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Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Good morning. Welcome to Tenneco Second Quarter 2015 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 begin and turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

[Linae Golla:]

Thank you. Good morning and welcome. This morning, we released our earnings and related financial information. On our call today Gregg Sherrill, Chairman and CEO; Brian Kesseler, Chief Operating Officer; Ken Trammell, Chief Financial Officer, will take you through the 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 up the call for questions. Before we begin, I need to tell you that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachments. The earnings release and attachments can be found on our website. Additionally, some of our comments 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'll turn the call over to Gregg.

[Gregg M. Sherrill:]

Thank you, Linae, and good morning, everyone. We've reached the midpoint of the year, and I'm pleased with our progress including solid results in the second quarter with continued margin improvement and good cash performance. And excluding currency, our revenue in light vehicle, commercial truck, and off-highway and the aftermarket all outpaced industry growth rates. Our organization is strongly aligned on the strategy we announced nearly three years ago, and we're seeing the strength of two complementary businesses, Clean Air and Ride Performance, providing balance across our operations and driving results with organic growth, counter cyclicality and cash generation to fund future growth. Our second quarter results reflect the strength of Tenneco's structural growth drivers, including higher light vehicle industry production, which we outpaced due to our strong and diversified customer base, built-in organic growth with emissions regulations around the world, driving incremental content on off-highway programs in North America, Europe and Japan, and on light vehicle and commercial truck programs in China and Europe. Increasing demand for MONROE Intelligent Suspension technologies, this quarter we launched three new models with these products. And a strong global aftermarket business, which accounted for about 40% of our Ride Performance revenues in the quarter, with the strong contribution to margins and our cash performance. This quarter, we were awarded 41 new programs with 14 customers, demonstrating Tenneco's product leadership and the position we have with our customers, as a leading supplier of both Clean Air and Ride Performance solutions. We have the technology and capabilities to provide our customers with the right solutions at the right time, all delivered through an outstanding global engineering and manufacturing network. These strengths distinguish Tenneco and put us in an excellent position to accelerate growth and increase shareholder value. Let's take a long through look at this quarter's results. On slide five, you can see total revenue was up 3%, excluding a substantial impact from currency of $176 million or 8%. Unpacking this a little further and using constant currency, light vehicle revenue increased 4%, led by the Europe, South America and India segment, where we launched and are ramping up on a number of new platforms. Global aftermarket revenue was up 6%, a very positive result in a seasonally strong quarter for aftermarket sales. Specifically, we had excellent sales in both product lines in North America and strong Ride Performance sales in South America. We also outperformed industry production in our commercial truck and off-highway business where globally unit demand was down about 25% year-over-year. We offset a good portion of this volume weakness with added content on off-road programs with Caterpillar, John Deere, AGCO and Kubota to meet Tier 4 Final and Stage IV off-highway regulations. On the truck side, we added content to meet Euro 6 requirements in Europe on programs launched last year and we added content in China where compliance is running at about 45%. As a result, our commercial truck and off-highway total revenue was down 7% compared with the 25% unit volume decline. On a value-add basis, commercial truck and off-highway revenue was down 4%, essentially all on volume declines in China. Revenues were basically flat in the North America and Europe, South America and India segments. Turning to earnings on slide six. Adjusted EBIT in the quarter was $162 million, including $17 million in unfavorable currency. Our earnings performance was driven by the strength of our light vehicle business, incremental content on commercial truck and off-highway programs and strong aftermarket sales. I'm also pleased to report that our margin performance in the quarter represents the ninth consecutive quarter of margin improvement. Value-add adjusted EBIT margin was up 30 basis points to 9.9% as we converted on revenues and benefited from restructuring actions and cost leadership initiatives. Notably, our margin results also include launch and start-up costs associated with two new Clean Air plants and a major plant expansion, all for significant incremental new business. We expect these costs will sequentially improve over the next several quarters as these plants ramp up. Now turning to our cash performance, we had an $18 million improvement in cash flow versus a year ago, primarily driven by working capital improvements. I also want to highlight that our debt, net debt and leverage ratios were record lows for the quarter. Over the last several years, we strengthened our balance sheet while investing and continuing to grow our business and putting Tenneco in an excellent position in terms of capital allocation strategy to drive shareholder value. To that end with our continuing strong performance and in light of current sector valuations, we will accelerate our share repurchase program. As a result, we would now anticipate completing it by the end of next year, one year earlier than previously announced. And finally, at the end of the day, Tenneco's success is driven by our 29,000 employees around the world, who are committed to delivering on our plan for profitable growth. They are the backbone of everything we do and I want to thank them for another excellent quarter. And with that, I'll turn the call over to Brian.

[Brian J. Kesseler:]

Thanks, Gregg. Good morning. Just a reminder, as we've taken more detailed look at our operational performance, all the revenues are excluding impact of currency. Starting on slide seven, Clean Air value-add revenue was up 1% in the quarter, driven by our light vehicle business in Europe, South America and India and aftermarket gains in North America. Breaking down global Clean Air value-add revenue by segment, North America was up 2% with a significant increase in aftermarket sales. Light vehicle revenue was about even versus last year, largely impacted by lower production volumes on the Ford F-150. Off-highway revenue was essentially flat, as new content on Caterpillar and John Deere programs offset a unit demand decline of about 30%. In the Europe, South America and India, Clean Air segment, value-add revenue increased 6% on a strong light vehicle volumes, including the ramp-up on programs, such as the VW Golf and Daimler A and B-class, and Land Rover L405 and L495 platforms in Europe. Similar to North America, commercial truck and off-highway revenues were about flat with incremental content offsetting the unit demand decline of about 20%, which included a 47% decline in units in South America. And the aftermarket revenue was impacted by a continuing weak market conditions throughout Europe. Turning to Asia-Pacific, Clean Air value-add revenue was down 8%. The added revenue from increased compliance with on-road emissions regulation was more than offset by lower light vehicle volumes and a 33% decline in commercial truck production. Looking at Clean Air EBIT on slide nine, adjusted EBIT was $108 million, including the $3 million impact to negative currency, compared with $120 million last year. Adjusted value-add EBIT margin was 11.2%, reflecting higher light vehicle volumes on lower commercial truck and off-highway volumes. The Clean Air results also include costs associated with the launch and ramp up of new plants in the United States and Poland, and a major plant expansion in Wales, all to support growth on significant incremental new business. As Gregg mentioned, we expect sequential improvement over the next several quarters, as these plants continue to ramp up to full production levels. Turning to Ride Performance, starting on slide 10, total revenue was up 5% this quarter. Breaking down revenue by segment, North America increased 1% on strong aftermarket sales, supported by the CARQUEST business coming online, and higher commercial truck revenue together offsetting lower light vehicle revenue due to downtime with a couple of customers. In the Europe, South America and India's segment, Ride Performance revenue was up 10%, driven by higher light vehicle volumes and new programs. In Europe, we benefited from MONROE Intelligent Suspension technologies launching and ramping up on light vehicles, including the Volvo XC90 and the new Renault Crossover. Higher aftermarket sales in South America and Europe also contributed revenue growth in this segment. And finally, Asia Pacific Ride Performance revenue increased 5%, mainly due to an increase in China light vehicle revenue, driven by higher volumes and programs with Ford, General Motors and Hyundai. On slide 12, Ride Performance adjusted EBIT increased to $77 million, including $14 million in negative currency, and adjusted EBIT margin was up 80 basis points to 11.5%. The improvement was driven by higher aftermarket sales in North America, South America and Europe; higher light vehicle volumes and the improvements were seen from cost leadership and restructuring activities. In summary, we continue to deliver solid results, while working through some down markets and strong currency headwinds. We're staying focused on our growth plans and executing on the Clean Air and Ride Performance cost initiatives to continue improving profitability in both businesses. With that, I'll turn the call over to Ken.

[Kenneth R. Trammell:]

Thanks, Brian. Now let's turn to some financial updates on slide 13. We recorded $7 million of restructuring and related cost this quarter, of which $6 million was in Ride Performance and the remainder in Clean Air. As an update, on our European restructuring program, we reached a savings run rate of $9 million in the second quarter on actions completed to-date. We continue to expect to reach our targeted annual savings rate during 2016, and at today's exchange rates that target converts to $55 million. Additionally, two days ago, we announced our intention to discontinue our Marzocchi Suspension business by year-end as we continue to optimize our Ride Performance business globally. The Marzocchi business had revenues of $7 million in the second quarter. With this action, we expect to improve our financial results by approximately $7 million annually beginning in 2016. Moving on to tax and interest expense on slide 14. Tax expense was $46 million on adjusted results in the second quarter for an effective tax rate of 32% in the quarter and 34% year-to-date. We still expect a full year effective tax rate before adjustments in the range of 33% to 36% and continue to expect cash taxes in the range of $150 million to $175 million in 2015. In the second quarter, interest expense was $17 million, down by $2 million as a result of the refinancing completed last December. Our annual interest expense should be around $70 million this year. Turning to debt on slide 15, we ended the quarter with debt, net of cash balances of $978 million, and a leverage ratio of 1.3 times. Moving on to cash flow on slide 16, in the second quarter, we generated cash from operations of $132 million. The increase compared to a year ago reflects strong working capital management including inventory improvements and lower cash tax payments. We measure our effectiveness in managing working capital through our days metrics. Overall days sales outstanding and accounts receivable excluding factoring were even with last year at 62 days. Inventory days on hand improved one day to 36 days, and days payable outstanding fell two days to 71 days. Capital investments to support our structural growth were $80 million in the quarter, that's in-line with last year, and we expect that capital expenditures will be between $300 million and $320 million in 2015. During the second quarter, we repurchased 556,000 shares of common stock for $33 million. Year-to-date, we have repurchased 748,000 shares for $44 million. To reiterate what Gregg said, we are accelerating our share repurchase program, and anticipate completing it by the end of 2016, based on our performance, current industry production forecasts, and what we anticipate we'll need in terms of capital spending and working capital to continue funding growth. And with that, I'll turn the call back over to Gregg.

[Gregg M. Sherrill:]

Thank you, Ken. Now turning to our outlook for the third quarter. We expect third quarter total revenue growth of 6% excluding a currency headwind of approximately 7% based on current exchange rates. We're well positioned to leverage higher industry light vehicle volumes with IHS Automotive predicting a 4% increase in global light vehicle production. We're launching and ramping up on a number of new programs in the third quarter including the continued ramp up on the new Ford-F1 50. We don't expect any change in the production environment for commercial truck and off-highway equipment in the third quarter. Although volumes remain weak, we will continue to add new content to meet Tier 4 Final and Stage IV regulations on off-highway programs, and to meet Euro 6 regulations on commercial trucks and passenger vehicles in Europe. Additionally, in North America, we'll ramp-up on full US-10 compliant system on a medium-duty truck program. And last, the global aftermarket is an important contributor to our Ride Performance results and we expect a strong performance in the third quarter. As we're now at the midpoint in the year, it's a good time to check how we're doing against the annual revenue outlook, we provided at the beginning of the year, including some of the specific content launches we highlighted back then. Looking first at the underlying assumptions on slide 17, IHS Automotive had forecasted global light vehicle production growth of 3%, which has now been lowered to 2%, largely due to declines in China and South America. Our revenue guidance was also based on further weakening in off-highway production, and those markets have declined more than we anticipated. And finally, as we've already discussed this morning, there have been fairly steep declines in commercial truck production in China and Brazil, which were not anticipated earlier this year. Now, turning to our 2015 revenue drivers on slide 19 and slide 20, which are the original slides that we showed you back in February. Our programs, launches, and incremental content, are where we expected to be at this point. First, we're launching light vehicle programs with higher technology content. In Clean Air, we launched and ramping up six platforms in Europe with SCR diesel aftertreatment with two more launching later this year. In the first quarter, we launched a manifold program in South America, and we have an upcoming launch on global electric exhaust valve program. In Ride Performance, we launched our MONROE Intelligent Suspension technologies on a McLaren program, the Volvo XC90 and Renault Crossover, and we have five more platforms scheduled to launch this year. Second, we're adding revenue with incremental Clean Air content on commercial trucks. In North America, we launched and will be ramping up in the second half of the year, gas and diesel aftertreatment for the new medium-duty trucks. In China commercial truck, we're seeing compliance with NS4 emissions regulations running at about 45%, in line with what we expected. We also added content from Euro 6 programs launched last year, which are now ramping and from new programs, including with Land Rover. Third, Tier 4 Final and Stage IV off-highway regulations in North America and Europe are adding content on Caterpillar and John Deere programs launched last year, which will continue to ramp up through 2015. We also launched and are seeing contributions from our AGCO and Kubota business, as these programs ramp up as well. And last, year-to-date, global aftermarket revenue has increased 5%, led by North America, including the new CARQUEST business. So, to summarize, we're making good progress in winning new business and launching and ramping up programs, all in support of continued growth. Now, looking forward at our revenue growth for the year on slide 21, based on the revised mid-year light vehicle production forecasts and the further weakness in commercial truck and off-highway production, we expect to be within our guidance range with full year total revenue growth of 5%, excluding currency. In closing, our results in the second quarter and outlook for third quarter revenues, speak to the strength of our Clean Air and Ride Performance businesses, and our structural growth drivers, which are the foundation for Tenneco's future success. At the beginning of the year, I said that beyond 2015, there were no changes to our revenue growth outlook, except the effect of currency exchange rates and market cyclicality. Today, I can reaffirm that long-term outlook, as I'm confident and our ability to continue growing profitably and increasing value to our shareholders. And now, with that I'll open up the call for questions.

[Operator:]

Thank you. Our first question is from Patrick Archambault with Goldman Sachs. Your line is open.

[Patrick K. Archambault:]

Hi. Yes. Well, thanks for the update. And maybe just starting with a last set of slides, you know I appreciate the incremental color on the industry. I guess, how much of that was – obviously the large part of it is clearly just industry wide volume base, but I'm wondering how much of that is also just specific cuts at some of your larger customers. I know CAT for instance, just a day or two ago, cut its outlook. So is it – is there a kind of a specific customer mix issue that you would sort of overlay on some of the macro factors as well and wanted to get the kind of importance of that.

[Gregg M. Sherrill:]

You know, Patrick, when we're looking at the off-road business, it is very difficult to get, we've kind of been through this before, sort of good industry wide if you will, third party estimates, a lot of it has to do with, if you just take CAT for example, they will build a lot of the same machine in a given plant, somewhere in Illinois that might get shipped to China or it might get shipped to Colombia, or it might get shipped right here in the United States. And the ones, that would have our content would be the ones shipped here. And the same would be true of any manufactures of equipment. So, what we're talking about is more specific to our customers. In other words, if their unit volume declines year-over-year, that's what we're seeing. Okay. The percentages that Brian gave you, Patrick, I think would be a good indicator for you in terms of what we are seeing from our customers because that's what we tried to give you in the performance for the second quarter.

[Patrick K. Archambault:]

Okay, got it. And then just on the F-150 issue on the light vehicle side, can you give us a sense of how the cadence of that should work? Is that something that at this point kind of beyond, into the second half should start being a meaningful tailwind as it's – the downtime is largely complete. And then can you remind us again of the incremental contents opportunity going from the older version to the new one?

[Gregg M. Sherrill:]

Let me take the last piece first. The content is pretty much the same, truck to truck, old to new. Okay? But you're absolutely right. I mean we're fundamentally based on everything we're seeing in the scheduled forecast right now, the headwind is behind us. It was worst in the first quarter. We still had it in the second quarter, it kind of converts itself to a tailwind in the third quarter and fourth quarters. Okay. So, they are definitely bringing that production back up, and it should have some positive comparisons in the next few quarters.

[Patrick K. Archambault:]

Okay, okay, great. And then just last one for me on margins. You guys put together pretty good margin performance, all in including everything up 20 basis points year-on-year. Despite the headwinds, so it sounded like there was some ability for that to improve in the second half for at least to be sustained. Wanted your comments on that, I mean two of the things that came up with some of the non-recurrence of launch, plant ramp costs, that are – maybe non-recurrence, but diminished costs, and then this F-150 item that we just talked about, what are the puts and takes that we're missing here as we think about first half versus second half year-on-year margin improvement.

[Brian J. Kesseler:]

Yeah. Patrick, this is Brian. What we see from and we highlighted the two points, one in the U.S., one in Poland, and a major expansion in the UK. Those obviously upfront costs are heavier as we get moving but those are launched and ramping. And that over the next several quarters, we would expect to see those that absorption continue to get better and better. And the F-150 will help our absorption on our facilities that are running. As Gregg mentioned that quarter-to-quarter improvement is pretty good on the volumes in the second quarter or third quarter to fourth quarter.

[Patrick K. Archambault:]

Okay. So, it sounds like, as we think about the back half, the year-on-year performance should at the very least be sustained if not even maybe a little better.

[Gregg M. Sherrill:]

That's fair enough.

[Brian J. Kesseler:]

Yeah. That would be our expectation.

[Patrick K. Archambault:]

Okay. Terrific. Thanks a lot guys.

[Operator:]

Our next question is from Patrick Nolan with Deutsche Bank. Your line is open.

[Patrick E. Nolan:]

Good morning, everyone.

[Brian J. Kesseler:]

Good morning.

[Gregg M. Sherrill:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Patrick E. Nolan:]

Two quick ones. First, can you give us some idea of how to frame the size of these kind of extraordinary launch costs as far as the margin drag in the quarter?

[Kenneth R. Trammell:]

Yeah. Pat, it was in the neighborhood of about $4 million bucks in the quarter. And as Brian said, as the plans ramp and continue to move to fill up the plan over the next several quarters, the impact of that will diminish over time.

[Brian J. Kesseler:]

When these types of launches are going on, I can view it – I wouldn't over concern about it because it's noise in the system. When you got three going at once, it's kind of a loud noise in the system, right, but it does diminish. I mean, you obviously have to put your costs in, in order to build the volume and ramp it up, and that's all is going on there, just happens to be three going sort of simultaneously.

[Patrick E. Nolan:]

Thanks. It's helpful. And if I could ask some better and more longer-term question. Gregg, can you just talk about your expectations for your European margins, particularly in Clean Air going forward? I mean on an adjusted – on a value-added basis, North America and Asia in Clean Air is doing over 14%, Europe's still in the low-single digits. How does that track over time? And is that a matter of when you get off-highway volumes in Europe to come back, and that's when we do see an improvement there? I know structurally, on the light vehicle side, those are going to be a bit lower, less than a third seems pretty low?

[Gregg M. Sherrill:]

Right. Yeah. Remember that segment too right now is including South America, which is pretty awful, right. So, you've got all that rolled into it. That's weighing it down, when you're comparing it to North America, okay. You got it on the platforms, I mean the – we'll always have some difference, based on the higher, bigger platforms here in North America versus Europe, we've talked about that before. And then, I think you got it. I mean the balance is truly getting the volumes back on this big stuff to commercial stuff.

[Kenneth R. Trammell:]

And don't forget in the quarter, the two of those three plants that Brian talked about are in our European segment, right. The expansion in Wales and the new plant in Poland.

[Patrick E. Nolan:]

It's very helpful. I'll get back in the queue.

[Gregg M. Sherrill:]

Yeah. And let's – I'm going to kind of reiterate one more time. When you're seeing that segment margins, it's not just South America, you've got India in there as well, which India is a pretty – it's still relatively small, so it's not weighing in there very much, but you're talking about a very small platform-based country.

[Patrick E. Nolan:]

Thank you.

[Operator:]

Thank you. Our next question is from Joseph Spak with RBC. Your line is open.

[Joseph R. Spak:]

Thanks. Good morning.

[Kenneth R. Trammell:]

Good morning.

[Gregg M. Sherrill:]

Good morning.

[Joseph R. Spak:]

I guess the first question is on the decision to accelerate the buyback, which was glad to see. I mean you mentioned a couple of things, one is some better performance, and then you seem to sort of imply maybe you're a little taking advantage of the market valuation as well. Are those the correct two factors to think about? And also, if – this sort of implies you're doing $175 million buybacks a year, you're sort of approaching or close to your leverage target. So, is that a good proxy for how we should think about your free cash flow for the next couple of years, or how you're thinking about it?

[Kenneth R. Trammell:]

So, Joe, let me kind of just – several questions there, let me kind of take them one at a time. Certainly given the current valuations on the sector and Gregg mentioned it in his comments, that is certainly a key factor in our decision to accelerate the share buyback. The second, it is – given not just recent operating performance, but our expectations as well as looking at the needs we have for capital investment for working capital and capital spending, over the next couple of years, we believe there's enough room within our leverage ratio target, right, remember that's that one-times for us to accelerate the share buyback. So, that's really what all the factors that kind of moved into the thought process on that.

[Joseph R. Spak:]

But you also have, I guess versus the last time we spoke to you, some additional cash cost – I mean I guess on a large, but some of the restructuring. So, I mean the read is that you're incrementally more positive on your operating performance going forward?

[Kenneth R. Trammell:]

I think that's true, right. And it's also our expectation for the market, and it's our expectation for our cash flow generation, right, a number of items.

[Gregg M. Sherrill:]

Yeah. Look I mean it's very much our confidence in our operational performance going forward, and I'll say it flat out. At today's valuations, I can't imagine not buying it right now, so it all kind of came together.

[Joseph R. Spak:]

Good to hear. And then just on – I appreciate the industry commentary on South America and China, which obviously we've seen the numbers in the headlines. Maybe what would be helpful is if you could just very broad strokes remind us of your total sales exposure initially to both light vehicle and commercial vehicle?

[Kenneth R. Trammell:]

So clearly, in both regions, it is still predominantly the light vehicle business. Recall though that from a market perspective in South America, we have about half of the business down there. Our customers have half of the business, that's the ones that we provide.

[Joseph R. Spak:]

(30

[Gregg M. Sherrill:]

(30

[Kenneth R. Trammell:]

You're exactly right, on the commercial side. And in China, obviously, a little bit more difficult to measure right now because of the fact that we're ramping up. And I think there is some ramp-up enforcement installation differences from customer to customer, but also a lot of differences in terms of the customers varying from that sort of overall production down that we talked about, about 33% for the market. So a lot of different factors there. We're in a very good position in China, but I can't give you any specifics about what sort of the market position looks like because it's still sort of in the early stages.

[Joseph R. Spak:]

Okay. Thanks a lot. I'll pass it on.

[Operator:]

Our next question is from Colin Langan with UBS. Your line is open.

[Colin Michael Langan:]

Oh, great, thanks for taking my question. I think you mentioned on the call that you're seeing commercial truck in China at 45% adoption. How do you think that plays out through the rest of the year? And can you actually explain how that generally works out, that you have enforcement only on half, how should – any color there?

[Kenneth R. Trammell:]

So, on the first question, yeah, we are expecting around that sort of 45% range for the year, right. We've seen that. We're not seeing anything that indicates it's going to change. Remember that we've talked about enforcement ramping up in the major cities first. So, certainly the installation rates are higher in the major cities and lower short of outside, and that's all we've seen so far. It depends – it honestly is customer-by-customer and region-by-region in terms of what they're putting on the trucks they're selling.

[Colin Michael Langan:]

Got it. And you think – and I think you've said in the past your share you think is consistent with your global share in China in commercial truck?

[Kenneth R. Trammell:]

Like I was saying in the answer to Joe's question, I think it's difficult to measure right now because of those different factors, customer installation rates versus industry and the ramp-up. But, yeah, like we've pointed out, you've got the list of our customers, right, and that's a very strong position in China.

[Colin Michael Langan:]

Okay. Any color on, I apologize if I missed this. Where you're seeing the off-highway and commercial truck market now versus what you started the year? And how your expectations have changed in a year?

[Gregg M. Sherrill:]

Yeah. I mean it's definitely weaker. I kind of said that in some of my earlier comments, and we expected weak markets. We said that right up front. But the off-road is weaker. We talked about North America being down, what, 30%. Europe is down, but Europe's got a mixture of both off-road and on-road in it, but it is down 20%. So, I suspect the off-road piece is probably down closer to North America, it's 30% and the on-road is pulling it up a little bit. So, we're seeing it down – last year, it was pretty weak, right. And, it's down globally to all of this stuff 25% this year, and the off-road 30% in North America just to use that as a proxy. So, it's definitely weaker than we thought. And, on the on-road stuff, clearly, both China and South America are little bit – not a little bit – are significantly weaker than what we had originally anticipated. But, we are driving strong content in, I mean let's don't forget, those markets globally were down 25% in unit volume, year-over-year in the quarter, and on a value-add basis, because I would take out all the potential fluctuations in the substrate pricing and all of that, we were down 4%. And, that's almost all explained by China.

[Colin Michael Langan:]

Okay. And, can you remind us on the cost cutting target of $55 million by mid-2015. How much is already completed of the $55 million?

[Kenneth R. Trammell:]

So, we had $9 million in savings in the quarter. So, we're – we got a run rate of about $36 million.

[Colin Michael Langan:]

All right, thank you very much.

[Kenneth R. Trammell:]

You bet.

[Gregg M. Sherrill:]

Thank you.

[Operator:]

Our next question is from Matt Stover with SIG. Your line is open.

[Matthew Stover:]

Thank you very much. Just follow on to Colin's question. As we think about that $36 million plus the $7 million from Marzocchi, Ken. How should we think about that contouring into the next year-and-a-half?

[Kenneth R. Trammell:]

Yeah, So, you on the $55 million, that is still going to be lumpy, we're still in the process of executing some of the savings and working with works councils and a number of things like that. So, we'll be there by at some point in 2016, but I can't give you an exact date or how it's going to work in over that time to $7 million. We should start seeing that really in the first quarter of 2016, because, we'll – given where we stand right now, we expect that the Marzocchi will be completed by the end of the year.

[Matthew Stover:]

Okay. And if I look at the SG&A, the year-over-year percent of sales was lower. And if I recall correctly, but my mind's been failing me, last year it was a little bit higher. Is there anything unusual that we should think about in terms of that year-over-year decrease in SG&A?

[Kenneth R. Trammell:]

Matt, no, really no. There's nothing really unusual that we would point out or call out on that. There's always timing of accruals, but I can't think of anything in particular that should be an issue.

[Gregg M. Sherrill:]

Yeah, I was going to say that's going to fall under that category, just kind of noise in the system and timing of various recoveries, et cetera, I think.

[Matthew Stover:]

Okay.

[Gregg M. Sherrill:]

All right?

[Matthew Stover:]

Great. Thanks guys.

[Operator:]

Our next question is from Richard Kwas with Wells Fargo Securities. Your line is open.

[Rich M. Kwas:]

Hi, good morning.

[Kenneth R. Trammell:]

Good morning.

[Gregg M. Sherrill:]

Good morning.

[Rich M. Kwas:]

Just want to take pulse on what's embedded in the outlook for the remainder of the year in terms of the 5% organic revenue growth for the year. In terms of the commercial truck market, specifically China and the emerging markets. I guess Gregg, are you assuming down 30% for the balance of the year in China, in North America? How do – I'm just trying to get a sense of how you've kind of de-risked the outlook here at this point?

[Gregg M. Sherrill:]

Yeah. I don't know that I'm giving you an exact percentage there. It's going to be roughly in that. We don't see it changing a great deal, but we do see right now a little bit of difference in the third quarter and the fourth quarter, sort of averaging out if you will. The third quarter is likely going to be down slightly again, all right. But the fourth quarter is probably going to be more in the order of flat to up slightly. So, there's just going to kind of weigh themselves out, but we're seeing it pretty much I think all in about where we saw the second quarter going through the rest of the year, if you just kind of average it through.

[Rich M. Kwas:]

Okay. So, no real change? Okay.

[Gregg M. Sherrill:]

No real change, but we're at this lower assumption, right, because of the second quarter down, so yeah.

[Rich M. Kwas:]

Yeah. That was what I was getting at. And then the $4 million of launch cost, did that hit Clean Air?

[Gregg M. Sherrill:]

That's all in Clean Air.

[Kenneth R. Trammell:]

And those three plans, one (37

[Gregg M. Sherrill:]

Were all Clean Air.

[Kenneth R. Trammell:]

Exactly, one in North America, two in Europe.

[Rich M. Kwas:]

Okay. And then last year, you had $7 million headwind from engineering costs, which I think hit Clean Air too. So, your comparable was when classified difficult with those costs going to get those costs. So, this is another $4 million against that. So, net-net it was there if you compare it, it's a little bit better year-over-year, right.

[Gregg M. Sherrill:]

Yeah, again, as I said earlier, Rich, these types of things, I call them, more noise than signal if you will, right. Because you're going to have – we're going to have launches ebb and flow quarter-to-quarter and year-to-year. This happened to be a fairly heavy one, because we did, it's all good moves, right? We're putting in new plants because our growth simply demanded it, both the North America and Europe. And we really haven't had to do that in quite some time. And the one is a fairly major expansion, the one over in Wales in the UK, so it's almost like building a new plan if you will. So, you got three going on. You know, we saw that a few years ago in China, if you recall and we had sort of four going in simultaneously, right? And then on the engineering side, I wouldn't – I'll be careful about putting all that in the run rate, because that gets to be timing stuff, right? Yeah, maybe – you've got the numbers in front of you, I don't in front of me, but if those $7 million I accepted last year, but it's probably you know, more of a timing thing that that wasn't similar this year, if you will.

[Kenneth R. Trammell:]

Just timing of recoveries Rich, and we've said on the calls before trying to sort of pick-out the quarterly SG&A versus looking at the last 12 months. If you look at the last 12 months, that tends to factor out the noise from a quarter-to-quarter basis, that Gregg's talking about.

[Gregg M. Sherrill:]

And I normally don't even talk about all our launch costs, that are just embedded in our ongoing costs, because we're launching so many programs around the world. But, really, twice in the last seven years, we've called it out, because of the unusual convergence in China few years ago, with four; and this time, with three; kind of spread across a couple of regions, with but still all hitting Clean Air.

[Rich M. Kwas:]

Okay.

[Gregg M. Sherrill:]

At once.

[Rich M. Kwas:]

No, I don't – I'm not being nitpick, I'm just trying to get the....

[Gregg M. Sherrill:]

No, I'm just trying to help you that it's really – we put it in there, because it was large, right, for a launch cost kind of a little bit extraordinary. But, I wasn't implying you're getting nitpick or anything, I was just trying to help you out.

[Rich M. Kwas:]

Yeah, I know. Fine. And then, just, Ken, when you look at the free cash flow, it looks like it's trending better here, first half of the year versus first half last year, and obviously with the buyback – acceleration of buyback, that shows your confidence in the free cash flow. But, I mean anything that we should be aware of, as we go out the next couple of quarters in terms of puts and takes on the free cash flow, and just an update on where you think the state of the working capital progress is at this point?

[Kenneth R. Trammell:]

Yeah. I mean, so Rich, on – for the free cash flow, obviously, working capital is sort of the biggest quarterly variance. And, as you know, we tend to – we need to use working capital through the first half of the year. And then that comes back to us, as we move through the end of the year, because of the seasonality of the businesses. And, I don't really see anything that changes in the seasonality. We have seen, as you saw, right, some improvement in our inventory days on hand. We think there is probably more to go there, and we'll continue to work on that. But, no, there is really nothing unusual or nothing specific I would call out in the next few quarters.

[Rich M. Kwas:]

Okay. Thanks so much. I appreciate it.

[Kenneth R. Trammell:]

Yeah. Thank you.

[Gregg M. Sherrill:]

Thank you.

[Operator:]

Our next question is from Ryan Brinkman with JPMC. Your line is open.

[Ryan J. Brinkman:]

Great. Thanks for taking my question. Just to follow up on the earlier cost saves question. With the European light vehicle market doing better now, can you point your operations there and you say that you're generating strong incremental margins on an organic basis as a result of that restructuring? And then maybe speak to capacity utilization in Europe, whether you might even be, I don't know capacity constrained, given the earlier actions to reduce capacity?

[Gregg M. Sherrill:]

We're not capacity constrained – and so and we don't anticipate that.

[Kenneth R. Trammell:]

Obviously, it's on the right side...

[Gregg M. Sherrill:]

On the right side.

[Kenneth R. Trammell:]

We're adding, some capacity as we just mentioned on the Clean Air side.

[Gregg M. Sherrill:]

Clean Air side.

[Kenneth R. Trammell:]

So, no, we're not capacity constrained. And certainly as we're seeing a little bit of an increase in the production levels on a year-over-year basis in Europe, that certainly helps through an absorption standpoint and brings incremental through. We're still – though remember very weak production levels historically speaking for Europe. So, we've certainly taken out some production on the Ride Performance side of the business, some production facilities, some capacity, and that's helping, but we still need to see some sustained recovery in the production levels of Europe.

[Ryan J. Brinkman:]

Okay. Great. Thanks. And then just one on Ride Performance. So you continue to show good progress in margin at this division, maybe just remind us of the biggest drivers there, I know you've spoken previously about better efficiency as a result of commonisation of global platforms et cetera. Is the aftermarket mix also a consideration and then or is the business maybe disproportionately benefiting from those European restructuring actions et cetera? And then just at 11.5% margin versus 10.7%, I think that's a record, right? So, where do think it could potentially top-out, is there any sort of natural limit to the margin that you think you can earn in that division?

[Brian J. Kesseler:]

Well, this is Brian. Let me tackle a couple of those. One, most of our restructuring activity has been going on in Ride Performance, and so that helps. Aftermarket is obviously a huge benefit for us with the mix of our aftermarket and our Ride Performance, Gregg mentioned about 40%, and that generally gives us a little bit better margin performance. And we have a lot of cost leadership initiatives driving there to commonize component levels, commonize designs, maximize capacity, and consolidate capacity, all of those still have room. And I would expect us to continue to see, see improvement going forward.

[Ryan J. Brinkman:]

Okay, great. That's helpful. Thank you.

[Operator:]

Our next question is from Brian Johnson with Barclays. Your line is open.

[Brian Arthur Johnson:]

Yeah. A couple questions. On the CV side, just wanted to kind of loop back, it's – you've been assuming going into the year, adoption of 40%, hold on, that the commercial truck and off-highway would be up 20%, it's down 3% in 2Q. So as we kind of think about just taking about 100 basis points off your total company guide, is it fair to say that the LV side is offsetting that, is it just the pace of some of the program launches you expect second half to offset that or do you expect – it didn't sound like you're expecting any uptick in commercial or off-highway in second half, and we did note that CAT is talking about further destocking through second half?

[Kenneth R. Trammell:]

So Brian, on the light vehicle side, actually production levels are down about a percent from the expectation at the beginning of the year, so light vehicle is contributing to us coming in at the lower end of the range that we had started the year with, but certainly the commercial truck and off-highway is as well. And like Gregg said, just a few minutes ago, I think in response to another question. Third quarter on commercial truck and off-highway, probably flat to a little bit down. Fourth quarter up a little bit; full year, probably up a little bit based on what we're seeing right now. And it does factor in, the fact that we've got generally weaker markets in just about every one of those regions where we do commercial truck and off-highway business.

[Brian Arthur Johnson:]

Okay. Second, just a broader picture question around the light vehicle emissions control side. A couple of trends out there. We're seeing Fiat put or potentially putting Magneti Marelli up for sale. You do have a small emissions control business, kind of how does that fit into the world, and is this something you could look at? And just secondly, kind of in light of all the pressures on OEMs from competitive pricing, the China slowdown, are you getting phone calls whether you can help them out with price cuts? And if so, how do you deal with them? If not, are you expecting them as you get into the year-end planning and budgeting in terms of both – in terms of the OEMs looking to set prices and price downs in the forthcoming year?

[Gregg M. Sherrill:]

Let me address the question on Magneti Marelli, and as you know, those rumors have circulated at varying levels for a number of years. And obviously, we can't and won't comment on anything in particular, but if anything happens, we'll certainly monitor it closely.

[Kenneth R. Trammell:]

Yeah. From – as far as the questions around some of the competitive pressures in the markets with our customers, they've historically never been shy about asking for continued cost reductions. I wouldn't say that we're seeing anything extraordinarily different than the normal pressures that are in the business model.

[Brian Arthur Johnson:]

Okay, thanks.

[Operator:]

Our next question is from Brett Hoselton with KeyBanc. Your line is open.

[Brett D. Hoselton:]

Good morning Gregg, Brian, Ken, Linae.

[Gregg M. Sherrill:]

Good morning.

[Brian J. Kesseler:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Brett D. Hoselton:]

Just trying to bucket the change in your guidance. Looks like you just, you're kind of down about 150 basis points at the midpoint let's say, and it seems like light vehicle production, your expectations are down about 100 bps on a year-over-year basis. So, that's maybe worth 70 bps leaving another maybe 70 bps in the midpoint, give or take. And, is the bulk of the remaining downside commercial truck and off-highway? So, how do I think about what's driving that in terms of kind of bucketing it?

[Kenneth R. Trammell:]

So, I – you hit the key drivers. At the end of the day, the IHS's expectation for production in the regions where we do business is down about 1% year-on-year. That translates obviously into an impact on our light vehicle production levels as well. Additionally, as Brian gave you some percentages as we walk through region by region, remember that sort of globally what we're seeing is a total of about 25% year-over-year decrease in the demand for our commercial truck and off-highway production. We're offsetting that with content, but it's really those two items that contribute to and I hesitate to say lowering, it's just specifying within the range that we gave you, 5% to 8%, that we think it's closer to the 5% range.

[Brett D. Hoselton:]

Okay. And, if I look at the kind of the 25% reduction in the second quarter in commercial truck, and versus the 7% decline in revenues, obviously that implies kind of 18% content growth roughly, and I'm assuming that I'm thinking about that correctly. Can you kind of give me a sense of where that number is at year-to-date?

[Kenneth R. Trammell:]

So, Brett the content add, right, you're doing the math, the content add is in some pieces of the business, right. The off-highway is where the regulatory changes are occurring, and that's where the content add really comes in, right. We also do business and commercial trucks. Obviously there is no content add going on in South America because there is no regulatory change. We do business in commercial truck in Europe as well. So, I mean, yeah the math says that net, net, net we're adding obviously content. But it's bigger on the off-highway side certainly than what you're talking about.

[Gregg M. Sherrill:]

I would actually run the content equation against the value-add revenue by the way of 4%.

[Kenneth R. Trammell:]

Yeah.

[Gregg M. Sherrill:]

The 25% versus 4%. Well, you get lots of noise in that the total revenue with the substrate sales, platinum pricing, all the commodities are crashing, so you get that stuff coming down, right? So, it's a lot better to run it against the 4%, if you're looking for – that's what a content we're adding. So, it's the difference in 4% and 25%.

[Brett D. Hoselton:]

Yeah. And I apologize, maybe I wasn't clear in my question. I guess what I'm driving at here is if I use the 25% and 4% for example, I've got 21% content growth in the second quarter. I'm wondering kind of what's the equivalent number on a six-month basis. And then what's the equivalent number for the full year 2015, I mean is this, if production were flat and FX weren't an issue and 21% content growth, what you were thinking for 2015?

[Gregg M. Sherrill:]

Yeah. I mean, there is nothing that's any different this quarter than there was in the previous quarters, or what we would expect for the future quarters.

[Kenneth R. Trammell:]

Yeah. So, yes the answer, in general terms is yes. And that's kind of why, I walked you through our original content adds that we set back in February and we're pretty much on – we're not pretty much, we're right on track, I kind of tick them off one at a time. So that' the story there. The content is where you're seeing it, give or take in a quarter, right. We're using the 21 delta for the second quarter, but that's going to be a pretty proxy for the full year.

[Brett D. Hoselton:]

Yeah. And just from a sales perspective, as I go into the back half of the year, it looks like the, by the fourth quarter, the FX comps start to get easier, the commercial truck and off-highway comps seem to get easier and the F-150 comps certainly seem to get easier. And so I'm kind of looking into the back half of the year thinking from a sales perspective, I know you've gotten an overall guidance number here, but certainly it seems like your comparisons are getting a bit easier and it looks like there is the potential for some margin improvement in the back half of the year as well. So it seems like you're setting up for a reasonably good back half of the year?

[Gregg M. Sherrill:]

Go. (51

[Kenneth R. Trammell:]

Yeah. Brett and I mean you're absolutely right from a revenue perspective, right. I think year-to-date, we're up about 4%. Obviously the second half has to accelerate to hit that 5% range and it's the things that you talked about. Clearly the F-150 comes back. Just generally speaking, it looks like the year-over-year comps in the third quarter are probably the best quarter for light vehicle production in the regions where we do business just like we've said on a full year basis. And we're launching that medium-duty truck in North America that Gregg talked about. The content adds continue to ramp regardless of what happens with the volumes and the off-highway business. So all of that should point to a slightly better second half than what we've seen so far in the first half in terms of revenues.

[Brett D. Hoselton:]

Great. Thank you very much.

[Kenneth R. Trammell:]

Thank you.

[Operator:]

We have one final question. Our final question at this time comes from Brian Sponheimer with Gabelli. Your line is open.

[Brian C. Sponheimer:]

Hi, Gregg, hi Ken, thanks for setting me in. Most of my questions have been answered. Just a quick one, stock comp plays a role sometimes in your quarter. Just what was the compensation number this quarter relative to year ago?

[Kenneth R. Trammell:]

So, Brian, you're actually asking me to remember last year, and I don't recall, off the top of my head, because the stock – remember what we were talking about in terms of stock index compensation.

[Brian C. Sponheimer:]

Right.

[Kenneth R. Trammell:]

Stock move virtually nothing this year, and I think it was a little bit of a headwind last year, but I don't recall the number from last year.

[Brian C. Sponheimer:]

Okay. Everything else has been answered. Nice job on the margin. Thank you very much.

[Kenneth R. Trammell:]

Thanks, Brian.

[Gregg M. Sherrill:]

Thanks, Brian.

[Operator:]

We have no further questions at this time. So, I will turn our conference back over to Ms. Golla for closing remarks.

[Linae Golla:]

Thank you. This concludes our call. An audio replay will be available on our website in about an hour. You can access the recording of this call also by telephone. In North America, you may reach the playback at 800-551-8143. For those outside North America, the number is 402-220-2056. This playback information is found in our press release. Thank you for joining us today.

[Operator:]

And this concludes today's conference call. We thank you all for participating. You may now disconnect. And have a great rest of your day.