Tsakos Energy Navigation Limited
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Good morning and welcome to Tenneco's Third 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 turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

[Linae Golla:]

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 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. With that, I will turn the call over to Gregg.

[Gregg M. Sherrill:]

Thank you, Linae, and good morning, everyone. We had a great quarter and I'm very pleased with our performance. Our total revenue was up 5% excluding the impact of significant currency headwinds, and we delivered our 10th consecutive quarter of margin improvement. When you take out the negative currency, our revenue growth outpaced light vehicle and commercial truck and off-highway industry production globally. The aftermarket also had an excellent quarter with stronger sales growth in our major regions versus the market. Our results reflect the balance we have across product lines, as well as end markets, regions, customers and vehicle platforms, which serves us well in supplying cyclical markets and customers worldwide. Additionally, our results this quarter point toward the progress we're making on our strategic imperatives for each product line. With outstanding products, the right strategies and strong execution, we continue to capitalize on the structural growth drivers that are delivering profitable growth for Tenneco. Taking a closer look at each of these drivers on slide five and, first, the increasing global light vehicle production, we have Clean Air, Ride Performance and Elastomer products on more than 315 platforms globally. And in the third quarter, we launched 45 programs with 22 customers. Second, emissions regulations continue to drive organic growth globally with additional content. On slide six, you'll see that we're announcing new customers for on-road diesel aftertreatment programs with MAN Trucks India, or MTI, and two additional customers in India, as well as a new on-road commercial truck program in Europe. We're also ramping up on full Clean Air systems for a new gasoline and diesel-powered medium-duty truck program in North America. We keep building our book of business with commercial truck and off-highway customers and are very well positioned to capitalize on these programs when these markets come back. Third, growing demand for our advanced Ride Performance technologies, specifically the full suite of MONROE Intelligent Suspension products. This includes our electronic Dual Mode technology launching on the Ford Focus RS later this year. Additionally, in the third quarter, we were awarded three new platforms with other customers featuring MONROE Intelligent Suspension technologies. And fourth, the strength of our aftermarket driven by our industry-leading brands. Next month, we're kicking off a year-long celebration of the 100th Anniversary of Tenneco's MONROE brand, one of the most highly recognizable automotive brands in the world. MONROE represents quality, customer service, performance and technology, attributes that continue driving higher aftermarket sales, which we did see in the third quarter accounting for about 40% of our total Ride Performance revenue and making a strong contribution to margins. So given these growth drivers, let's take a closer look at revenue, beginning on slide seven. As I said, revenue increased 5% to about $2.2 billion after excluding an 8% currency headwind in the quarter. The increase included 5% revenue growth in both product lines compared with last year. Using constant currency, light vehicle revenue was up 6%, significantly outpacing flat global industry production and led by higher revenues in North America, Europe, and India. The global aftermarket generated a 9% increase in revenue on strong Ride Performance sales in North America and South America. Our commercial truck and off-highway revenue also outperformed industry production due to additional content to meet Tier 4 Final and Stage IV off-highway regulations on programs with Caterpillar, John Deere, AGCO, and Kubota, as well as higher revenue from on-road programs in North America and Europe. While unit demand was down 30%, our commercial truck and off-highway revenue, excluding currency, declined only 7%, or 4% on a value-add basis, continuing to demonstrate strong incremental content growth. Now, turning to earnings on slide eight. Adjusted EBIT in the quarter was in line with last year, but includes $24 million in negative currency. Excluding the currency impact, EBIT improved 15%. Also, as I said upfront, I'm very pleased that our margins continued to improve. This quarter, value-added adjusted EBIT margin increased 20 basis points to 9.7%. The light vehicle and aftermarket top-line growth, added commercial truck and off-highway content, and the benefits from restructuring and cost leadership initiatives, all contributed to the improvement, overcoming the challenging currency environment. In summary, an excellent quarter and making progress on our growth plans. Our employees are aligned around strategies that are clearly working, and all supported by Tenneco's global manufacturing and engineering footprint, our integrated supply chain network, and business management system to deliver Clean Air and Ride Performance products that meet the needs of our OE and aftermarket customers. As always, I want to recognize and thank the tremendous efforts of our employees worldwide. And with that, I'll turn the call over to Brian.

[Brian J. Kesseler:]

Thanks, Gregg, and good morning. Beginning with revenues on slide 10, and just a reminder that all of my comments refer to value-add revenues excluding currency. I'll also be referencing slide 11, which provides information on our commercial truck and off-highway revenue. Global Clean Air value-add revenue was up 5% in the quarter, with improvement driven mainly by higher light-vehicle revenue and aftermarket sales. Looking at revenue by segment, North America Clean Air was up 7%, driven by light vehicle revenue growth of 6% on stronger volumes, including the ramp-up on the Ford F-150 and on new platforms for GM and Fiat Chrysler. We also had very strong growth in the aftermarket. Our commercial truck and off-highway equipment revenue rose 4% in the quarter as a result of Tier 4 Final content growth with Caterpillar and John Deere. This is in spite of a 35% decline in unit demand. In the Europe, South America and India Clean Air segment, revenue increased 7%. Light vehicle revenues rose 13% on strong production volumes, including program launches with Jaguar and Nissan, as well as the continued ramp-up on new programs in Europe, such as the VW Golf, Daimler A-Class and B-Class, and Land Rover L405 and L495 platforms. Commercial truck and off-highway revenues were 15% lower versus last year, with incremental content partially offsetting the unit demand decline of 25% in the segment driven by both Europe and South America. Turning to the Asia Pacific segment, Clean Air revenue was down 4% in the quarter, driven primarily by 9% lower light vehicle revenue, including lower industry production volumes in China. Commercial truck and off-highway revenue for this segment increased 69%, driven by the continued ramp-up of Kubota off-highway programs in Japan and installation rates for systems on commercial trucks in China that were higher year-over-year and about even with what we saw in the second quarter. However, we continue to see a very weak truck market in China, with production down 28% in the quarter. Looking at Clean Air EBIT on slide 12, adjusted EBIT was $107 million, including $7 million in negative currency, compared with $102 million last year. Adjusted value-add EBIT margin improved to 11.5% from 10.7%, driven by stronger light vehicle volumes in North America and Europe, higher North American aftermarket revenue and operational cost improvements. In our press release, we pointed out the benefit of recoveries from a customer in China which, due to timing, all occurred in the third quarter. Even without this recovery, we improved margin by 20 basis points. Turning now to Ride Performance beginning on slide 14, total revenue was up 5% this quarter. Breaking down revenue by segment, North America Ride Performance revenue was essentially flat. Strong aftermarket sales were offset by lower commercial truck production. In the Europe, South America, and India segment, Ride Performance revenue was up 13%, largely driven by light vehicle revenue growth in Europe that outpaced a 5% rise in industry production. We benefited from new programs including with Jaguar and Land Rover and from the continued ramp-up on programs with MONROE Intelligent Suspension technologies on the VW Passat and Volvo XC90. We also had a good quarter for aftermarket sales in South America and Europe, which contributed to the revenue gain in this segment. And, finally, in the Asia Pacific segment, Ride Performance revenue was about even with a year ago against lower light vehicle industry volumes. Turning to Ride Performance earnings on slide 15, Ride Performance adjusted EBIT was $58 million and adjusted EBIT margin was 9.4% compared with 9.8% last year. Currency in all segments had a significant impact in the quarter. Excluding currency, adjusted EBIT margin improved to 11%. This improvement was driven by higher aftermarket sales in all three segments, stronger light vehicle volumes in Europe, South America, and India segment, and steady improvements from our cost leadership and restructuring activities. So, all in all, it was a strong third quarter with results that demonstrate our focus on driving growth that outpaces our underlying markets, while delivering continued margin expansion. My thanks to the global Tenneco team for another strong performance. And 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 16. We recorded $35 million of restructuring and related costs this quarter, of which $31 million was in Ride Performance and $4 million was in Clean Air. As we announced early in the quarter, we recorded charges of $25 million related to discontinuing our Marzocchi Suspension product line, as we continue to optimize our Ride Performance operations globally. We expect to complete this action by the end of the year and expect our financial results will improve by about $7 million annually beginning in 2016. We also recorded $10 million for ongoing cost improvement initiatives. The savings run rate from the European cost reduction initiative was $10 million in the third quarter on actions completed to date. We continue to expect to reach our targeted annual savings rate during 2016, which at today's exchange rates is $55 million. Now, moving on to tax and interest expense on slide 17. Adjusted tax expense was $48 million in the third quarter for an effective tax rate of 36%. For the full year, before the impact of the expected R&D credit extension, we expect an effective tax rate before adjustments of about 35%. And we now expect cash taxes of about $125 million in 2015. In the third quarter, interest expense was $16 million, an improvement of $4 million compared to last year, due to the refinancing completed last December. Our annual interest expense should be about $67 million for the year. Turning to debt and cash flow, starting on slide 18, we ended the quarter with debt, net of cash balances, of $1.1 billion. This resulted in a leverage ratio of 1.4 times; it's about the same as last year. Moving on to cash flow, in the third quarter, we generated cash from operations of $106 million, and continue to focus on managing working capital, including improving inventory days on hand. The year-over-year operations comparison includes an increase of $20 million related to the timing of cash tax payments. Year-to-date cash generated from operations was $188 million, compared with $89 million last year. Turning to our working capital days metrics, days sales outstanding and accounts receivable excluding factoring were 65 days, up 3 days compared to a year ago. Inventory days on hand improved 1 day to 38 days, and days payable outstanding fell 1 day to 72 days. Capital investments in the quarter were $67 million, compared to $95 million last year. The lower year-over-year expenditures are primarily due to the timing of spending to support new programs. Year-to-date, capital expenditures are $217 million, and we now expect full-year expenditures toward the lower end of our guidance range of $300 million to $320 million. This quarter, we took advantage of the overall sector decline and we repurchased 2.4 million shares of common stock for $114 million. Year-to-date, we have repurchased 3.1 million shares for $158 million. In the fourth quarter, we expect to complete another voluntary program, offering to buy out former employees vested in our pension plans, this time primarily focused on Canada. We expect to record a non-cash charge of about $4 million for this. And with that, I'll turn the call back over to Gregg.

[Gregg M. Sherrill:]

Thank you, Ken. Now, before I get into our outlook for the fourth quarter, I want to talk more broadly about where we see our business to-date and Tenneco's strategic direction. Beginning first with our current position, which I am very pleased with, about three years ago, we aligned our organization around specific strategic imperatives, building on an already successful strategy to drive profitable growth by unlocking the full potential of Tenneco's product lines. We serve an outstanding customer base with Clean Air and Ride Performance products as well as a full suite of highly engineered Elastomer NVH products that are part of both our Ride Performance and Clean Air solutions. The scale with our customers, our capabilities, and underlying financial strength make Tenneco very competitive as a global supplier to automotive and commercial truck and off-highway customers. Clearly, our strategy is working as we've won new business and successfully delivered organic revenue growth of 42% over the last five years, outpacing global light vehicle production by 20%. We successfully funded restructuring and cost improvement initiatives, and consistently improved margins and our cost competitiveness. All of this was accomplished while significantly improving our balance sheet, which is absolutely necessary since we operate in cyclical markets. And to this point, our growth is even more impressive when you consider that several of our key markets are undergoing severe down cycles. The cadence of our growth as it relates to Clean Air is primarily driven by the regulatory timeline. About eight years ago, we entered the development phase for diesel engines and off-highway markets. With our technology and global capabilities, we were highly successful in achieving significant market share, although as we launched, off-highway market conditions were entering and continue to be in a severe down cycle. Likewise, with the regulatory implementation for on-road vehicles in China and Brazil, our market share success is outstanding. But again, market conditions are very weak. On slide 20, we've indicated where Tenneco revenues would be under more normalized conditions and based only on actual booked business. And now, we're about to enter a multi-year era of tightening light vehicle regulations in North America and Europe affecting both gasoline and diesel engines. Also in this timeframe, regulations in China and emerging markets continue to tighten along with regulations applying to large engine applications. Again, we are aggressively pursuing this content in line with the regulatory timeline and regardless of actual or projected market conditions. Organic growth opportunities remain our top priority and we'll continue making the investments necessary to capture those opportunities. That's a given, and I can say with confidence that we're on a path of even greater organic growth with the structural growth drivers underpinning our business. As we talked about earlier, those key organic growth drivers include

[Operator:]

Thank you. Our first question comes from Mr. Brian Johnson. Sir, your line is now open.

[Brian Arthur Johnson:]

Yes. Good morning.

[Gregg M. Sherrill:]

Good morning.

[Brian Arthur Johnson:]

I just want to kind of talk more strategically about, I think, the core issue in emissions now, which is, of course, Volkswagen's issues with meeting Euro 6 cost effectively and actually meeting – our U.S. Tier 2 Bin 5 and by implication Euro 6 and Euro 7. So I just want to kind of get your thoughts on a couple of things. First, more of a housekeeping. What's the content per vehicle difference in terms of Tenneco value-add if a European goes into a showroom and comes out with a gas-powered – gas-fueled car versus a Euro 6 diesel? Second, what kind of additional cost content per vehicle opportunities are there as European OEMs perhaps look more at a belt-and-suspenders, or they might say belt-and-braces, approach to meeting the real-world requirements on 2017? And then, finally, given the extra cost involved in emissions given the kind of press around NOx coming out of the tailpipe, where do you see diesel share going in Europe?

[Gregg M. Sherrill:]

Okay. I think I captured three questions there, Brian. I'm going to take them one at a time. If I miss some or misunderstood them, you just repeat it for me. On the content difference, if you walk into a showroom, it absolutely depends on which platform you go for. We have platforms where we have both hot-end and cold-end on the diesel. And if in that case you walked in and didn't buy that one versus another one that was a gasoline-powered that we had content on, there would obviously be a negative content difference. On the other hand, we have a lot of diesel applications where we have a cold-end only. And in those cases, you would actually have a higher content of Tenneco if you bought a gasoline-powered engine, replacing that one that had Tenneco content on it. So where that mix shift ever would go, which I think the dust is a long way from settling on, and I'm sure you would agree with that, net-net. And the other thing I want to point out here is we're really talking Europe. Passenger car diesels are a European thing, right? I mean, they're very low percent here in North America. I think you guys have even heard me referring to it as rounding to zero at times in the past, right? And it's virtually nonexistent in China and a lot of the other markets in any big way. So we're talking diesel – I mean, we're talking Europe for diesel passenger cars. And so let's just stay focused there. It doesn't really, in my mind, expand to the rest of the world in any significant way. So the first answer to your question is net-net, I mean, I would just say it's probably not going to have any impact on us, right? It could be positive if it went the one way I told you, or it could be negative, but that whole thing would come out, I think, with virtually no impact in the end because of the number of platforms we're on and that mix of product that we have on them out there. From an opportunity point of view, there are certainly some opportunities. There have been. This whole issue of real driving emissions has been out there long before the recent events and is, in fact, a part of the Euro 6c regulations. We've been working on them for some time, and they kind of phase in. And I don't have all the technical details of that here today. That would be probably worth another call in and of itself, if everybody was interested in it. It sort of starts in 2017 and then really gets implemented more, I think, in the 2019 timeframe where the test regime will also apply to on-road testing, okay, because there has been a recognized difference in the lab test results versus certain real driving conditions, all right, as defined I suppose by that testing regime. So, yes, there is a possibility and we're working on those right now. It's kind of all been baked in because Euro 6c has always been there, and I don't see a great deal of change in that, okay? And then I'm going to hit the last question, if you want to follow up, I'll give it to you, which is the extra cost that that could be and what it might mean to the European diesel market. I kind of listed for myself as all of the noise hit the system a few weeks ago on this, what are the diesel mix drivers particularly in Europe, right? Clearly, the diesel is still the most efficient between the two engines. So you've got lower CO2 emissions, better fuel economy, a big driver on the positive side. You have the diesel engine power and torque performance that half the drivers in Europe are quite accustomed to now, because that's roughly the penetration there, right? You have the various tax regimes, which granted could change on diesel fuel versus gasoline that make it economical over there. You have a very significant installed diesel engine capacity, doesn't change overnight. And you've got commitments by a lot of Europe OEs to a diesel strategy to meet the CO2 requirements, which I think would also be rather difficult to change overnight. You mentioned a negative. Cost of emission compliance is going to go up a little bit, but that was already there with the real driving emissions certification. And so – and what's the customer perception of diesel, that's the dust that I don't think has settled yet, because again, it's a European issue, are quite accustomed to diesels and whether this has some lasting impact on their perception to diesels, I don't know, but I don't know that it's going to be that great. And, of course, there's going to be ever more now as result of what we've just seen, higher regulatory scrutiny, I think, probably around the world. A longwinded answer to your question.

[Brian Arthur Johnson:]

Well, I guess, then two follow-ups. Are there any things that you were talking with client customers about for Euro 6c 2017 that now maybe they are on the fence, I don't know if it's a Lean NOx trap or a SCR – doing an SCR in addition or in lieu of the Lean NOx trap that would actually result in more Tenneco value-add?

[Gregg M. Sherrill:]

Well, I'm not going to sit here and say that none of that's going on out there, right? All of those is just kind of come upon us in the last few weeks. But I'm not personally aware of product plan changes. Remember, there were lot of product plans in effect to meet Euro 6c already, which we're involved with. And what you're talking about is really incremental to that, I think. And I'm not aware of any. I'm not saying they might not be engaged with one of our commercial teams or engineering teams out there. But, I'm not aware of them.

[Brian Arthur Johnson:]

Okay. And then on the U.S. pickup truck side, how comfortable are you that the solutions that the OEMs have implemented largely centered around your end-to-end technology are, in fact, if consumer – if some testing organization were to actually put them on the roads would sort of be in line with how the EPA tests came out?

[Gregg M. Sherrill:]

Yeah, I think we're confident. I mean there's a lot of on-road testing that goes on anyway, even outside the certification process, right? And, in fact, I think one of those pickup trucks has already been selected for some special testing on-road prior to its certification this year, and that happens to have our content on it. So, there'll be a definitive answer to that by the end of the year. But, yeah, we got confidence. I mean, those on-road testing, and that's all our customers' testing. So, it's really more a question for them than us. But from everything we've seen, the confidence is there.

[Brian Arthur Johnson:]

Okay. Thanks.

[Gregg M. Sherrill:]

And by the way, just to back up to your prior question, we would see no impact to these 0.75-ton-and-above diesel applications due to all of this. I mean, those applications are there for torque and performance, right? And it's very difficult to achieve that with any other.

[Brian Arthur Johnson:]

And, I guess, final question just to close this off. If there is post-2020 more hybrids, which is our and Ricardo's and IHS' forecast for Europe. How does the gas – how does emissions control on a hybrid differ from emissions control on a non-hybrid for some of their engine? Would there be any real difference if the automaker chose to mate it with a 48-volt start-stop system or a mild hybrid or even a Prius hybrid in terms of the Tenneco value-add opportunity?

[Gregg M. Sherrill:]

No. It really doesn't. I mean, it's still – let's assume that that hybrid is a gasoline engine, right? I mean, it still has to meet the tailpipe emission requirements coming up Euro 6c. And you know that our content is roughly related to the power output of the engine, right? So, whatever size engine goes in there, whether it's a hybrid or not, if it's that size engine it's going to have a very similar content. If they were to downsize the engine and make a little bit more smaller ones, that might have a negative influence on content. But we're going into this Euro 6c regime where the regulations are getting more stringent as well. So, that, in turn, puts the content back in. We really don't see, I'll just kind of summarize, any effect in the next several years of what we've seen out there net-net other than the possible positive attributes of more stringent content which I've said are there already because the real driving emissions requirements were coming in already, and it really hasn't changed our product planning at all.

[Brian Arthur Johnson:]

Okay. Thank you, Gregg. Very thorough answers.

[Gregg M. Sherrill:]

All right.

[Operator:]

Thank you. Our next question comes from Mr. Colin Langan. Sir, your line is now open.

[Colin Michael Langan:]

Oh, great. Colin Langan, UBS. Thanks for taking my question.

[Gregg M. Sherrill:]

Good morning.

[Colin Michael Langan:]

Good morning. Following up, not to stay on the same topic, but can you help quantify your actual exposure to European light vehicle diesel? And any color on your market share? I believe in the past, you've indicated that you're almost on a revenue basis 50/50 split between gas and diesel in Europe, which given some of the data out there the diesel content tends to be quite a bit higher, which would mean that you're going to actually probably have higher market share in gas. So, is that actually a nice offsetting factor if we do see a shift from diesel that you have much greater share on like the gas side?

[Kenneth R. Trammell:]

Yeah. Colin, as Gregg said, there is diesel content that's cold-end and that's no different between the gasoline and the diesel side. If you look at our Clean Air revenue, so just our total Clean Air revenue like we showed you today, all of the revenue that's there that is passenger car diesel, all right. So, I'm not including the pick-up trucks. I'm not including on-road or off-road commercial trucks or off-highway, that sort of stuff, just passenger car diesels, about 11% of our Clean Air revenue comes from diesel, both hot-end and cold-end. And like Gregg said, the cold-end will be no different whether it goes between gasoline or diesel. So, yeah, I mean, we're well positioned. We're well balanced between gasoline and diesel. And by the way, that 11% like Gregg said is almost entirely focused on what happens in Europe because that's where all of the passenger cars are.

[Gregg M. Sherrill:]

And even though, as Ken said and I said earlier, the cold-end is the same, pretty much, diesel to passenger. If that shift occurred between a platform where we did have only cold end on diesel to a passenger car where we had the whole system, now the content increases, right, because of the hot-end content.

[Colin Michael Langan:]

Got it.

[Gregg M. Sherrill:]

There's just a million permutations that the thing can shift into out there. And with the complete platform coverage we have, first off, and it's impossible to say with all those permutations, but we are quite confident that this is not going to have a negative effect, and that shift has to pretty much occur over time anyway, right? I mean, it can't shift overnight very easily.

[Colin Michael Langan:]

Yeah. Makes a lot of sense. Any color on – so if you're around 11% sort of, mostly Europe, I suppose, Clean Air diesel, I mean, what would it be European Clean Air gas? Is that a similar percent of your sales today or I'm trying to gauge the – if you do see that shift, I mean, if whether you're more levered to that or...

[Kenneth R. Trammell:]

I don't have our passenger car just Europe, but if I look at passenger car gasoline globally obviously which is much more prevalent outside of Europe, the passenger car gasoline revenue, again, a percent of our total Clean Air revenue that's around 35% or so. All right? But that's...

[Colin Michael Langan:]

I guess, to be more directed...

[Kenneth R. Trammell:]

.

[Colin Michael Langan:]

...do you think you're more levered to gas in terms of market share, or is that a misconception?

[Gregg M. Sherrill:]

In Europe, you're saying?

[Colin Michael Langan:]

In Europe, yeah, in Europe.

[Kenneth R. Trammell:]

We're probably roughly 50-50 in terms of our revenue between pass car diesel and pass car gas in Europe. I think that's a reasonable assumption to make. Our total...

[Colin Michael Langan:]

On a dollar basis.

[Kenneth R. Trammell:]

Right. Our total revenue.

[Colin Michael Langan:]

Okay.

[Gregg M. Sherrill:]

I just want to go back because 50-50 is not the number to use in assessing this thing because the 50 that's diesel, there is a percent of that is only cold end only, right?

[Colin Michael Langan:]

Right.

[Gregg M. Sherrill:]

And you're only talking about a hot-end content difference here, right?

[Kenneth R. Trammell:]

Yeah. And Linae is pointing out to me that it's probably a little under 50% diesel over 50% gasoline in Europe.

[Colin Michael Langan:]

Okay.

[Kenneth R. Trammell:]

But again, 35% of our total Clean Air revenue passenger car diesel, that's a global number.

[Colin Michael Langan:]

Okay. And I guess switching topics a little bit. On the outlook, you held your sales outlook for the year. It sounds like those markets, I know there's been a lot of negative news on the off-highway side. What are the offsets that are enabling you to hold your sales guidance up. But, what was actually getting better in the quarter that was enabling you to keep things where they were?

[Gregg M. Sherrill:]

Well, everything now is about fourth quarter, right? So, everything is booked to three quarters now and it's all about the fourth. And I think we kind of have baked in to our forecast the weaker commercial vehicle markets. And there's been some indication that they're a little bit weaker than we originally thought, but we had put a little conservatism in there, because we've kind of been just conditioned to do that with those market conditions. What we have seen recently is a little bit of strengthening in what we had seen in China. And that's why we kind of called out the production schedules we are now seeing in China for the fourth quarter versus what we had anticipated were a little bit stronger. And to be perfectly honest, China would be the risk, and they can change schedules relatively quickly. But, I guess, if the global conditions continue like we anticipate right now both off-road, on-road, light vehicle globally and we're only talking about the next couple of months now, and if China's schedules hold like we're seeing them right now, that's where we're basing it on. We'll hit the fourth quarter where we think we will and the map will yield 5% growth rate for the year.

[Colin Michael Langan:]

And is the China helped by improved adoption rates on commercial vehicle emissions or...

[Gregg M. Sherrill:]

It's been a little bit more light vehicle production schedule strengthening.

[Colin Michael Langan:]

Okay. All right. Thank you very much.

[Gregg M. Sherrill:]

Yes.

[Operator:]

Thank you. Our next question comes from Mr. Rich Kwas. Sir, your line is now open.

[Rich M. Kwas:]

Hi. Wells Fargo Securities.

[Gregg M. Sherrill:]

Good morning.

[Rich M. Kwas:]

Good morning, everyone. For just Gregg or Ken, I just want to get your thoughts here on we look forward here into 2016, 5% growth rate organically for 2015. What are the puts and takes for the organic growth for the next year? Obviously, production is one of them which is macro. But when you look at from a content standpoint, what are the plusses or minuses in the context of where you're comping against new business this year where it become just less favorable for you?

[Kenneth R. Trammell:]

So, I mean, Rich, if we look at – let me try and answer your question this way and let me know if this doesn't get to what you're looking for, all right? If we sort of look at the regulatory time line, next year, there aren't as many regulatory changes. That being said, I don't think anything sort of changes in the underlying growth characteristics that we've seen over time. We would still expect to grow a little bit faster than what the overall production rate is. And then that, obviously, as we sort of look toward 2017 when regulatory changes begin to pick up again, probably later in the year, we'd see some of those launches start to roll in for us and drive some growth related to that content add.

[Gregg M. Sherrill:]

Yeah. We're sitting here. Obviously, we don't provide our guidance until we're talking to you guys three months from now. But when you look out right now, as Ken said, 2016 is relatively quiet from a regulatory implementation point of view. We've been through those time frames before. I think 2012 was kind of a quiet year, and we talked about it back then. So, you got a relatively quiet 2016 here. But everything that we're looking at right now, I mean we're still going to have good revenue growth next year. We're going to outpace the markets. It's still the ramping in and all of that of what we have going, and all that data is coming in and being built right now. But, I'm very comfortable we'd given you positive color in the sense of we'll definitely grow next year and outpace those markets. And, we will also be gearing quite – focused on gearing towards a number of significant launches late next year that ramp into 2017 as additional regulations begin to kick back in. And then when I'm talking about right in all of that where we got additional content going in and you've seen us winning more intelligent suspension system programs et cetera.

[Rich M. Kwas:]

Gregg, is that – you have some programs that launch this year that lap over next year, so...

[Gregg M. Sherrill:]

That's right.

[Rich M. Kwas:]

Is the context that assuming that whatever production's going to be next year, you can grow still a couple of points ahead of that? I think it's hard...

[Gregg M. Sherrill:]

We will outgrow the markets. That's correct. Yes.

[Rich M. Kwas:]

So many factors in it?

[Gregg M. Sherrill:]

Yes.

[Rich M. Kwas:]

Okay. All right. And then slide 20, I thought it was interesting. That's a good slide in terms of where you are with commercial vehicle versus production levels or what's labeled as normalized production levels.

[Gregg M. Sherrill:]

Right.

[Rich M. Kwas:]

I guess the pushback on that would be we've gone through a super cycle in terms of commodities for the last 15 years, and lot of these markets where your content is relevant is off-road, and that hinges on ag and mining, and construction, et cetera. So, is it realistic to think that those volumes would ever come back? Or is the reality is that, okay, we're depressed now, but we think we can probably get some of that back, but the $1.7 billion is really kind of blue sky.

[Gregg M. Sherrill:]

I don't think the $1.7 billion is blue sky.

[Rich M. Kwas:]

Okay.

[Gregg M. Sherrill:]

But, quite frankly, internally, we do have a blue sky number if things are going back to peak cycle. But these are not peak cycle numbers...

[Rich M. Kwas:]

Okay.

[Gregg M. Sherrill:]

...that we're looking out here. When we said normalized and that's where we could come up with, it was an estimate sort of – I mean, yes, it cycles, right? I mean, these businesses are cyclical. They don't run downhill ad infinitum, nor do they run uphill all forever. So, we know we're in a very deep down cycle. We know where commodities are around the world. We know the tie-ups on infrastructure spending and all that stuff that's damaging these markets. We know the agricultural situation et cetera. So, we certainly anticipate a cyclical comeback, a turn, if you will, upwards. And there we try to capture what we would consider to be more normal, not full-blown, trying to settle and growing 30% again and everybody is digging iron ore out of every country in the world. That's not the assumption there, okay? It is more of middle of the road, if you will.

[Kenneth R. Trammell:]

And Rich, the other thing I would point out because, specifically I know you mentioned commodities and mining. Recall that for the off-highway, the only regions that are regulated now are North America and Europe. And because there's relatively less mining that goes on there versus the areas that Gregg talked about, the mining cycle will have a little bit less of an impact on that comeback than construction and ag and forestry and that sort of side of the equation.

[Gregg M. Sherrill:]

We didn't put that in as a prediction. We put it in as perspective, right?

[Kenneth R. Trammell:]

But...

[Gregg M. Sherrill:]

But somewhere in that range. And, I mean, even where we're at, which is a terrible market condition out there, the target was 29%, right? And the next inflections will be in different regulatory areas. That's what I tried to say in my remarks, particularly now light vehicle affecting all powertrains beginning in 2017 with the Tier 3 and the Euro 6c coming in, in the big markets, right?

[Rich M. Kwas:]

Yeah.

[Gregg M. Sherrill:]

And easing in over four or five years.

[Rich M. Kwas:]

Yeah. No, it's a helpful slide. I'm just taking the perspective of, are we going to get that – does that assume peak ag here in North America and peak infrastructure in China? It doesn't appear that way, so...

[Gregg M. Sherrill:]

No, sir. Not peak.

[Kenneth R. Trammell:]

And again, the infrastructure in China, because the off-highway is not regulated in China today, has no impact on that calculation.

[Rich M. Kwas:]

Right. That's an on-road number, right? Okay. All right. And then just last, Ken, on the 1 times net debt to EBITDA target goal – Gregg, your comments around, first, the buyback influences that, but then your comments around – your comments were more aggressive around whether it's M&A or organic investments, et cetera. Is that 1 times just kind of there now, and it's a goal, but we're going to consider a bunch of other things here, and it's not exactly a target? If we get there, we get there. But there's a lot of other things that could happen between now and then. Is that the way to interpret that?

[Gregg M. Sherrill:]

Okay. Here's the way I see it. First off, we're there. We were there at the end of last year. Now, quarter-to-quarter, we cycle I think – what were we? 1.4 times? Because you know the cyclical movement in the year. But kind of think end of year, right, and so we're there, right? And so what we're saying is with the strength of the balance sheet, right, in the cyclical markets that we do live in, some are down right now, some of them are up, right? It's kind of a mixed bag depending on what market you're talking about around the world. But nevertheless, we feel with the cash we're generating, with the investments that we're looking at, right, then first off, the share buybacks, we would intend to continue to buy out of excess cash, right, and that's what we've been doing. Now, we are turning more attention to what our inorganic opportunities may be there, that would in turn help me drive further organic growth, right? I'm not just going to buy something to buy something. You guys have heard me say that before. And if those opportunities took us above 1 times on a temporary basis, we would certainly expect that business, that resulting business, to help me get it back down towards that, right? But we're willing to flex, that's what we're saying.

[Rich M. Kwas:]

Okay. I appreciate it. That's a good color.

[Gregg M. Sherrill:]

Okay.

[Rich M. Kwas:]

Thank you.

[Gregg M. Sherrill:]

Yeah.

[Operator:]

Okay. Thank you. Our next question comes from Mr. Ryan Brinkman. Sir, your line is now open.

[Ryan J. Brinkman:]

Thank you. Good morning. Ryan Brinkman from JPMorgan.

[Gregg M. Sherrill:]

Hi, Ryan.

[Ryan J. Brinkman:]

So you mentioned a number of opportunities and risks already relative to fallout from the VW situation. I'd like to get your thoughts on just a couple more. Positively, you talked about focus on laboratory versus real world that can help. You didn't discuss, but I wonder if it's relevant, like, we've seen with Autoliv being tapped to meet inflator demand for recalled Takata airbags. Could you potentially be called upon to help VW out in a pinch if they have to add a lot of emissions content to a lot of vehicles quickly? And then negatively, I didn't hear you talk about – there was mention of hybrids, but potential acceleration of the shift that some have called for toward fully electric vehicles. And then lastly, and this is probably unfair, it's very early days. But have you made an attempt or are you ready to communicate when you sum up all these various different complicated cross-currents whether you think that the net impact at the end of the day is positive and negative for Tenneco.

[Gregg M. Sherrill:]

The answer to your first question is, it's yes, it's possible. Okay? That we could be involved in what you're describing as this whole thing evolves, but I think it's too early, and we're certainly not prepared to talk about anything there today, but it's certainly possible. Okay? You mentioned it relative to the Autoliv, their whole airbag situation, that's why I'm answering there. As I said, I really – I think there is a greater chance in the next three years to four years to five years of there being a positive effect, and it goes back more to the real driving emissions, which were already there, right? And this has really kind of surfaced that whole thing and put it right up in everybody's face. That the content is positive, more positive than negative. All right? Because I don't see an enormous fast mix shift. Okay? And again, we're talking Europe. And I could prove to be wrong, but I just – when I look at all the positive drivers and let's don't forget, they have very strenuous CO2 and fuel economy requirements in Europe. If you look at the European regs, they're more stringent on that than the U.S. on the CO2 piece. Ours are probably more strenuous on the NOx piece, if you're talking diesel engines. Right? But nevertheless, the Europeans are very focused on meeting those CO2 requirements. We know that a lot of people over there have diesels in their powertrain mix for achieving those regulations and there are ways we know that you can solve and many customers have solved the NOx problem at a competitive pricing level, and they're doing quite well out there. So I see that continuing. I mean, net-net, it's either going to be probably neutral to positive out there in the future. Again, I kind of go back to all of this is pretty much in line with the way regulations were headed with Euro 6c and those real driving conditions anyway.

[Ryan J. Brinkman:]

Okay. That's really super helpful actually. And then just last question to delve into another aspect of the nuance, I guess. You talked about already the content per vehicle difference on diesel versus gas. But that's today, right? So I'm curious how you see that disparity trending over time given different changes in regulations and technology? Do the increases in emissions regulations that are coming in the next few years require more incremental content to diesel or to gas? And then lastly there, I recall in the past you talking about a trend toward more use of direct injection, I think it was in gasoline cars increasingly requiring the use of gasoline particulate filters, which aren't always on gas cars, whereas diesel particulate filters are. That could reduce the disparity? Thoughts on the gap?

[Gregg M. Sherrill:]

Yeah. I think, if anything – and I kind of wish I had Tim here. And if I have to correct myself, I'll be the first one to come back and correct. If anything, the gap will tend to close over time. I mean, the diesels are kind of got from a physical content in them what they've got, right? I mean, there'll be marginal differences maybe to add to meet real driving conditions depending on what your platform is set up for right now. Some of them probably meet it already, okay? And there would be no change to those. But the gasoline engines and the GDIs and all that that you're talking about and particularly in Europe, where the strict – I think the way they count particulate matter differently now than North America, it's more of a – I'll get this backwards, watch me, mass versus number. But don't get me to the technical part. It's a little more strict in Europe. That's where – and we're already beginning to see programs asking for gasoline particulate filters. Not all. Some will solve it otherwise. It's kind of a trade-off situation that they're looking at in their whole powertrain setup. But all I'm saying is, is that the trend is to drive more gasoline content. It's not a big step change, like all these huge diesel regulations that we've just been through where you added whole things like SCR systems, et cetera. But you may have to add a whole thing in some instances, like a gasoline particulate filter. And so I see the content – it's not going to close. The gap will not close. But if anything, there will be a trend, I think, in the next four years or five years of more content on a gasoline engine as a percent than on the diesel, and I could be wrong. And it does depend on how all of them decide to solve this even on the diesels and the gasolines.

[Ryan J. Brinkman:]

Okay. This has been great color on the call today. Thanks a lot.

[Gregg M. Sherrill:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mr. Joseph Spak. Sir, your line is now open.

[Joseph R. Spak:]

Good morning. It's Joe Spak from RBC Capital Markets.

[Gregg M. Sherrill:]

Good morning.

[Kenneth R. Trammell:]

Good morning.

[Joseph R. Spak:]

I guess, the first question is, do you have any sense in Europe what percent of light vehicle diesels have in SCR today?

[Gregg M. Sherrill:]

It's a good question.

[Kenneth R. Trammell:]

Joe, I don't know that we could tell you what the mix between SCR and Lean NOx traps is. I can tell you that Lean NOx traps were more efficient on smaller displacement diesel engines because they've got a lot more precious metals content, and larger displacement engines tended toward some sort of liquid urea SCR application to get at NOx. So you might look at it that way. Based on kind of what we're seeing, I think we're seeing a trend toward more SCR, obviously less Lean NOx traps.

[Gregg M. Sherrill:]

That's really something that we'd have to get out of the market, but maybe we should. I don't think we have the answer to it today. Again, it kind of goes back to what was the customer's powertrain strategy. We kind of all know what one of those customers' strategy was now. It's been pretty publicized. But if you look at some of the others, and again we're talking Europe, I mean clearly some of them went straight SCR. I think there are some applications out there where it is both Lean NOx and SCR. So you've got varying strategies. I don't have the answer to what that mix is today. That's a good question, and we might could find it. But I don't know what it is.

[Joseph R. Spak:]

That's fair and we could follow up. But I guess, and sort of maybe to summarize some of the points you were making earlier, as you move to Euro 6c, and then Euro 7 I guess is still being negotiated, but I mean is it your view that you need the DOC, the particulate filter, SCR, the Lean NOx trap, maybe some EGR, are you going to need all that content in order to meet those standards?

[Gregg M. Sherrill:]

That's not – I don't think that's clear. I wouldn't go so far as to say, again especially you broke it – you certainly need the DOC, you need the particulate filter. Those are kind of separate. Now we're talking – this has been a NOx question, right? In the NOx end of it is the Lean NOx trap or the SCR. And I'm not going to say that you have to have both in every condition. I mean, that may be a very technical decision made by a customer for some other reason, on how he's calibrating his powertrain.

[Joseph R. Spak:]

Okay.

[Gregg M. Sherrill:]

Okay.

[Joseph R. Spak:]

And then, I mean, Euro 7 is still being negotiated, right? I mean, do you have any – it's probably still early days in light of all this news, but any insight into whether customer are changing plans or even whether a Euro 7 timetable or the actual standards gets changed?

[Gregg M. Sherrill:]

Not really. It is just way too early on that one.

[Joseph R. Spak:]

Okay.

[Gregg M. Sherrill:]

Yeah.

[Joseph R. Spak:]

Okay. Last one, I just want to talk a little bit about, I guess, Customer A in North America on slide six. Can you talk a little bit about how you went about getting that business? Is that sort of a new dual source? Is it a conquest? Because I always thought your opportunity in North America on the emissions side for commercial vehicles was with new regulations coming, and obviously that didn't happen. So I just want to get a better sense of that dynamic about how that relationship and that business was won.

[Gregg M. Sherrill:]

Well, I think it's not dual sourced. I mean, we have the business on it. And it was simply a new platform from a customer that we went out and won. I don't know how else to tell you.

[Joseph R. Spak:]

Okay.

[Kenneth R. Trammell:]

And, Joe, we've been mentioning it for a while, it hasn't been on the...

[Gregg M. Sherrill:]

Yeah.

[Kenneth R. Trammell:]

...on the chart. So it's not new. It is...

[Gregg M. Sherrill:]

Just incremental to what we've been talking about.

[Kenneth R. Trammell:]

It's actually launching this quarter.

[Joseph R. Spak:]

It launched, yeah, that was – yeah, it launches in the fourth quarter?

[Gregg M. Sherrill:]

Right. We're just hung up with the customer.

[Kenneth R. Trammell:]

Actually, third quarter. We saw revenue in third quarter.

[Gregg M. Sherrill:]

Yeah.

[Kenneth R. Trammell:]

I think second quarter revenue in the third quarter.

[Gregg M. Sherrill:]

And we're just – it's a respect to the customer's wish on timing of the announcement, so...

[Kenneth R. Trammell:]

Yep, as soon as we can, we'll give you the name.

[Gregg M. Sherrill:]

Right.

[Joseph R. Spak:]

Okay. Thanks a lot, guys.

[Gregg M. Sherrill:]

Yep. Thank you.

[Operator:]

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

[Brian Sponheimer:]

Good morning. Thanks for fitting me in here.

[Gregg M. Sherrill:]

Morning.

[Brian Sponheimer:]

I guess I'll just ask a question about the other side of the house. As far as kind of what you're seeing in Ride Performance from an aftermarket perspective on a global level, we've got 3 trillion in miles driven in North America or the U.S., but you mentioned Asia coming off. Just give a little color as to maybe what more you're seeing on the other side.

[Brian J. Kesseler:]

Yeah. Across all regions?

[Brian Sponheimer:]

Yes, please.

[Brian J. Kesseler:]

Yeah. So we're seeing continued strength on our North America aftermarket. We've captured a great customer in North America with the CARQUEST business that we've mentioned in previous quarters. We didn't mention it this quarter. But it continues to have very positive effects. We're still continuing to see great growth here. Europe, we're hopeful that we're starting to see some rebound there. And in China, we're prepping very aggressively for that market as it continues to age and with being the largest global car park by 2025. So we're setting the foundations there. South America, we continue to do fairly well in a very interesting environment. So we continue to expect to see very strong growth and contribution from our aftermarket going forward.

[Brian Sponheimer:]

If I'm thinking about the Chinese aftermarket and a six year old or seven year old vehicle that's going to need new shocks and struts, when do we start to see that growing car park really start to benefit the aftermarket there and really help you guys?

[Brian J. Kesseler:]

Yeah. The first replacement cycle is usually in that seven-year and eight-year timeframe. So we're concentrating very heavily in the Tier 1 cities, which is where the car parks been first and is aging, and then as the new cars are going into the Tier 2, Tier 3, Tier 4 cities. So we've got a time lag here. And then the distribution model in China still is going to need some shaking out over time as that continues to mature. We expect it to start behaving like the more mature markets, but that'll shake out over a number of years.

[Brian Sponheimer:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Mr. Matthew Stover. Sir, your line is now open.

[Matthew Stover:]

Thank you very much. Two questions. First, I was wondering if you could kind of talk about the margin development in APAC. It seemed to be quite solid given the end markets, and I'm wondering if you could sort of flesh that out a little bit. And then, two, on the slide where you focused on future investment opportunities, there's obviously the effect on organic growth. You've been funding that to-date, but how should we think about that impacting kind of future RD&E percent of sales investments and CapEx percent of sales?

[Kenneth R. Trammell:]

So on the investing for growth, I think CapEx as a percent of sales, working capital as a percent of sales, and I think you mentioned research and development, all those will stay fairly constant. In other words, they'll grow with the sales growth that we expect to see.

[Matthew Stover:]

Okay.

[Kenneth R. Trammell:]

And then, Matt, I'm sorry. Remind me your first question again.

[Matthew Stover:]

On the margin development in China.

[Kenneth R. Trammell:]

Margin, yes. Thank you.

[Matthew Stover:]

Yeah. It was pretty solid.

[Kenneth R. Trammell:]

Yeah. Look, we pointed out that we had a $5 million customer recovery in the quarter that occurred in China, because obviously the margins looked – were certainly a very strong improvement, especially considering the fact that the revenues were weaker. So we wanted to make sure you saw what the impact of that was and you can see what the margin impact is.

[Gregg M. Sherrill:]

The China margins continue to be quite strong, and there's...

[Kenneth R. Trammell:]

Yeah.

[Gregg M. Sherrill:]

...a lot of work going on continuing that march. The $5 million that kind of accumulated and got caught up in the third quarter, corporately it's noise in the system. I wouldn't even have talked about it other than it occurred in Asia where the revenues aren't as great as, say, the North America, the European segment, and it had kind of an outsized influence on the margins. So we thought it would be good for clarifying purposes for you guys.

[Matthew Stover:]

Okay. Thank you.

[Kenneth R. Trammell:]

Thanks, Matt.

[Operator:]

Thank you. Our next question comes from Mr. Patrick Nolan. Sir, your line is now open.

[Patrick E. Nolan:]

It's Deutsche Bank. Morning, everyone.

[Gregg M. Sherrill:]

Morning.

[Brian J. Kesseler:]

Good morning.

[Kenneth R. Trammell:]

Morning.

[Patrick E. Nolan:]

Thanks for getting me in. I just had two more quick questions. First for Ken, once again the SG&A and R&D spending was really well-controlled in the quarter despite the revenue decline. Can you just talk about, as revenue eventually starts to recover on a fully consolidated basis, is this level of R&D and SG&A to sales kind of what we should be thinking about or should it be moved back more towards kind of the historic levels you pointed to?

[Kenneth R. Trammell:]

So I mean research and development, again, I think over time and obviously quarter in and quarter out there's variance based on gosh, even customer recoveries and a number of things like that. But we've been staying right around 2%, I think 1.9% to 2% last several years. I don't see that changing over the course of the next number of years. SG&A, we'll certainly look to lever the G&A piece, but we'll continue to make investments in selling because that's what drives our growth.

[Gregg M. Sherrill:]

Yeah, there's really two pieces. There's kind of a, I won't say totally fixed, but an almost fixed piece of R&D more in the core sciences and advanced type work that we do. It doesn't vary with the volume as much. But the biggest chunk is what we call our applications engineering, which is all the work you're doing on every program around the world constantly, and that's the piece that should stay pretty constant as a percent of sales with revenues.

[Patrick E. Nolan:]

Got it. And Gregg, if I could just ask one to you on – it seems like this – the strategic options for the use of cash seems to be – you seem more optimistic that something could happen there on that side. Could you maybe just talk about the financial metrics when you're looking at a potential acquisition as far as what kind of accretion you would expect and how soon? The reason I'd ask is there's been some recent acquisitions in this space that have paid what most of us view as a pretty healthy multiple. So maybe you could just touch on that relative to the decision whether or not to buy back stock relative to doing M&A.

[Gregg M. Sherrill:]

Well, obviously, it's kind of a difficult one to answer. We intend to be smart. I tried to say that, okay, about any opportunity that comes up. And anything that did come up – and it would – it's hard to answer for every single one. Is it a technology acquisition? Is it someone that expands our presence in a region or whatever? And it's resulting in what we see as future organic growth off of a sort of new platform, if you will. And we would factor all that in into how we valued the acquisition. But clearly, we're not interested in going out there and overpaying, if you will, for anything. It would have to – and we would have to explain it quite clearly on a case-by-case basis to you. But we're definitely looking for that type of thing. And really, if you think about it, we've been in a long evolution here, right? We've put in this organic growth story, regulatory driven and intelligent suspension system sort of driven story. About eight or nine years ago, we were still fairly highly levered. We managed to achieve all that growth, at the same time driving that leverage down to where we got our balance sheet where we felt we needed it to operate in the world that we've got. And we're willing to be flexible there as I've said. But we've always had those sort of – that flow of priorities, from organic growth through making sure that our operations were structured absolutely efficiently through to the balance sheet, through to inorganic opportunities and direct returns to shareholders, those five elements and they're kind of – and what we see as priority order of driving shareholder value, right? So that's how we look at it and it would be difficult for me to sit here and talk specific metrics with you today other than clearly we would lay those out in any opportunity that we had and show you how we believe that would, in fact, be the best way to invest the money to drive shareholder value.

[Patrick E. Nolan:]

Got it. Thanks very much, guys. Good margin performance in the quarter.

[Gregg M. Sherrill:]

Thank you.

[Brian J. Kesseler:]

Thanks.

[Operator:]

Thank you, speakers. I would now like to hand the call back to you.

[Linae Golla:]

Thank you. This concludes our call. An audio replay will be available on our website in about an hour. You can also access the recording of this call by telephone. In North America, you may reach the playback at 866-465-2112. For those outside North America, the number is 203-369-1429. This playback information is also found in our press release. Thank you for joining us today.

[Operator:]

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.