're really none last year and that ramp up is underway. And then we mentioned a couple of the new launches and Kubota and AGCO as those continue to build through the year. I'm not sure if I'm missing anything there, Ken.

[Kenneth R. Trammell:]

Yeah. I mean, Brian, the other point, obviously the light vehicle, which is the biggest driver of our revenue, if you look at the IHS projections for production, the year-over-year increase actually peaks in the third quarter. I mean, instead (20

[Brian Arthur Johnson:]

Okay. And one more question. On the Ride Performance margins in Europe, I know you're doing some restructuring in Spain. We did see at least last quarter, last half margins found year-over-year in Europe ride production. When do you think that turns around, when's the restructuring done and what the trajectory of margins in that segment?

[Kenneth R. Trammell:]

Also, Brian, as we've talked about for a while the restructuring in Europe is a bit more drawn (20

[Brian Arthur Johnson:]

Okay. But it sounds like in – on North America, you're seeing good demand in terms of orders and restocking the channels asking for coming into second quarter?

[Kenneth R. Trammell:]

Yeah. The aftermarket in North America continues to do quite well. Like you said, we haven't seen anything that indicates that out the door sales for our customers are a particular challenge. And in addition, like we've talked about for the last couple of quarters, we've got the incremental revenue associated with the CARQUEST helping us as well.

[Brian Arthur Johnson:]

Okay. Thank you.

[Operator:]

Our next question comes from Brett Hoselton. Sir, your line is now open.

[Brett D. Hoselton:]

Good morning.

[Gregg M. Sherrill:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Brett D. Hoselton:]

Couple of questions. Quick questions. Yeah. First of all, 2015 revenue guidance. Based on your guidance, as of the fourth quarter, it kind of seems like you're still targeting 5% to 8% growth. The Europe, the FX seems to be kind of in that 7% headwind range for the full year. Ken, I presume that you've kind of updated the numbers. Is that in line with what you're thinking very roughly at this point in time?

[Kenneth R. Trammell:]

Yeah. I mean, the FX piece, Brett, I wish I could predict, but I guess if I could then I probably wouldn't be talking to you on the phone today. Certainly, we've seen the dollar strengthen throughout the first quarter. I think when we started the first quarter, in terms of our first quarter revenues, we were expecting somewhere in the 4% currency headwind. And as we talked about it, it went wound up being 7%. So certainly that, if it stays where it is, we're probably somewhere in that range, maybe slightly higher as we move through the rest of the year, but we're waiting to see what happens with the currency exchange rates.

[Brett D. Hoselton:]

Perfect. And then – and I apologize. I know Brian asked the question about revenue and I kind of got distracted, so it's maybe a bit of a repeat, but I was hoping you could dial in a little bit more closely on the commercial truck and off-highway outlook for the year. I think during the last call, you talked about kind of all-in your expectations were kind of flat to up single-digits including FX and other things along those lines, seems like FX might be a little bit greater headwind. What's your general expectations for the commercial truck and off-highway? You're up 1% in the first quarter. Is the thought that it's going to be kind of just up a little bit through the remaining three quarters, or is there some reason to believe that it's going to accelerate or possibly there's some reason to believe that it's going to actually decelerate and maybe start to decline through the remainder of the year?

[Gregg M. Sherrill:]

It could be a little bit lumpy as we go through the year. I don't think we see any change to the original outlook we gave you, the 5% to 8% total revenue growth, whatever the commercial truck piece that was inside of that. Obviously, we're up just 1% in the first quarter. There's a little bit of pressure in the second quarter. We know China's production levels on trucks are down like 30%, I believe, this is the latest forecast, and that's what they were down in the first quarter. And China is hard to predict, so that's kind of remains to be seen as we go through the year on the production side. But like I said, the NS4 penetration continues to improve. By that, I mean, the content growth we're getting is they're ordering more and more of a percent of the trucks with that content. And then we don't see any change to the Tier 4 Final, Stage IV ramp through the year from what we saw at the beginning of the year. And we also mentioned the launches that are ramping up on some specific customers, particularly Kubota, AGCO and one that we can't name yet, but it's here in North America on medium-duty trucks, which will help as we go through the year as well, but we just don't see any change right now. It's still going to be a very challenging year. The markets are weak; we know that. We said that at the outset we're not seeing any change. Overall, to that, just a couple regions maybe that are at least in the first quarter a little bit weaker than we anticipated and that would be China on-road truck and Brazil on-road truck.

[Brett D. Hoselton:]

Excellent. Gregg, thank you very much. Ken, thank you.

[Gregg M. Sherrill:]

Thanks, Brett.

[Operator:]

All right. Our next question comes from Richard Hilgert. Sir, your line is now open.

[Richard John Hilgert:]

Thanks. Good morning, everyone. Just a couple of questions on margin. It looks like Asia Pacific really took off this quarter on the margins versus the first quarter of last year. And I was wondering can you give us a little bit of color of what might have been happening in that region that brought that up. Was it just operating leverage and the amount of volume that you're putting through there growing or is there something else going on in the region that brought the margins up?

[Kenneth R. Trammell:]

Yeah, I mean, Richard, you really hit the nail in the head. I mean, the volumes are strong in China. You'll recall, a few years ago, we had to add some additional capacity to deal with the growth in China and we've certainly been filling that capacity up. So we've got some fixed cost absorption that helps us and the market remained strong. And we've got a great platform mix on both the Clean Air and the Ride Performance side, the ones that tend to sell well in China. And so we have continued to see our revenue grow faster than the light vehicle production levels in China as well. So all that works in our favor.

[Richard John Hilgert:]

Okay. Great. Yeah. And then Ride Performance, Ride Control in North America also up over about 170 basis points EBITDA margin. I was wondering is that more of the higher priced electronically-controlled suspension product or is that more aftermarket? What's going on there?

[Kenneth R. Trammell:]

So, I mean, Richard, remember that the electronically-controlled components are really only built and sold in Europe at this point. We'd certainly love to see more penetration in North America, but that hasn't occurred. So it's really Europe that sees any benefit from the Monroe Intelligent Suspension. In the North America Ride business, again, we've got some good production levels, we've got manufacturing improvements on the original equipment side and the aftermarket continues to do well also. So all that is a really positive drive on a year-over-year basis.

[Richard John Hilgert:]

Okay. And then with the $8 million in EBIT from currency in the margin, excluding the currency impact, would you've been about flat year-over-year EPS including the tax?

[Kenneth R. Trammell:]

Yeah. So $8 million of EBIT is about $0.08 of EPS, if that's your question.

[Richard John Hilgert:]

Yeah. Okay. So...

[Kenneth R. Trammell:]

Right.

[Richard John Hilgert:]

...but that's including tax, too, that's after-tax, right?

[Kenneth R. Trammell:]

Yeah. That's right. After-tax, right? So we got about 60 million shares outstanding. So if you take an after-tax number on $8 million, you'd get to about a $0.01 for every million in EBIT.

[Richard John Hilgert:]

Okay. Great. Thanks, guys. Appreciate it.

[Operator:]

All right. And our next question comes from Colin Langan. Sir, your line is now open.

[Colin Michael Langan:]

Great. Thank you for taking my question. First, can you give any color on you mentioned there is a higher take rate in China on truck. I mean, any sense of the penetration and how you expect that to trend, and any color on your share on that market as it's starting to ramp-up?

[Kenneth R. Trammell:]

Yeah, Colin. So we said at the beginning of the year that we were anticipating something I think around 40%, 45% penetration rate or installation rate whatever you want to call it. I don't know that we're much off from that at least at this point. I can't predict what's going to happen for the rest of the year. But we are seeing the content additions that we expected with the customers that we expected. So that continues to go as well as we could expect, especially in the phase of the weak volumes that we're seeing right now in China for the commercial truck business.

[Colin Michael Langan:]

And any color on your share in China commercial truck?

[Kenneth R. Trammell:]

So, you know, we've had the list of our customers in our investor presentation for quite a while. It stays the same. So really no change in what we've talked about before, Colin.

[Colin Michael Langan:]

Okay. And...

[Gregg M. Sherrill:]

We're very well positioned...

[Kenneth R. Trammell:]

Absolutely.

[Gregg M. Sherrill:]

...with those customers, and extremely pleased. Share is a little difficult to actually calculate right now, because different customers have different penetration rates of even taking this product, and we don't know what some of the others would be. We would only know our own customers. So we kind of, we're not going to really give you a share or percent right now, but it's positive, we know that. And the take rate continues to go up, and it's – we're extremely well positioned with the number of truck companies that do represent a huge share of the China market ultimately.

[Kenneth R. Trammell:]

Yeah, Colin, qualitatively, because I don't have a quantitative number to give you for the reasons that Gregg said. We believe, we've got the larger share of the commercial truck after treatment market in China. We're number one.

[Colin Michael Langan:]

Perfect. Can you give an update on Navistar, the roll off there? Is that – I imagine that was a headwind this quarter. When does that do we start announcing year-over-year headwind, that roll off?

[Kenneth R. Trammell:]

Yeah. So, Colin, that will continue to roll off slowly. I think what we said in the fourth quarter was we didn't expect to have to talk about it again. Maybe that's the best way to put it.

[Gregg M. Sherrill:]

That's right. It's a small effect now.

[Kenneth R. Trammell:]

Well, lot of diminishing returns.

[Colin Michael Langan:]

Okay. And just one last more longer term question. Can you give any color on, when we look at North America Clean Air margins versus Europe, South America and India, why does these trucks so different? I mean, can you get those margins in Europe, South America and India to the North America level over long-term or if there's just some structural issue that keeps those lower?

[Gregg M. Sherrill:]

Yeah. The way I've always looked at that is on a similar platform basis. I see no reason that margins can't be similar between the European market and North American market. In other words, a C-Class platform or a luxury vehicle platform or whatever, the mix will always be stronger in North America towards the higher profitable, the light trucks for example, they don't have really in Europe. So from a mix point of view, North America, well, I think it's pretty safe to say will always be pretty favorable there and that would account for higher margins than our European business.

[Colin Michael Langan:]

Okay. All right. Thank you very much.

[Operator:]

And our next question comes from Rich Kwas. Your line is now open.

[Rich M. Kwas:]

Hi. Good morning, everyone.

[Gregg M. Sherrill:]

Morning.

[Kenneth R. Trammell:]

Morning.

[Rich M. Kwas:]

So on the – on China commercial, 30% down Q1, something similar for Q2. Ken or Gregg, what's the embedded outlook for the balance of your second half of the year in the 5% to 8% organic growth for China commercial?

[Kenneth R. Trammell:]

So, Richard, at the beginning of the year, we expected China to be down a little bit to maybe as good as flat year-over-year. So clearly, it's down some. On an overall basis though, I mean, we've seen platforms including in China that are doing better on the light vehicle side we had anticipated. So the 5% to 8%, that's why we said again we're very comfortable with where we are on the 5% to 8% excluding currency. It's really the balance of the business; light vehicle, commercial truck, off-highway and the aftermarket, they get this to that 5% to 8%.

[Rich M. Kwas:]

But is the commercial – China Commercial, does it get less worse as the year goes on?

[Kenneth R. Trammell:]

Certainly are expecting based on the projections we've seen from some third-parties that the second half of the year is better than the first half of the year. I just can't tell you for sure how accurate those estimates are at this point.

[Rich M. Kwas:]

But it's fair to say relative to February when you reported Q4, the China commercial is worse for the full year being made up by strength in light vehicle, is that the way to think about it?

[Gregg M. Sherrill:]

That's probably fare enough.

[Kenneth R. Trammell:]

Yep.

[Rich M. Kwas:]

Okay. And then, Ken, on the buyback, there's a little bit of buyback this quarter. You've talked about funding in for the free cash flow. Your free cash flow – your cash generation is somewhat lumpy seasonal. So how should we think about deploying capital going forward here? Can we think of you being a little more aggressive potentially even when there's quarters where cash flow generation is modest? How should we think about that considering in the valuation of the stock, et cetera?

[Kenneth R. Trammell:]

Yeah. So, Rich, we – I mean, we think about all of our investment opportunities, including share repurchases over the long-term, right? Remember that the goal of the repurchase program is really to return value to shareholders, but after we met all other investment needs. So growth in the business, opportunities for new business, but also maintaining the balance sheet strength that we've got. You saw us in the first quarter we are able to maintain and actually slightly improve that leverage ratio, but we do intent to use, like you said, our free cash flow. So I would expect over the next three years, you would see the buyback opportunity fairly mirror what our overall free cash flow for those three years is.

[Rich M. Kwas:]

But do we think of it as being lumpy in the seasonality with the free cash flow where Q4 is typically very strong, Q2 is modestly positive and you have outflows in Q1? Do we think of it that way in terms of mapping it or --

[Kenneth R. Trammell:]

Rich, we haven't tried to talk about what the quarterly plans are, what the quarterly decisions will be to repurchase shares, but we've just tried to kind of focus everybody on the longer term. So I don't have any answer to your quarterly question.

[Rich M. Kwas:]

Okay. All right. Thank you.

[Operator:]

Next question comes from Joe Spak. Sir, your line is now open.

[Joseph R. Spak:]

Good morning, everyone. First of all, thanks for the disclosure on organic growth on commercial vehicles in the quarter. Is it possible to get that what you think that was for all of 2014 as well?

[Gregg M. Sherrill:]

The organic growth for commercial?

[Joseph R. Spak:]

Yeah. Because you said you were saying plus 1%, but then obviously with currency, I think it was actually down 7%. So – and I think in the 2014, you've reported it all in. So just wanted to get any sense of what do you think that was in 2014?

[Kenneth R. Trammell:]

So the percentages we gave you in 2014, which I don't remember off the top of my head right now, Joe, were – I mean, the currency was not a big impact in 2014, right?

[Joseph R. Spak:]

Okay. Okay.

[Kenneth R. Trammell:]

The currency didn't start to weaken until really in the fourth quarter.

[Joseph R. Spak:]

Okay. Okay. So then my next question would be, on the non-controlling interest, which is, I guess, part of your sort of little preannouncement as well, that was up 75%, my understanding is that's mostly China. So I mean, is there something unusual there or is it a fair read that your China income was up 75%?

[Kenneth R. Trammell:]

So, Joe, I mean just a quick reminder, right, the non-controlling interest is the share of our joint ventures which are primarily in China.

[Joseph R. Spak:]

Okay.

[Kenneth R. Trammell:]

That's owned by minority interest owners, right. And that ranges, the percentage ranges from – our ownership percentage ranges from as low as 51% to as high as probably 65% or 70%. So, as China income changes, that's the primary driver of the change in non-controlling interest. Asia Pacific is primarily driven by what happens in China. Thailand, Korea, Japan are in there; those are fairly small. Australia used to be larger. And as we've talked about several times over the last couple of years is continuing to shrink simply because of the fact that the original equipment manufacturers are exiting Australia. So what you see in the Asia Pacific results is obviously primarily driven by what goes on in China. When you're thinking about non-controlling interest, it's movement, it's change, like we said number of times before really should be related to what happens in the Asia Pac EBIT numbers.

[Joseph R. Spak:]

Okay. So that's – so I mean when you talked about obviously some good ramp-up in China, so through those two metrics that's how we're seeing?

[Gregg M. Sherrill:]

Yeah. And I also think if you looked at our non-controlling interest expense in the fourth quarter of last year, we're not that different from it. So I mean, if you look at on our run rate basis, it probably built through the year, I didn't look at it quarter-by-quarter. But the first quarter of last year to the fourth quarter, it had substantially increased, because our earnings had substantially increased and that's just continuing into this year. We didn't reset in the first quarter, if you will.

[Joseph R. Spak:]

Right. Okay. And then last question is I'm sure you guys saw the ICCT. I guess, it was out there saying some of the real world's clean diesel results weren't as good as maybe some of the test results. And I guess you could sort of read that two ways. One is sort of the continued shift from diesel maybe to gas in the light vehicle side or that automakers need to turn to better NOx equipment or more robust NOx equipment. So I guess, just as – and especially as we sort of move towards harmonized testing I think finalization later this year maybe just some updated thoughts on how you're thinking about how that could impact your business.

[Gregg M. Sherrill:]

First off, you're absolutely right, I've read some of those reports. And it's probably being addressed customer by customer a little bit differently. I mean, I haven't – there's certainly not been a direct impact on our business. It's really a matter of the test regime as I understand it. So everyone meets the test regime as it's designed when you launch the vehicle and then there is the so-called how well does that test regime actually reflect, as you'd pointed out, real world driving conditions, which may in fact drive some changes to the test regime, not clear to me yet, but I'm sure they're studying all of that. And if anything, I mean, we can meet it. We know that. We got plenty of room to meet any of those real world driving, I really wanted to (40

[Joseph R. Spak:]

Okay. Thanks a lot, guys.

[Operator:]

Next question comes from Ryan Brinkman. Sir, your line is now open.

[Ryan J. Brinkman:]

Hi. Thanks for taking my question. Just curious, firstly, what you're seeing in terms of commodity prices, both the impact to 1Q and the full year? I understand your precious metals are essentially entirely pass-through, but I would expect they also have some decent non-precious metal exposure there, particularly on the ride control side. So has it been helping and should we expect that tailwind to perhaps strengthen some? How to think about that?

[Kenneth R. Trammell:]

So, Ryan, commodities are certainly favorable. Remember that our biggest buy, and I'm going to – like you said, I'm going to take the substrate components out, because the precious metal is literally a pass-through. But our biggest buy is steel, a lot of number of different grades of steel. The most vulnerable piece of that is the alloy components of the stainless steel that we buy, and it's mostly chromium alloy in North America, mostly nickel alloy in Europe. And remember that over the course of the last seven years or eight years, as we've seen volatility in that, we work very hard to get arrangements so that we get changes in our pricing associated with that. Therefore, as those go both up and down, they really have much less of an impact on our margins. We are anticipating – seen a little bit of good news, but like I said, we've also got some arrangements with our customers that require a good bit of that to go back to them.

[Ryan J. Brinkman:]

Okay, great. And then can you just help to quantify you discussed it a bit, but maybe better help frame your exposure to South America, the various countries and currencies there, maybe how much of a drag was it this quarter? And is it still the case that you're growing there because of the new content being added or does the magnitude of industry decline now and you're just having become more established there in recent years mean that this is a drag to organic growth now?

[Kenneth R. Trammell:]

So, most of our business in South America exist in Brazil and Argentina. We don't really have anything in Venezuela, which seems to be one that's gotten the most press. So we're more exposed to what happens to Brazil and Argentina. On content, remember that the regulations changed on the commercial truck side back in 2012. So it's not really a content issue, it's just the movement of the overall market, and also there's not been a recent change in light vehicle emission regulations in South America either. So right now, it's really what's happening with the production levels. That market, obviously, as we've talked about for the last several quarters is – has been very weak. Hopefully, we see some good news later this year, maybe third quarter or fourth quarter, based on some of the projections that I've seen. But at this point, it's just an economic issue with what's going on in the Brazil and Argentina economies.

[Ryan J. Brinkman:]

Okay. Okay. And then Joe asked about CV growth by your metric in 2014. What about in the first quarter of 2015 that we could compare the 1% organic revenue growth to? So did it decline 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, I don't know it's a lot right? And then just how to think about commercial vehicle production growth as the year progresses and then your performance relative to that growth or contraction?

[Kenneth R. Trammell:]

Yeah. So I don't have the currency impact by individual platform or segmented platform to give you, but I mean, obviously, like we said, currency is a headwind and it's probably not that much different for the commercial truck off-highway business than it is for the business as a whole. In terms of penetration, I mean, you've seen the list of our customers. That's a pretty extensive list. And we're going to – we will continue to add the content that we anticipated. The good news is, although we're in a downturn right now, I mean, obviously, the next move should be up for overall volumes. By the time that happens, we should have all the content installed and so we should see some pretty good recovery.

[Ryan J. Brinkman:]

Okay, great. And just last question. On the last I guess on the 4Q call there was some discussion of the F-150 changeover. And according to IHS, it looks like it was at least a similarly big drag in 1Q, something like down 41% year-over-year. So how has your business there been tracking? How do you expect it to track going forward? And is that – what is your exposure there? It's large, right? So as you go from being down something like 40% to being up in the back-half of the year, does that kind of de-risk this improvement in your organic revenue growth from like 4% 1Q, 5% in 2Q to 5% to 8% for the full year? Is that meaningful for you?

[Brian J. Kesseler:]

Yeah. This is Brian. The F-150 program was obviously a large program for us. The numbers you recalled in Q1 were right. I mean, we saw minus 41% year-on-year. Q2, the IHS numbers say will be slightly lower minus 9% production volume. But then that starts picking up in Q3 about 40% and 76% in Q4 as they come right out of that changeover. So that will obviously sequentially help our business there.

[Kenneth R. Trammell:]

Yeah. The F-150s are sixth largest platform and it's about 3% of revenues.

[Ryan J. Brinkman:]

Right. Okay. So, yeah, I mean, if it's down 40%, I mean that's -

[Kenneth R. Trammell:]

(45

[Ryan J. Brinkman:]

...drag here whole organic revenue growth. Okay. Very helpful. Thanks so much.

[Brian J. Kesseler:]

Thank you.

[Operator:]

Okay. Next question comes from Pat Arshall (46

[Unknown Speaker:]

Hi. Yeah. Good morning.

[Gregg M. Sherrill:]

Good morning.

[Unknown Speaker:]

Just two left for me. Can you just remind us, like, in terms of the off-highway stuff, what's your relative exposure in ag versus construction? I don't know if you'd sort of mentioned that previously, but I would guess construction has obviously more material just given your presence with Cat, but you've mentioned some pretty big business wins with some of the ag guys as well. So I wanted a little bit of perspective on that.

[Kenneth R. Trammell:]

Yeah. So, Pat (46

[Unknown Speaker:]

Okay. And just maybe building off that, I mean, any color at least from those contracts where there is clear visibility is there any kind of color you can give us on the end markets? What seems to be discussed out there right now is that construction is actually picking up a little bit although and ag remains weak, but I don't know what you guys are seeing on the ground.

[Gregg M. Sherrill:]

If you look at all of those markets, the two biggest for us clearly are construction and agriculture. We don't know the exact split here this morning. Construction is probably slightly bigger, but agriculture, we're still very significantly exposed to through Deere and of course the building business at AGCO, right? Then if you get into the other markets, which are smaller, the forestry, the – and for us mining, because mining is mainly done in regions that aren't even regulated sort of et cetera. So we're going to be pretty heavily exposed to the construction and ag. There has been a little bit of uptick. I don't know if it's just noise in the system or not right now that construction has picked up a tad. We don't really see it in the production schedules at this point. It could be positive news. We'll just have to wait and see.

[Unknown Speaker:]

Okay. I appreciate that. Last one for me is you manage to put together a pretty good margin performance despite the headwinds. How do you see, I think, it's 40 basis points on value-add up year-on-year. I know you guys don't give specific margin guidance for the year, but how sustainable is that, what are the – in subsequent quarters what are the main drivers to continue to see some kind of an expansion despite what are some challenging end markets?

[Gregg M. Sherrill:]

Yeah. I think the drivers is just momentum and what we've been doing. We do continue to launch platforms in both light vehicle and certainly commercial on-road and off-road that are positive to our margin. So that continues and you kind of heard us talk a little bit about the cadence of that this morning. Strong North American aftermarket helps certainly us drive our margins. And then I think we're just getting a lot of traction under our overall cost focus initiatives that we've been talking about now for several quarters and you're seeing us drive bottom line performance there as well. So I think it's just momentum that we've got and we still see runway left in driving those margins. And again, I think we talked back in February it was our anticipation that we would drive margin improvement this year. Again, we don't say that quarter to quarter, because various things can happen noise in the system quarterly, but over the course of the year, we still expect to drive margins and we're very pleased that we did in the first quarter so.

[Unknown Speaker:]

Okay. Great. That's all I had. Thanks for taking my question.

[Gregg M. Sherrill:]

Thank you.

[Kenneth R. Trammell:]

Thanks.

[Operator:]

Our next question comes from Brian Sponheimer. Sir, your line is now open.

[Brian C. Sponheimer:]

Hi. Good morning, guys.

[Gregg M. Sherrill:]

Morning.

[Kenneth R. Trammell:]

Morning.

[Brian C. Sponheimer:]

Just one question on the aftermarket side. Any change – you mentioned the CARQUEST business being an additional set of revenues for you. Any change in terms coming from advance that could potentially flow-through from a working capital perspective as we look out the next 9 months to 12 months?

[Kenneth R. Trammell:]

No, Brian. Don't expect anything there.

[Brian C. Sponheimer:]

All right. All right. Thank you very much.

[Gregg M. Sherrill:]

Thank you.

[Operator:]

There's no further questions at this time. Next question comes from Emmanuel Rosner. Sir, your line is now open.

[Emmanuel Rosner:]

Hi. Good morning, everybody.

[Kenneth R. Trammell:]

Good morning.

[Gregg M. Sherrill:]

Morning.

[Emmanuel Rosner:]

Just couple of points of clarification. On the F-150, beyond the improved production cadence in the second half, do you also have increased content versus the old platform?

[Gregg M. Sherrill:]

I think we said before we have pretty much the same content versus the old platform.

[Kenneth R. Trammell:]

Right.

[Emmanuel Rosner:]

Okay. And then also just a final point on the commercial vehicle outlook for the rest of the year. So you gave a lot of good drivers for increased content and new launches. But at the same time, some of the markets obviously are quite weak, particularly in China. Do you still believe you can do the strong year-over-year revenue growth specifically in commercial truck and off-highway that was part of your February outlook or do you think that you can get through overall the same goal for the company, but it might be more from light and less from commercial?

[Gregg M. Sherrill:]

We still see that we're going to hear our total revenue, including aftermarket, that's all our markets like, commercial, on-road, off-road 5% to 8% for the year. As you go through the years, there can always be some gives and takes, but we don't see a great deal of difference than what we saw back in February when we gave that guidance. We see all of them help and contribute a little bit as we go through the year, and, yeah, so far this year, as we've said, there's been a little bit of unexpected weakness or more than normal unexpected weakness in the China truck and Brazil markets. But all in all, we don't see it affecting our 5% to 8% overall goal.

[Emmanuel Rosner:]

Okay. And then one last one from me. Just a little bit longer term I guess beyond this year. When I look at some of these regulatory drivers of your growth in the commercial and off-highway business, a lot of these regulations have sort of kicked in and being phased in between last year and this year in the U.S., in Europe, in China and obviously you're seeing the benefit of that in your organic growth. When we look beyond 2015, what are the big pieces of what we should focus on – what will move the needle for your commercial and off-highway revenue geographically and from a regulation point of view?

[Gregg M. Sherrill:]

As you look beyond 2015, and again we're going to talk China for just a minute, because particularly in Beijing, where they could be moving on to Beijing 5 and Beijing 6 and then to the extent that that might drag the rest of the country in that way and we know that China is putting an incredible amount of attention from the central government point of view on their air pollution problem. So we continue to see potential, just because we're getting NS4 penetration now, it's very positive thing, they're not going to continue to increment those regulations to really get out the particular matter even more so than they are right now and continue to drive on NOx remembering that they've had a big headwind as they've tried to get their fuel at the quality level that they need and they're getting closer and closer there as well. So there's a lot of things going on in China. But from a regulatory point of view also, beginning in 2017, moving back to the light vehicle side of the business, the U.S. fed Tier 3, which phases in over a number of years, will drive some more content as well as what we're seeing in the Euro 6c light vehicle sort of a similar thing going on in Europe. So, yeah, there's still regulatory content coming in. We've just come through a heavy period of diesel regulation, and now there's kind of a look back again at regulation driving not only continue to drive diesel, but gasoline engines as well.

[Kenneth R. Trammell:]

Operator?

[Operator:]

Yes, sir.

[Kenneth R. Trammell:]

Can we cancel – can we complete the call now, please?

[Operator:]

Okay. Sure. So we show no further questions at this time.

[Linae Golla:]

Thank you. So then this concludes our call. An audio replay will be available on our 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 888-324-9357. For those outside North America, the number is 773-756-0169. This playback information is found in our press release. Thank you for joining us today.

[Operator:]

All right. And that concludes today's conference. Thank for your participation. You may disconnect.