Tenneco's (TEN) CEO Gregg Sherrill on Q4 2015 Results - Earnings Call Transcript

| About: Tenneco Inc. (TEN)

Tenneco, Inc. (NYSE:TEN)

Q4 2015 Earnings Conference Call

February 09, 2016, 09:00 ET

Executives

Linae Golla - Executive Director, IR

Gregg Sherrill - Chairman & CEO

Brian Kesseler - COO

Ken Trammell - EVP & CFO

Analysts

Joe Spak - RBC Capital Markets

Brian Sponheimer - Gabelli

Pat Archambault - Goldman Sachs

Samik Chatterjee - JPMorgan

Brian Johnson - Barclays Capital

Colin Langan - UBS

Brett Hoselton - KeyBanc Capital Markets

Patrick Nolan - Deutsche Bank

Richard Hilgert - Morningstar

Rich Kwas - Wells Fargo Securities

Operator

Welcome to Tenneco's Fourth Quarter and Full-Year 2015 Earnings Release Conference Call. [Operator Instructions]. I would like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

Linae Golla

Good morning and welcome. This morning we 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 and full-year results. The slides related to our prepared comments are available on the investor section of our website at www.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 attachment. 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 will turn the call over to Gregg.

Gregg Sherrill

Thank you, Linae and good morning, everyone. I'm very pleased with our fourth quarter and full-year results which demonstrate the effectiveness of our strategies and the progress we're making on realizing our vision for Tenneco. We're generating profitable growth, continuously improving operations and investing to achieve long term success.

Looking first at the fourth quarter, on slide 5, we delivered an 8% increase in revenue, excluding currency. We delivered record high EBIT, net income and earnings per share. On an adjusted basis, EPS increased 32%. We delivered margin improvement for the 11th consecutive quarter and we delivered outstanding cash performance.

In the quarter, light vehicle revenue was up 11% due to our strong positions in Europe, China and North America. This performance exceeded light vehicle industry growth of 4%. Incremental clean air content drove a 1% increase in commercial truck and off-highway revenue, despite a 16% decline in unit demand. And the global aftermarket delivered a steady performance, with revenue up 3%.

These fourth quarter results represent a strong finish to 2015, where for the full year revenue increased 5%, excluding currency, with growth outpacing industry production. Our earnings were very strong, with our highest ever full-year EBIT. Both product lines improved margins year-over-year. In total, our margin improved for the sixth year in a row. And our cash performance was outstanding, with a 52% improvement over last year. All in all, an excellent year and finishing with great momentum as we move into 2016.

Now, taking a look at what's driving our performance, the building blocks of our business and the factors we control remain constant and position Tenneco for continued growth. We have a solid foundation, a clear strategic direction, the capabilities to execute on our opportunities and a unique combination of factors driving revenue.

First is the regulation of criteria pollutants. The timeline for global implementation of emissions regulations is on slide 8 and this timeline directly aligns with the growth cadence for our clean air product line. In every region of the world, these regulations are driving new programs and additional content for Tenneco. Partnering with our customers, we bring the capabilities and products needed to meet regulations for any powertrain application. If you look back from 2006 through today, in every segment and into every region of the world, emissions regulations have advanced at least one and in many cases, two levels. Looking forward, the regulatory timeline demonstrates that trend continuing.

The second driver is our advanced ride performance technology. This is an area where we're seeing content growth with our full suite of Monroe Intelligent Suspension technologies that meet increasing demand for enhanced vehicle ride and handling. The third key driver is our global aftermarket. This year marks the 100th anniversary of Tenneco's Monroe brand, one of the iconic aftermarket brands representing premium products, quality and customer service. We continue to lead in mature markets with our brand's strength while investing for growth in all regions.

Underpinning these structural growth drivers and reflected in our 2015 results is the balance we have across product lines, end markets, regions and customers. Our customers recognize Tenneco as the leading supplier of both clean air and ride performance products, including our elastomer products which have synergies across both product lines. Furthermore, no customer represents more than 15% of total revenue and we supplied about 340 platforms in 2015, with a favorable balance across vehicle segments.

We also serve diverse end markets which is an advantage when operating in cyclical industries. Last year, our OE light vehicle revenue was 73% of the total; aftermarket was 15%; and OE commercial truck and off-highway generated 12%.

Now let's take a closer look at the full-year results. Beginning with revenue on slide 9, total 2015 revenue was $8.2 billion. Excluding an 8% currency headwind, revenue increased 5%, including gains in both clean air and ride performance. Looking at revenue by market served, light vehicle revenue was up 6% versus industry growth of 1%, driven by our strong customer and platform position globally. Commercial truck and off-highway revenue was down 3% or 1% value-add, in the face of a 23% decline in unit demand.

Incremental clean air content on programs in Europe, North America, China and Japan drove our strong performance against the industry. And lastly, the aftermarket delivered a solid performance, with revenue up 6% on stronger sales in both North and South America.

Turning to 2015 earnings on slide 10, for the full-year, adjusted EBIT was up 2%. But if you exclude negative currency, adjusted EBIT increased 13%. This strong gain reflects our light vehicle growth and the benefit of incremental content on commercial truck and off-highway programs, as well as higher aftermarket sales.

On the cost side, we're executing well on plans to continuously drive greater efficiency and lower our cost structure which was evident in our 2015 results, with manufacturing savings and restructuring activities adding to earnings.

As you know, we're strongly focused on driving profitable growth. So I'm proud that 2015 marked our sixth consecutive year of margin improvement, including a strong fourth quarter improvement. Adjusted EBIT margin increased 80 basis points in the quarter. And for the full year, margin improved 40 basis points to 9.3% and outstanding performance for both the quarter and the full year.

And, finally, I want to mention our share repurchases in 2015. As we have previously discussed, Tenneco has a strong balance sheet and our growth and profitability plans are delivering results. So we can now be more aggressive with our capital allocation priorities, including providing additional capital returns to our shareholders.

In 2015, we repurchased 4.2 million shares for $213 million, bringing our total number of shares repurchased since 2011 to 6.2 million or 11% of shares outstanding. Before I turn the call over to Brian, I'd like to thank our dedicated team of 30,000 employees around the world. As I visit our facilities, I'm always impressed with the pride they have in Tenneco and their commitment to serving our customers. I appreciate the effort they give every day and the passion I see for achieving even greater success.

And with that, I'll turn the call over to Brian.

Brian Kesseler

Thanks, Gregg and good morning. We're starting off the year with great momentum. We delivered an outstanding quarter, with revenue growth and our 11th consecutive quarter of margin improvement. It's clear that our team is aligned, focused and executing well. Just a reminder that all my comments on revenue refer to value-add revenue and exclude currency. Beginning with clean air revenue on slide 12, global clean air revenue was up 9% in the quarter, an excellent performance driven by stronger light vehicle volumes, content growth on commercial truck and off-highway programs and stronger aftermarket sales.

Breaking it down by reporting segments, North American clean air revenue was up 7%, mainly driven by a 7% increase in light vehicle revenue. This increase was due to stronger volumes on the Ford F-150 as it continues to ramp and on GM and RAM pickups and also on the Chevy Malibu. Commercial truck and off-highway revenue in North America rose 4% on the Ford medium-duty truck business and incremental content on existing off-highway programs, despite a 37% decline in unit demand. The North America aftermarket also had a good quarter, with revenue up 5% on stronger clean air product sales.

In the Europe, South America and India segment, revenue increased 12%. Light vehicle revenue rose 14% on improved production volumes in Europe, new program launches with Jaguar and the continued ramp-up on programs with VW, BMW and Land Rover. We also had higher revenue in India, where production is improving and we have a good platform mix.

These positive drivers more than offset continuing weak industry production in South America which was down 29%. Commercial truck and off-highway revenue for this segment was up 7%, primarily driven by the ramp-up on stage 4 programs and higher commercial truck volumes in Europe, all of which more than offset a 46% decline in commercial truck production in South America.

In the Asia-Pacific segment, revenue increased 12% in the quarter, driven by stronger light vehicle volumes in Daimler, VW and GM platforms in China. Asia-Pacific commercial truck and off-highway revenue increased 50% versus last year on the continued ramp-up on Kubota off-highway programs in Japan and higher aftertreatment installation rates in China commercial truck programs more than offset a 30% decline in China unit demand.

Clean air EBIT results are on slide 15. Adjusted EBIT rose 16% to $119 million, including $10 million of negative currency. Adjusted value-add EBIT margin improved 130 basis points to 12.3%. This very strong performance was driven by higher light vehicle volumes, commercial truck and off-highway content growth and aftermarket sales. And on the cost side, manufacturing savings also contributed to the improvement.

Turning now to ride performance, beginning on slide 16, total revenue excluding currency was up 5% in the quarter. In North America, ride performance revenue was down 4%, mainly due to lower volumes on our commercial truck platforms. In the Europe, South America and India segment, ride performance revenue was up 14%, driven by higher light vehicle revenue, including continued growth on Monroe Intelligent Suspension programs of VW, Volvo, Renault and BMW and the ramp-up of new programs with Daimler and Jaguar Land Rover. Higher aftermarket revenue in South America and Europe also contributed to the gain in this segment. And, finally, in the Asia-Pacific segment, ride performance revenue rose 11%, driven by higher light vehicle volumes in China, including on programs with VW and Ford.

Turning to ride performance earnings on slide 18, adjusted EBIT was $51 million. And it increased 4%, if you exclude $5 million in negative currency. Adjusted EBIT margin was about even with last year, at 8.8%, driven by higher aftermarket sales in Europe and South America and strong volumes on light vehicle platforms in Europe and China. These positive drivers offset weakness in South America.

We also incurred planned costs related to four simultaneous fourth quarter launches on Monroe Intelligent Suspension programs and early phase spending on four upcoming 2016 launches. This growth represents very good penetration of our advanced systems and we expect these costs to sequentially improve through 2016 as this new content ramps up, resulting in continued year-over-year margin improvement for the segment.

In summary, I want to thank the global Tenneco team for a very strong quarter. They executed well to deliver growth and bottom-line results, with a disciplined approach to generating savings and greater efficiencies across all of our operations.

And with that, I'll turn the call over to Ken.

Ken Trammell

Thanks, Brian. Now let's turn to the adjustments in the quarter on slide 19. We recorded $16 million of restructuring and related costs. That includes $4 million related to exiting our Marzocchi operations which was substantially complete by year-end. This action is part of our continued work to improve our ride performance operations globally. The Marzocchi operations generated $26 million in revenue during 2015 and recorded an operating loss of $5 million.

In addition, we recorded $12 million for ongoing cost improvement initiatives, $10 million of which related to the European cost reduction initiative. The savings run rate from the European initiative was $10 million in the fourth quarter on actions we've completed to date. We continue to expect to reach our targeted annual savings rate during 2016 which, at current exchange rates, is $55 million.

This quarter, we completed another voluntary program offering to buy out former employees vested in our pension plans, primarily former employees in Canada and we recorded non-cash charges of $4 million.

Now moving on to tax expense on slide 20, before adjustments, tax expense was $35 million for an effective tax rate of 27% in the quarter and 33% for the full year, at the low end of the rate guidance we gave at the beginning of 2015.

During the fourth quarter, we completed three important actions that will provide tax benefits in 2016 and beyond. First, we completed a reorganization of the ownership structure of several of our joint ventures in China which will drive management efficiencies in addition to permanently reducing our tax rate.

Second, we implemented a structure that will more closely align our plants and allow us to recognize a tax benefit for certain expenses in China that we previously could not deduct. This action will also permanently reduce our tax rate on an ongoing basis. And third, we implemented a business process change that will reduce our North American tax costs related to our Mexican operations. This action also reduces our tax rate permanently.

Collectively, we expect these actions will reduce our ongoing tax rate to 31% to 32% from the mid-30s rate we have been seeing for the last several years. Cash tax payments are expected to be in the range of $140 million to $160 million during 2016.

Now, moving on to slide 22, cash flow. Cash from operations increased 31% to $329 million in the fourth quarter. The improvement over last year was driven by higher earnings, lower interest and tax payments, as well as strong working capital management, including lower inventory days on hand and customer tooling collections.

For the full year, cash generated from operations increased 52% to $517 million, a new record high performance. Our key working capital metrics continued to be strong in the fourth quarter, with days sales outstanding and accounts receivable, excluding factoring, at 57 days; inventory days on hand at 36 days; and days payable outstanding at 73 days. Capital investments in the quarter were $78 million and $295 million for the full year. In 2016, we expect that our capital expenditures will be between $300 million and $330 million.

In the fourth quarter, we continued to repurchase shares, purchasing 1.1 million shares for $55 million. That brings the total repurchase during 2015 to 4.2 million shares for $213 million. As of year-end, we have $337 million remaining on the share repurchase authorization that we expect to complete by the end of 2017.

Now turning to slide 23, we're continuing to work on reducing our pension exposure. During 2016, we expect to launch a voluntary program offering to buy out active employees and retirees who have earned benefits in the U.S. pension plan that was frozen back in 2006. We expect to complete the program by the end of 2016 and will record a non-cash charge at the time.

The cash payments to those who elect to take the buyout will be made from the pension plan assets and will require us to make a contribution to the plan that we currently expect will be between $23 million and $27 million. This amount is included in the pension contributions projected for 2016 that we provide on slide 30.

While we won't know how many participants will accept the buyout offer until it closes, the average participation rate in similar situations has been around 50%. At that participation level, the charge would be in the range of $85 million to $90 million and our U.S. pension liability would be reduced by about 50%.

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

Gregg Sherrill

Thank you, Ken. As you can see on slide 24, Tenneco has a great track record of solid execution, profitable growth and value creation and we're confident in that continuing. Turning first to slide 25 and our first quarter outlook. Excluding currency, we expect total revenue growth of 5%, outpacing a projected 2% increase in aggregate industry production. That industry number includes 2% light vehicle production growth and commercial truck and off-highway production about even with last year. Based on current exchange rates, we estimate currency headwinds in the quarter of about 2%.

As we announced in Detroit last month, we expect total revenue growth of 5% in 2016, excluding currency. That growth outpaces forecasted aggregate industry growth of 3% which assumes a 3% increase in light vehicle production and a 1% decline in commercial truck and off-highway.

Our revenue growth is consistently outpacing the industry and we expect that to continue, driven by the power of our light vehicle position with leading customers and on key platforms globally; increasing emission regulations creating new opportunities and adding clean air content; growing demand for electronic suspension technologies; and increasing demand for our aftermarket products.

These drivers, with more detail for 2016, are on slide 27. On the light vehicle side, we expect incremental clean air revenue from large programs that launched in 2015 with Daimler, Jaguar Land Rover, Porsche and GM, to name a few. We also expect to benefit from new platform launches this year with Jaguar, GM, Volkswagen and Ford.

In our ride performance product line, we expect incremental revenue from Monroe Intelligent Suspension programs with four new launches in 2016 and the continued ramp-up on programs launched in 2015, including the Volvo XC90 and the Ford Focus RS.

We also expect revenue growth from our commercial truck and off-highway programs, despite weakness in those markets. Driving this growth in off-highway will be the continued ramp-up on programs in North America and Europe and on the mid-year 2015 launches with Kubota in Japan. On the commercial truck side, we launched diesel and gasoline engine content on Ford's new medium-duty truck in mid-2015 which will add to our revenue increase in the first half of the year.

We're also increasing our market share with commercial truck customers in China and beginning to launch programs with India truck customers to meet Bharat stage IV regulations, now in effect in 50 cities. We expect the aftermarket to make a solid contribution in 2016, with our leading position in the mature markets. We will also continue investing in the emerging markets such as China, where the car park hasn't yet reached of the sweet spot for our products. We intend to be well-positioned in those markets so we can quickly expand when the opportunity is there.

Now looking beyond this year, our revenue growth not only continues, but we expect it to accelerate in 2017 and 2018, as you can see on slide 28. Excluding currency, we expect to grow revenue between 6% and 8% in 2017 and between 7% and 9% in 2018. While 2016 is a relatively quiet regulatory year, new light vehicle emission standards begin phasing in, starting in 2017. These regulations will support clean air revenue growth in North America and Europe. Additionally, during this period, there will be new regulatory requirements on commercial trucks in China, India and Brazil.

On the cost side, we're investing to optimize our operations globally and improve Tenneco's cost competitiveness. This is a continuous process and we're seeing the benefits of manufacturing efficiencies and cost savings in both product lines.

In closing, it's clear that our foundation is solid and our strategies are working. We've outpaced the industry and delivered organic revenue growth of 38% over the last six years, while also improving margins and investing for the future. We delivered excellent results in 2015 with our performance accelerating in the fourth quarter and we're carrying that momentum into 2016 with a positive outlook for the year.

Our expectations for revenue growth and EBIT margin improvement will help drive higher net income and earnings per share in 2016, with the added benefit of a lower tax rate due to the permanent structural tax changes we've made.

And, beyond that, we see out growth further accelerating in 2017 and 2018. We're not letting up in any way on all the things that are working so well which gives me great confidence in Tenneco's future success.

And with that, I'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Joe Spak of RBC Capital Markets. Your line is now open.

Joe Spak

I guess I want to start there on slide 14, just to better understand a little bit what happened in 2015 and then as we think about 2016. So, you had the Europe, South America region down about 20%. Obviously FX was a large part of that, but then you also had the Scania business and Brazil. So, should we think about those two factors -- the launch of some of new business and South America challenges roughly offsetting each other?

Ken Trammell

So, Joe, I think you're thinking about the Scania business. That was actually European launch. We've been doing Scania business since 2012 in South America.

Joe Spak

No, right. So I was talking about for the segment overall, like that segment was down 20%. So I guess FX would explain a large part of that, but then you would have expected some growth from the Scania launch. And I guess the offset to that would've been some of the challenges in South America. Is that how we think about what happened that year?

Gregg Sherrill

Yes, I think that is it. We were -- commercial truck and off-highway, at least in the quarter, was up in that segment about 7%. And it was due to, I'm sure, a number of things. Scania, I'm quite positive would have helped, along with some of the stage 4 stuff, even on the off-highway. And the only negative that that was up against was that huge decline in South America market production.

Joe Spak

Okay. So, now as we think about 2016, as we think about CV and OH down about 1% on volume for the year. Given that some of the launches were more in 2015 -- and you've obviously had great outgrowth throughout the year and even in the fourth quarter. But because we start to anniversary some of those launches, should we think about -- how should we think about the outgrowth versus the production volume for 2016?

Gregg Sherrill

Yes. If you're only in the -- and I'm assuming we're talking globally, commercial truck and off-highway where the markets are going to still be down, as we said. If you will, the production volume is down. We still expect a modest growth in our revenues. It is a quiet regulatory year. We've been talking about that for several quarters now. 2016 is quiet, so you're absolutely right, it's lapping a few launches last year. There's some content going in.

We've won some market share in China that's going to be positive. And I think our Kubota volumes are ramping up nicely. Those have been kind of slow to ramp, but they began last year and will continue this year. So net-net, we're looking right now at a modest increase in our revenue against that 1% down market. I think 1%, right?

Linae Golla

Right.

Gregg Sherrill

Yes.

Joe Spak

Okay. And then just in completeness -- for completeness sake, is the ride control business for that segment, the commercial vehicle and off-highway, roughly geographically distributed as the clean air stuff you provided??

Ken Trammell

Yes, Joe, we haven't really broken that out. I don't think it would be that different. Maybe a little bit more heavily weighted in North America, because we do a fair amount of both heavy-duty shock and elastomer business on commercial trucks, on highway commercial trucks in the U.S.. But yes, I don't know that it's that significantly different.

Gregg Sherrill

It's not that significantly different, probably with the exception of China.

Ken Trammell

China. There's really no on highway ride business in China--

Operator

Our next question comes from Brian Sponheimer of Gabelli. Your line is now open.

Brian Sponheimer

Just a mix question in North American light vehicle. As you look at 2016, any talk from your customers about potentially kicking down some car production -- and we've certainly seen it from Fiat Chrysler -- and shifting more to SUV and crossover? Just talk about what you are hearing there from an inventory and channel.

Brian Kesseler

This is Brian. So, I think as we take a look at the volumes in this quarter, I think everybody is aware of some of the downtime on the car platforms on Fiat Chrysler. But we're also seeing a lot of conversation around picking up volume on the SUV and pickup truck production out in the year. So, I think, net-net, I think we'll be in line with where we see the guidance.

Brian Sponheimer

Okay. Then just on North American on-highway, any visibility as to when you think inventory clear [Technical Difficulty] dealer level and production at your customers can better align the Class 8 side with overall demand?

Brian Kesseler

We see some reductions taken out of -- being out, taken out of production to correct inventory with a couple of -- with one of the OEs in particular. The other ones are -- I probably -- we're not seeing that type of correction yet, production versus sales.

Operator

Our next question comes from Pat Archambault of Goldman Sachs. Your line is now open.

Pat Archambault

A couple of things, am I getting it right that essentially all of your commercial vehicle, like the CV OH, from a volume perspective you expect to be down, in aggregate, 1%. And that just seemed less bad than I would've thought and maybe we could unwrap that little bit because I thought from both and on- and off-highway perspective -- the only market that seems to be up is Europe. So what -- maybe we can just talk a little bit more about the puts and takes there.

Gregg Sherrill

If I understood you correctly, it's actually even less, less bad than what you think. Our revenue should be up modestly this year; it is the production volumes that we see down about overall average 1%. We're looking at a modest improvement in revenue. This goes back to what I said just a moment ago. We're certainly lapping some partial-year volumes on launches last year. That helps.

I mentioned Kubota is ramping up recently, nicely, as we see things right now. That is certainly helping. We've gained a little bit of market share in China. Even though the market is definitely down in commercial vehicles in China, our share is up. And as well as here in North America, mid-year we started ramping up on the Ford medium-duty, so we'll get a nice lapping and full-year worth of volumes on that as well.

Ken Trammell

And, Pat, I want to point out the 1% industry production expectation actually comes from Power Systems Research. As you guys know, there is still a lack of visibility to the number of regulated engines that are built in the regulated regions, North America and Europe, versus what Power Systems Research projects.

So, obviously, the industry performance may very well be different than their projection. But that's because there's not the ability -- we don't have it, you guys don't have it -- to tell what the actual regulated industry production is, because a number of those get exported to non-regulated regions.

Pat Archambault

Yes. Ken, that was more my question, is it just seemed that -- and I get it; you guys are deferring to that service for those projections and the data is harder to come by. But it just seemed like that wasn't the most conservative estimate. Just because it does seem like, no matter which market we look at, basically on- and off-highway is still in decline. So that was my main question there, was more on the volume side, not on the revenue side.

Ken Trammell

Yes, Patrick and on that, of course, last year was a really lousy year for those guys, so the rate of decline hopefully will decrease. But again, I do want to point out that the numbers will be different, because PSR just doesn't have the visibility to the units that we actually wind up putting on. What you're hearing from us, when Gregg talked about our modest outgrowth, is our bottoms-up, based on what our customers are telling us they expect to build, versus a reliance on PSR.

Gregg Sherrill

And to be honest, what we're seeing here, halfway through the first quarter, are schedules that are supporting that at the moment.

Pat Archambault

One last one for me, Ken on the pension deal that you did, you're having to fund additionally to do that, obviously. Is it because you are buying out people at more than 100 cents on the dollar? Or maybe just a little bit more on how that transaction will work.

Ken Trammell

No, it's not buying them out. We're buying them out on a 100 cents on the dollar, based on the net present value what their future benefits will be. The reason for the contribution is the plans are not quite fully funded. And when we wind up splitting the plans to terminate the piece of the plan that will be associated with the folks who have accepted the buyout offer, we will need to put a little bit more funding in to make sure we stay at the minimum level. That's the $23 million to $27 million funding contribution I referenced in the discussion.

Operator

Our next question comes from Ryan Brinkman of JPMorgan. Your line is now open.

Samik Chatterjee

The first thing I wanted to touch upon is the margins. I know you are guiding to margin expansion in 2016. But if you could take us through the big buckets there, maybe what's the incremental margin we should be assuming on your organic growth? And how much is the incremental savings year on year or in 2016 versus 2015? And then maybe if there are any headwinds to keep in mind as we look at margins for 2016.

Ken Trammell

At the end of the day, our margin growth, we're expecting to continue to have the drivers that we've seen for the last six years. We certainly got some revenue growth and we captured that, obviously, at decent incremental margins. In fact, we've averaged something in the mid-teens offer the course of the last five or six years, in terms of converting revenue growth into margin improvement.

Secondly, we've talked about here for quite a while the improvement that we continue to see and expect to continue to see, through 2016 on our restructuring actions. And then both Gregg and Brian referenced our manufacturing improvements, as we continue to get traction in the plants on getting waste out of the system, improving our consistency; the things that have been driving our margin expansion for the last six years.

Samik Chatterjee

Any headwinds to keep in mind as we model margins for 2016?

Ken Trammell

Nothing else than what we normally see.

Samik Chatterjee

Okay. So then, moving on, just given the higher market share for light trucks, like pickup trucks and SUVs, in the North America market now than probably a year ago or two years ago, I was just curious on your maybe content per vehicle on the light truck platforms compared to passenger car platforms. Is there a difference there?

Ken Trammell

So on the clean air side of our business, like we've said for quite a while, the content moves with essentially the horsepower of the engine. So obviously when you've got a light truck with a large V8 or a diesel engine, it has higher horsepower; so, therefore, that's going to require additional content to meet the regulations.

Brian Kesseler

The same thing would be true on our ride performance business. As you get bigger and bigger vehicles, the requirements for dampening forces go up, so it has higher content.

Samik Chatterjee

And last one for me. Just based on your expectations for accelerating revenue growth or organic revenue growth in 2017 and 2018, just how should we think about capital expenditure beyond 2016?

Ken Trammell

Our CapEx as a percent of revenue runs a fairly consistent percentage of current-year revenues, between 3% and 3.5%. I would expect us to stay probably up toward the upper end of that range, 3.4%, 3.5% of current-year revenues.

Operator

Our next question comes from Brian Johnson of Barclays. Your line is now open.

Brian Johnson

I wanted to go into a few of the technical drivers, perhaps, of the outperformance in commercial vehicle. The first, could you maybe elaborate on the Tier 4 ramp, when it kicked in, what the additional content is? And I recall, in some prior truck emissions control, there were all sorts of games around engines and inventory, versus engines delivered to customers. Is there any of that effect going on, in terms of -- because we know there's inventories at commercial off-highway manufacturers, in terms of the phase-in of this emissions.

Gregg Sherrill

I think most of that has washed its way through the system. I can't say that all of it has. It does depend on inventories out there, et cetera. One of the gauges I have of that is our business with Kubota which goes into a number of different off-highway customers, those engines. And its ramp-up for a couple of years was quite slow, for the reasons you were talking about, the inventory engines and the way they could continue to ship Tier 3 from the old engines, etcetera.

And what we're starting to see in 2015 and on into 2016, is the Kubota volumes of Tier 4 volumes ramping up very nicely, telling me a lot of that is flushing its way out of the system. Because all the new engines are now being produced at the Tier 4 level. That's probably the best gauge I have, is almost with that single customer, because they ship to numerous other customers.

Ken Trammell

Yes and, Brian, remember, Tier 4 Final was phased in 2014 and 2015, so it's now fully in effect. And as we continue to move through that phase-in period and into the period afterward, whatever inventory, as Gregg said, should really flush its way through the system.

Brian Johnson

Okay. And second question in China, you mentioned market share gains, but is there also increased enforcement as ultralow sulfur diesel fuel comes online? And do you have any sense of where -- I know it's a complicated question -- where the refining capacity is on that? Because my understanding has been that's been one of the factors why regulators haven't pushed as quickly, as the regs would say, on the truckers to clean up their act.

Gregg Sherrill

Right. Yes, that was exactly right. That was a big holdup for quite a while, was the availability of the fuel. That appears to be fairly behind us, at the level that they're at for their own China National 4 implementation. But still, the enforcement has leveled off somewhat. We would still -- I would like to think we're going to see higher enforcement later in the year than what we've got right now. But we really haven't baked any of that into our forecast.

We're assuming it's plateaued for a while, the enforcement is where it is, based -- whatever factors there in China. The positive news in China, you've got sort of flattish probably enforcement rates is what we're anticipating. You still got relatively low volumes, down significantly on commercial trucks. But the positive side is we picked up some share.

Brian Johnson

And final question around Tier 4s, any discussion amongst your OEMs or regulators about having either, A, the equivalent of real-world driving for heavy commercial vehicle diesel; or B, just beefing up the systems for the random -- what I've been calling recently breathalyzer tests -- that newspapers our auto clubs or regulators might want to run?

Gregg Sherrill

No, that's what I think I'd have to check on. I'm not aware of any of that. But I would like to double-check with our technical guys. We can get back to you on that.

Operator

Our next question comes from Colin Langan of UBS. Your line is now open.

Colin Langan

There has been some media reports about one of your top competitors looking to do either of partnership or a sale. Any thoughts on the opportunities for M&A in this market? Is that something you'd actually consider or are you more leaning towards making some cash for buybacks, stuff like that?

Gregg Sherrill

Well, we've always said, if you look at our capital allocation priorities and come right down -- they are in priority order. And once you have the balance sheet where you like it -- and we do which gets you past priority number three. Four and five -- four is any strategic opportunity that might be there. If it made sense, if it was right for Tenneco, aligned with our strategic priorities, we would certainly be interested. So I'm just talking, generically speaking, now.

Given the absence of that, we will continue with executing on the share buyback authorization that we have out there. And you've seen us doing that all through 2015. But clearly if something did come up, we could pull back on the share buyback. Because we do believe clearly that anything that fit our strategy, was the right M&A thing, would drive higher shareholder value than just the share buybacks which more or less redistribute. But nothing to really comment on there this morning, but those will be our -- just to give you a clearer view of the priorities, how we would look at it.

Colin Langan

And how do you think about M&A? Are you looking for technology? Are you looking for customers? What are the key value adds when you're looking at targets?

Gregg Sherrill

It could be any of that. We feel like we're in pretty good shape, as you know, but clearly no business is perfect. There are holes here and holes there that you can fill. And if we found technologies that we thought would advance us, we would certainly be interested. We've done that in the past.

If we found something that covered geographic -- I'm using the term hole; it's not a total hole, but you know what I'm saying -- where we think we'd be better served, we'd the interested in that. So it's really across the board. It's not any one item. Again, within the product lines that we consider strategic to Tenneco.

Colin Langan

Can you remind us about on your on-road truck exposure, where does it reside geographically? Because I know that your stock often trades down on North America truck [Technical Difficulty].

Gregg Sherrill

Yes, North America -- we basically, on the clean air side, do not participate on Class 8. We do have the medium-duty. And we just talked about launching a program last year, the Ford medium-duty, so we're in that. In Europe, of course, we're in with the Daimler platforms, Scania; can't remember the others right now, but it's a fair representation in Europe. In Brazil, almost hate to talk about Brazil, but market share-wise, we have a quite substantial market share down there, I think on the order of 50%.

And China, it's kind of difficult to tell market share because the market is still a little bit undefined, as they continue to increase their penetration. But you've seen our list of customers. And as we're seeing, we've even added a few more for some more market share penetration here this year.

Colin Langan

Just to clarify, when you see headlines, North America Class 8 down, that really has absolutely no impact on your--?

Gregg Sherrill

Really has no impact.

Ken Trammell

Yes, not on the clean air side and a little bit on the ride side.

Gregg Sherrill

Yes, a small amount on the ride, we don't factor that, we shouldn't.

Ken Trammell

Yes, Colin, I was going say, it is frustrating to see the stock trade with the on-highway commercial truck Class 8 numbers in North America, because that does not drive our business. We're a very well-balanced business, significant light vehicle exposure. We've got great off-highway exposure. We've got strong commercial truck presence outside of North America. So we feel the balance of the business shouldn't really drive trading on any one small piece of information in our shares.

Colin Langan

And one last question, can you give us an update on your capacity utilization on the commercial vehicle? Are those facilities better utilized now? Or is there still plenty of capacity as that ramps back and you should have pretty good leverage on the upside?

Brian Kesseler

Yes, we're about the same on capacity utilization as we're operating. So, a lot of out of upside there, as that volume comes back.

Colin Langan

And what is that? Is that 50% utilization--?

Brian Kesseler

Yes, roughly 50%.

Operator

Our next question comes from Brett Hoselton of KeyBanc. Your line is now open.

Brett Hoselton

Two quick questions, just clarification. One, the pension buyout, in your example, you said maybe we get 50%. I know that you are not committing to that. So, do we just assume that the $15 million goes down to $7 million and it's, like $0.08 benefit to your earnings next year or something like that?

Ken Trammell

In terms of the pension expense, I don't think it's -- what you've seen for the 2016 projections is what we expect our pension expense to be for 2016. It's not a one-for-one change. Because, as you know, there's actuarial real adjustments; there's the amortization of past actuarial adjustments. It's not a direct one-to-one. We might get some benefit in 2017 from the pension change, but I wouldn't assume it's a 50% reduction. Don't forget, we also still have pension plans in Canada, the UK and some other markets that are not part of what we're trying to achieve in the U.S. right now.

Brett Hoselton

Second question, as I look at your guidance, a revenue of plus 5% in 2016. Have you provided a percentage growth target embedded in that for light vehicle, commercial vehicle and aftermarket?

Ken Trammell

So, we told you what we believe the markets will grow. Light vehicle is going to grow about 3%. That's what IHS is projecting for 2016. Commercial truck is going to be up 1% -- I'm sorry. I said up; I meant minus 1%. And again, that is Power Systems Research projections. And if you look at our overall portfolio, we'll see growth in excess of that, at that roughly 3 percentage point level. Versus a net 2% up for the industry production, the aggregate industry production, we should be up 3%.

Now, that's driven by a number of different things. It's driven by the things that Gregg said. We should grow a little bit faster than the commercial truck and off-highway business -- than the commercial truck and off-highway industry does. We're seeing modest growth versus the decline in production there.

We will certainly grow faster on the light vehicle side. Brian talked about a number of platforms that we launched in 2015 for Monroe Intelligent Suspension and new platforms that will launch in 2016. That will help us grow faster, as well. So it's a number of different pieces, so no, we haven't given you specific end-market projections. But if you look at the detailed buildup of what we expect to do, it's how we get to that 5%.

I think you asked about the aftermarket. Again, that's over the cycle, generally a market that grows roughly, plus or minus, the GDP rate. We expect to pick up a little bit of market share as we continue to grow the business in some of the regions, especially places like China, over the next few years. So we do expect to grow a little bit faster than GDP in the aftermarket.

Brett Hoselton

Yes. I can sense, Ken, that you really would like to give us a percentage change for the light vehicle and commercial vehicle. Am I correct or would you prefer not to?

Ken Trammell

The projections that we've given you are the projections that we're going to give.

Brett Hoselton

Okay. And then as we think about the commercial vehicle -- if we look at the fourth quarter, you outperformed the industry by, I think, about 17%. Is that a consistent, rough estimate of the run rate for 2016? Or is it potentially going to slow down in 2016?

Ken Trammell

I'm sorry, Brett. Can you ask that question again? I'm not sure I understood your question.

Brett Hoselton

So in the fourth quarter, the market was down -- or, let's see. I'm sorry, I've got to look at my chart here. The demand down 16%, revenue of 1%, so there's a 17% differential. So you've got a 17% organic growth rate or new business growth rate. So you outperformed the market by 17%. So my question is, is that representative of what you think you're going to do in 2016?

Ken Trammell

No, Brett. If you look at the phase-in of the regulations, the phase-in of Tier 4 final and its equivalent in Europe on the off-highway business, was complete at the end of 2015. So we will continue to get some benefit as we finish the ramp-up of the installation of that into 2015 -- I'm sorry, into 2016.

We will also get some benefit from the Ford medium-duty truck business that Gregg mentioned. Gregg also talked about the fact that Kubota -- we're seeing ramp-up on that. But, no, once the regulatory phase-in ends, we will start to move closer to what's happening with the market.

Gregg Sherrill

So that outperformance will definitely moderate a little bit in 2016. That's what we've been saying, because it's such a quiet year, so you don't have launches of new stuff. We're overlapping a lot of things, etcetera. In that outperformance in total, because it's going to shift back towards light vehicle, will reestablish itself in 2017 and 2018 a little more aggressively.

Operator

Our next question comes from Patrick Nolan of Deutsche Bank. Your line is now open.

Patrick Nolan

Most of my questions have been answered, so I just had two follow-up questions. So the first, I wanted to ask the margin question maybe in another way. You did roughly 5% organic in 2015 and you achieved about 40 basis points of value-added margin improvement. You're guiding, again, to about 5% organic growth next year. When we think about the potential margin improvement, are there any start-up costs for the accelerating growth in 2017-2018, that maybe you wouldn't be able to achieve that similar type of 40 basis points margin improvement?

Brian Kesseler

As we take a look at our launch load into 2017 and 2018 and what we see coming at us, I don't think there would be any extraordinary costs that we wouldn't anticipate and plan for. It might get bumpy as we go quarter to quarter, as we go. But from a full-year perspective we would -- our expectation is that we'd continue to expand our margins in each of the product lines.

Patrick Nolan

And on the M&A side, Gregg, can you maybe talk or Gregg or Ken, have the multiples on some of those acquisition targets come in to a similar magnitude as we've seen some of these public multiples come in? Or are they still relatively high?

Brian Kesseler

Pat, that probably assumes that we've been very active at pursuing a lot of different targets, so I really don't know any answer to your question.

Operator

Our next question comes from Richard Hilgert of Morningstar. Your line is now open.

Richard Hilgert

Looking at margins again, I'm looking at the different segments and the regional representation. I'm assuming the year-over-year change in EBITDA margin for Europe/South America is mainly due to South America, yes?

Ken Trammell

So certainly there was the South America impact, Richard. And Brian also referenced in his comments the fact that we've got some launch costs related to the Monroe Intelligent Suspension platforms. We've got four that we launched in 2015 that will -- as those ramp up, we'll begin to smooth out over the course of 2016.

Gregg Sherrill

That was a good news/bad news thing. We just had simultaneous launches -- four basically in the fourth quarter. And we have four launches coming up in this current year, other launches, that there was some preliminary spending going on. So it all came together. And that's what Brian was saying, launch costs can be lumpy, quarter to quarter. That's a perfect example. And then they smooth out as time goes on. We've seen this before when you had heavy launch loads, for example, in China a few years ago, et cetera.

Richard Hilgert

Okay. So in particular in the ride performance, I guess that's where it's going to be showing up, obviously.

Gregg Sherrill

That's where those did, yes.

Richard Hilgert

Like, 190 basis point difference contraction from one year to the next. So, I thought that that might also be the negative leverage that you get out of the operations from South America, too.

Gregg Sherrill

Well, that was a part of it.

Ken Trammell

It's both. Like we said, it's South America was certainly a contributor; and the launch costs that we talked about in Europe were a contributor, as well.

Richard Hilgert

Okay. And then the other little bit of color I was hoping you could provide. When I look at the Asia-Pacific -- you were talking again here launch cost issues in prior periods. But for 2015, as I go through each of the quarters, in both the clean air division and in the ride performance division, it seems kind of lumpy, the margin performance.

Some quarters, tremendous outperformance versus the year ago, on margin. But other quarters, then, all of a sudden a swing in the other direction. We wound up the year with good margin expansion in both clean air and ride on the Asia-Pacific. So, overall, that's a great thing. But I'm just curious, why so lumpy?

Brian Kesseler

Richard, we saw production levels change in China fairly quickly, especially in the middle two quarters of the year. And I would also point out that in the third quarter, in our commentary about what happened in the business in -- the clean air business in China, we had about a $5 million resolution of a customer issue that gave us a benefit in that quarter, as well. So I think if you take that out, you would see the outperformance in the third quarter move back to more normal levels.

Operator

We have one more question comes from Rich Kwas of Wells Fargo. Your line is now open.

Rich Kwas

Just on the commercial side, just a follow-up to some of other questions asked. So if I have this straight, the 1% is Power Systems Research, the down 1%. But the outlook for your business, with modest growth organically, is just the roll-up of your programs. So does it actually tie to the 1% down or --? Because I'm just trying to gauge, as we go through the year, should we use this 1% as the bogey? Or is it just more of a subjective look at things?

Ken Trammell

Rich, all of our projections, of course both light vehicle and commercial truck, off-highway business -- are bottoms-up, what our customers expect to build and our -- what we expect to put on those, as opposed to what the third-party forecasters do.

If you go back to what we said just a few minutes ago, when you look at Power Systems Research, there's one key piece of data that they just don't have visibility to. And, quite frankly, it's difficult, I think, for any of us to get visibility to and that's the percentage of those units that are built in the regulated regions -- being North America and Europe -- that get the aftertreatment content.

And that's because they export engines from this region to somewhere else, whether it's Colombia or Australia, where off-highway doesn't have the same regulation; therefore, it doesn't get the after-treatment content. So what you are hearing from us is, us trying to give you our expectation based on what our customers have told us they will build; and including the changes that Gregg, Brian and I have been talking about from Ford; Kubota ramp up; the ramp-up of the final installation of Tier 4 Final from 2014 and 2015. That means that we should certainly do better than that negative 1%.

I can't tell you how accurate that negative 1% is. I can tell you, in the past, it hasn't been very accurate. But it's the best benchmark we can find to at least give you what the third-party forecasters are looking at.

Rich Kwas

So just broadly speaking, if we take current estimates for the year across the various regions and sectors and take it today, we should just gauge what happens. And then, directionally speaking, that's going to influence your revenue performance--?

Ken Trammell

It will have some influence, absolutely, Rich. At the end of the day, it's the favorite answer, though, mix is what matters. And that mix difference may very well -- that mix may very well be different than what the overall market projection by PSR is showing.

Gregg Sherrill

And as I mentioned earlier, we're sitting here now halfway through the first quarter. In the first quarter, schedules are pretty much in line with exactly what we're telling you. We're looking at about a 5% revenue growth in the quarter.

Rich Kwas

Yes, okay.

Gregg Sherrill

And what we know on actuals from the customers right now, so --.

Rich Kwas

Yes, I'm just trying to get at the sense for this 1%, whether -- how much it really means which it doesn't seem to mean much.

Ken Trammell

Like I said, it's just the best benchmark we've been able to find, Rich. If we had a better -- we would let you know.

Rich Kwas

I understand. And then, net debt to EBITDA, Ken -- so the 1.3 times the net leverage ratio. So, anticipating that you do buy back over the course of the next several quarters, should we expect that that ratio is fairly consistent? Is that the goal here?

Ken Trammell

Well, again, Rich, we don't look at quarterly leverage ratios, because there is seasonality to the cash usage of the business. Again, our target is to stay around that 1 times level. I think we ended the year at 1.2. That was 1.1 last year. I'm going to call that roughly the same. And our goal is to stay in that same zip code, the 1 times, plus or minus, as we go through the course of the next several years.

Rich Kwas

Okay, all right. And then just a housekeeping, Ken, the SG&A, did that get any benefit from the lower stock price in the quarter that was a good guy? I know there's always a relationship where stock goes up, stock goes down; it's like a $2 million EBIT benefit or headwind. So was there any real significant benefit?

Ken Trammell

No. If you look at the change in the stock price in the fourth quarter of 2014 and the fourth quarter of 2015, it was about the same. So, no impact really year-over-year.

Operator

Thank you. We don't have further questions at this time.

Linae Golla

Great. Well, then that concludes our call. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone. In North America, you may reach the playback at 888-566-0133. For those outside North America, the number is 203-369-3422. This playback information is found in our press release. And thank you for joining us today.

Operator

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

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