Tenneco's (TEN) CEO Gregg Sherrill on Q1 2016 Results - Earnings Call Transcript

| About: Tenneco Inc. (TEN)

Tenneco Inc. (NYSE:TEN)

Q1 2016 Earnings Conference Call

April 26, 2016 09:00 AM ET

Executives

Linae Golla - IR

Gregg Sherrill - CEO

Ken Trammell - CFO

Brian Kesseler - COO

Analysts

Brian Johnson - Barclays

Colin Langan - UBS

Ryan Brinkman - JPMC

Pat Archambault - Goldman Sachs

Patrick Nolan - Deutsche Bank

Rich Kwas - Wells Fargo

Matt Stover - SIG

Brett Hoselton - KeyBanc

Joe Spak - RBC Capital Markets

Richard Hilgert - Morningstar

Operator

Good morning and welcome to Tenneco's First Quarter 2016 Earnings Release Conference Call. Today's conference is being recorded. [Operator Instructions].

Now I'd 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 first quarter results. The slides related to our prepared comments are available on the investor section of our Web site. After our comments, we will open up the call for questions.

So 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 Web site.

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. As I said last quarter, we came out of 2015 with strong momentum and our goal was to carry that momentum into 2016 with a positive outlook for the year. Clearly we're off to a great start with results we announced this morning. We improved on all metrics with revenue growth and margin improvement helping drive our highest ever first quarter net income and earnings per share. The numbers, all first quarter records are outstanding, we delivered a 9% increase in revenue and a 20% increase in adjusted EBIT excluding currency, an increase of 50 basis points and adjusted value add EBIT margin, a 24% increase in adjusted net income and a 33% increase in earnings per share and a 42% improvement in our operating cash performance. With these results, there is no doubt that our strategies are working and each quarter we're consistently building on a strong track record a solid execution, profitable growth and value creation.

The foundation of our success and our path forward for continued growth remains unchanged. We continue to execute on opportunities in both product lines driven by our four structural growth drivers. The first is the strength of our position on light vehicle platforms globally excluding currency light vehicle revenue increased 11% in the first quarter outpacing industry production growth of 1%. Second is the global mission regulatory landscape where we're benefiting from content growth online on light vehicle platforms and commercial truck and off-highway program to meet new regulations. Excluding currency our first quarter commercial truck and off-highway clear air revenue was up 8% or 15% on a value-add basis despite flat production in these markets. The third growth driver is increasing demand for electronics suspension systems which also contributed to growth this quarter as we continued to launch and ramp up new programs with Tenneco's Monroe Intelligent Suspension Technologies.

And last the growing demand for our aftermarket products is the fourth revenue driver. The global aftermarket had a strong first quarter with revenue excluding currency up 8%. This included positive contributions from North America, Europe and South America. Before I get into more detail on our results, I also want to reinforce one of Tenneco's underlying strength and that's the balance we have across many dimensions. We have multiple product lines, run a variety of platforms with a broad base of customers. We serve different end markets and have operations around the world. Our results are not dependent on any one customer end market or region which had been advantaged in serving cyclical markets and this balance helps mitigate the impact from market risks due to macroeconomic or political issue that we don't control. Again an underlying strength of our business with a positive effect on our results.

Now let's turn to our first quarter results beginning with revenue on Slide 5. Total revenue was up 6% to $2.1 billion excluding currency headwinds of $69 million revenue was 9%, outpacing 1% rise in aggregate industry production with solid gains in both the Clear Air and Ride Performance product lines. The year over year increase includes higher volumes on Ford F-150 due to the model change last year and benefit from the final quarter of the cart west changeover. Even setting aside these unique first quarter factors, our revenue growth easily outpaced industry production. As I mentioned our total commercial truck and off-highway revenue included strong Clean Air revenue growth from incremental content. Our Ride Performance commercial truck and off-highway revenue was more in line with the very weak industry production and was also reduced by the sale of our Marzocchi specialty business, but in all a very positive revenue picture in the first quarter.

Taking a look at earnings on Slide 6, our adjusted EBIT of $138 million was a record for the first quarter and up 10% from a year ago excluding $12 million in negative currency adjusted EBIT was up 20%. This excellent earnings performance was driven by global light vehicle and aftermarket revenue growth, incremental clear air content on commercial truck and off-highway programs and operational cost improvements. Everything we're doing to grow the top line and our disciplined approach to improving operations and lowering cost structure is reflected in a trend of consistent profitability improvement. This quarter adjusted value-add to EBIT margin increased 50 basis points to 8.5%, marking our 12 consecutive quarter of margin improvement. Additionally, it's very encouraging to see that both the Ride Performance and Clear Air margins grew significantly.

And finally outstanding results don't happen without an outstanding team and one that embraces our values based culture, which is the decor or everything we do. Recently, I visited facilities to honor winners of Tenneco's new TEN10 Award, that recognizes employees who simplify our values. It gives me great confidence in our future when I meet our employees and see the team work, ingenuity and passion for our business. So my thanks for our global team for inspiring all of us to achieve even greater success.

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

Brian Kesseler

Thanks, Gregg and good morning. We are pleased with our performance this quarter, delivering both revenue growth and continued margin improvement with strong execution and alignment on our growth strategies and improvement initiative. As we look at the segment results remember that all revenue numbers referred to value add revenue and exclude currency.

Beginning with Clean Air revenue on Slide 8, total Clean Air revenue was up 10% in the quarter an excellent performance driven by stronger light vehicle volumes, constant growth on commercial truck and off-highway programs and stronger aftermarket sales. Breaking it down by reporting segments, North America Clean Air revenue was up 11% driven mainly by an increase in light vehicle revenue. The increase was due to higher volumes and the strong platform mix, which included growth on some of our largest programs, including the GM epsilon platform.

As Gregg mentioned, our revenue was also up significantly on the Ford F-150, primarily due to the low comparable from a year ago when the new model was just ramping. Commercial truck and off-highway revenue in North America rose 20% on the new Ford medium duty truck business and continued incremental Tier 4 final content an existing off-highway programs with Caterpillar and John Deere. The North America aftermarket also had a good quarter with Clean Air revenue up 3% versus last year.

In the Europe, South America and India segment, revenue also increased 11%. Light vehicle revenue rose 12% on improving production volumes in Europe, and a strong platform mix including new program launches with Jaguar, GM and Volvo as well as they continued ramp-up on programs with BMW. India also contributed with higher revenue on stronger light vehicles volumes with Ford, BMW and Mahindra. Commercial truck and off-highway revenue for this segment was up 9%, primarily driven by the ramp-up on Stage 4 off-highway programs and higher commercial truck volumes in Europe. The ESI segment posted good quarter despite economic and political turmoil in Brazil and industry production decline of 27% for light vehicles and 39% for commercial trucks in the South America region.

In the Asia-Pacific segment, revenue increased 5%, driven by light vehicle revenue growth of 4%, primarily due to stronger volumes on VW, Daimler and Fiat platforms in China. Asia-Pacific commercial truck and off-highway revenue was up 16% mainly driven by the continued ramp-up on Kubota off-highway programs in Japan.

Clean Air EBIT results are on Slide 9. Adjusted EBIT rose 19% to $111 million, including $9 million in negative currency. Adjusted value-add EBIT margin improved 110 basis points to 11%. This very strong performance and was driven by higher light vehicle volumes and favorable mix, commercial truck and off-highway content growth, aftermarket sales and operational cost savings.

Turning now to Ride Performance, beginning on Slide 11, total revenue excluding currency was up 6%, driven by higher light vehicle volumes and aftermarket sales. In North America, Ride Performance revenue was down 1%, mainly due to lower volumes on our commercial truck platforms in some point downtime with a couple of our light vehicle customers. Aftermarket Ride Performance revenues were up 5% versus last year, driven by the change over the new Car Quest business that began in the fourth quarter of 2014 and which is now complete.

In the Europe, South America and India segment, ride performance revenue was up 13%, driven by higher light vehicle volumes and content and stronger aftermarket sales. Growth continued on recently launched Monroe Intelligent Suspension programs with VW, Renault and Volvo as well as the ramp-up of programs with Daimler and Jaguar Land Rover. Similar to last quarter higher aftermarket sales in South America and Europe also contributed to gains in this segment. And, finally, in the Ride Performance Asia-Pacific segment, revenue increased 14%, driven by higher light vehicle volumes in China, primarily on programs with Volkswagen.

Turning to Ride Performance earnings on Slide 12, adjusted EBIT was $53 million, up 13%, including $3 million in negative currency. Adjusted EBIT margin improved to 100 basis points at 10.1%, driven by stronger light vehicle volumes in Europe, India and China and higher aftermarket sales in Europe, South America and North America. Last quarter we mentioned planned cost related to a number of launches on Monroe Intelligent Suspension programs in early 2016, these launches are going well and as expected we did see sequential cost improvements during the quarter, helping to improve our ride performance margins which we expect we will continue.

To sum it all up, my thanks to the Tenneco's team for driven a great quarter and a great start to 2016. We are accelerating growth and making progress on creating the cost leadership culture that helps us to achieve results faster and at a lower cost in everything we do.

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 13. We recorded restructuring and related expense of $14 million for ongoing cost improvement initiatives, all in our Ride Performance product line. We recorded $12 million for our European cost reduction initiatives and which 5 million related to asset right downs in the final costs for the disposition of the Gijon plant in Spain. During the first quarter, we reached an annualized run rate on this cost reduction initiative of $49 million. With the disposition of Gijon plant which was completed at the end of the first quarter the annualized rate will essentially reach our target of $55 million. Consequently this would be the final update on our European cost production initiative that we began in 2013. Additionally, we reported $2 million for headcount reductions in our South America business in response to the continued light vehicle and commercial truck production weakness in that region.

Now moving on to Slide 14, for a few highlight on taxes. Our effective tax rate was 32% this quarter that's down from 38% last year and our cash taxes paid were $21 million. We continue to expect an effective tax rate for the full year in the range of 31% to 32% as a result of the structural changes I discussed in the fourth quarter. Cash tax payments in 2016 are still expected to be between $140 million and $160 million.

Moving on to cash flow on Slide 16. Cash used from operations in the quarter was $29 million, that's a 42% improvement compare to last year, mainly driven by higher earnings, and the stronger working capital management, including lower days sales outstanding and accounts receivable at quarter end.

Capital investments in the quarter were $59 million primarily to support new programs in Europe, North America and China and for the full year we expect capital expenditures of about $330 million as we respond to some recent customer requests mostly for light truck capacity expansions scheduled to come online later this year.

We repurchased 360,000 shares this quarter for $60 million, these shares were held by pension plan, this is part of positioning the pension plan assets for the voluntary buyout program that I discussed last quarter. We took the first steps in this program during the first quarter and will complete the program by the end of the year. As a reminder if we see a participation rate of around 50% will record a noncash charge of $85 million to $90 million later this year and will reduce our U.S. pension liability by about 50%. Since we announce the current share repurchase program in early 2015, we've repurchased 4.6 million shares for $229 million and we have $321 million remaining on the share repurchase authorization which we expect to complete out of free cash flow by the end of next year.

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

Gregg Sherrill

Thank you, Ken. Turning now to our outlook on Slide 18, and beginning with the second quarter. Excluding currency, we expect our revenue growth to exceed industry production by 2 percentage points resulting in a 6% increase in total revenue. This growth will be driven by higher light vehicle volumes and stronger aftermarket sales. We expect commercial truck and off highway revenue to be roughly in line with industry production. Our Clean Air commercial truck and off highway revenue will be up on incremental content. The Ride Performance revenue will be more in line with the markets and continue to reflect with sale of the Marzocchi specialty

Business. This very positive revenue growth outlook for the second quarter outpaced this forecasted aggregate industry production of 4% which assumes a 4% increase on light vehicle industry production and a 1% decline in commercial truck and off-highway production.

Turning to our full year outlook we now expect to outpace aggregate industry production by 3 percentage points up from the 2 percentage points in our guidance at the beginning of the year. This revenue forecast is based on what we see in our underlying content and mix performance. As a result today we are raising our 2016 revenue growth estimate to 6% excluding currency which assumes industry production growth of 3%.

Our revenue drivers for 2016 are detailed on Slide 19. On the light vehicle side, we have incremental revenue from the large Clean Air programs that launched last year with key customers including Daimler, Jaguar, Land Rover, GM and in Ride Performance we’re driving incremental revenue with the ramp up on 2015 launches with our Monroe Intelligent Suspension technologies and we’re launching four more programs this year.

Looking at our commercial truck and off-highway business, which makes up about 12% of our total revenues the industry production forecast remains weak. However we’ll continue to benefit from incremental Clean Air content and Tier 4 final and stage IV off-highway programs. The ramp up on 2015 off highway launches with Kubota and the ramp up on Ford's new medium-duty truck which we’re supplying out of our new Clean Air plant and Jeffersonville, Indiana. We also expect a solid contribution from the global aftermarket with the revenue up in all major regions.

In summary, we have very positive revenue growth for the second quarter and a stronger outlook for 2016. We also expect to continue our margin improvement trend in the second quarter and for the full year as we continue to make progress in driving ongoing efficiency improvements and lowering our cost structure.

Finally as you see on Slide 20, we have solid revenue growth this year and we continue to expect our growth to accelerate after 2016 with no change in 2017 and 2018 outlook that we provided last quarter.

And with that we can open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. Brian Johnson of Barclays. Sir, your now is now open.

Brian Johnson

Little housing, want to maybe talk a little bit more strategically about intelligence suspension, you mentioned in the winter that this was roughly an $80 million business and you could see the industry growing 25% CAGR just a few things, one, any update on that and then two as we think about what you have in your pipeline, can we expect to be more activity here any sense of if it's passing tamper it's CPV [ph] at $50 to $60 where Intelligent Suspension on [indiscernible] ago, is it purely an OEM or is there any aftermarket immediate opportunity or you just have to wait for those stocks need replacing and then finally you talked a lot about it in Europe, that is just something where there is interest or hopefully even backlog on U.S. North America base production?

Brian Kesseler

Brian, this is Brian Kesseler. Let me try and answer those in order, really no change from what we see as the market opportunity that we outlined last in the winter. From an aftermarket perspective right now we're concentrating all our efforts on making sure that we can deliver and supply to the OEMs. As those age obviously that will be a great aftermarket opportunities for us and we as get through some of the launch activities that we have we'll turn our attention to see if there is any incremental aftermarket opportunity.

But our focus right now is on our OEM customers there. In the third part which was content, there is a wide range of content per vehicle, if you take a passive traditional convention production line and then move up to a dual mode, it can be two to four times the content. If you move all the way up to a kinetic line, which is a full suspension system that we have some of the supercars, it can be 6 to 10 times. So we are seeing a lot of activity in Europe as first adopters, but we do have significant quoting activity inside the North America market also. And then we eventually in short order expect to see that migrate order to our China operations also.

Brian Johnson

And it's a value proposition just handling in comfort or there fuel economy or other safety benefits coming on it?

Brian Kesseler

Fuel economy isn't much of the value prop at this point, but we do see comfort, we do see sport handing and we do see from an anticipatory, having the vehicle anticipate the road changes and react rather than -- in real time. So we're seeing some of the safety systems that are inside the vehicles now also allow us to integrate into those systems and anticipate road change conditions to smooth the ride for the consumer.

Brian Johnson

Okay and then I guess second question on, there has been a whole new wave of IPCC F8s on European diesel, we've also seen --which many of them, while not cheating, not doing well in real road tests, we’re seeing Opel talking about SCR, committing to SCR and then [indiscernible], assumes whether Opel is a customer or not, can you help us quantify the content increase for Tenneco should other OEMs decide or should they or other OEMs actually implement SCR on more mass market cars?

Brian Kesseler

I can only speak qualitative there still Brian because I think there is still as I said for a couple of quarters a lot of dust to settle on this thing. Clearly there is a sense amongst everyone on absolutely making certain probably to even greater factor of safety that these regulations are met. As we've been saying for many-many years, the hands down solid way to address NOx is SCR. I mean it simply works and so we're beginning to see the discussions out there of moving in the future some of the platforms maybe from Lean NOx traps towards SCR, just again because the system works so well. And clearly that's an opportunity for us, it's just what I -- there is no way of quantifying it yet because those powertrain plans aren't really set at this point in time.

But the movement is positive from a content point of view and we've also discuss before the real world driving emissions thing in Europe which has been around for some time, everybody’s been working at well before all of the recent problems that have existed also drives you further and further in that sort of higher content point.

The content I still don't want to over amp on it. This is positive in its tailwind the factor. I don’t' see it being a step function changes in the light vehicle role at all, just positive in the content, sort of qualitatively.

Ken Trammell

And to point out Brian, we do build both lean NOx traps and SCR, therefore it’s a content change but not necessarily like Gregg saying the step function change.

Operator

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

Colin Langan

Just one, any color on the guidance increase? It looks like overall production for the year seems to be pretty steady, it’s just a customer mix benefit that you are seeing or is there some end market that’s actually really driving the increase for there?

Gregg Sherrill

It's a little bit -- it's clearly above the production, I mean the production is -- you are right, I mean it's help pretty steady I think since we gave our first guidance, it's a little bit production changes between the regions but net-net aggregate industry production like in 3% for the four year, and I am talking four year now, right. And if so then -- if you look at our content and our launches in the ramp-up on those, it's kind of a all of the above, they are just kind of moving in a positive way, they did in the first quarter, we seeing that and continuing in the second quarter. We are pretty well understanding at this point in time where we are at and hence, carrying forward into the full year. So for that fact, and it was a really a little bit of a number of different areas and we kind of detailed those on Slide 19, that gave us confidence on raising that 2% outperformance now to 3%. Clearly, some of it was based on the outperformance that we incurred in the first quarter as well.

Colin Langan

Got it, and any color about the 8% aftermarket growth, I mean, is that mostly market share gains that the Car Quest opportunity or is there something going on it, kind of market that’s driving, it just seems like a pretty large number of aftermarket.

Brian Kesseler

Yes, would be 8% in the quarter was influence by the final quarter the Car Quest changeover, which we are done with now. But we are seen solid gains in all of our markets, Europe is picking up good progress from market share gains from our side, our South American continues to do very well in a very difficult market and North America continues to outpace the general [technical difficulty] rate. So we are seeing in each of the regions and a lot of the growth initiatives that each of the teams have are starting to get traction.

Gregg Sherrill

It's really pretty encouraging there because as you know for a number of quarters, the aftermarket is not quite well. But it is not really included Europe. And this quarter we did see some nice gains in Europe from a market share point of view. The market itself is still not as strongest as we like it to be, but still some positive indication on our own sort of market growth there.

Colin Langan

Got it. Just last question, any color on -- now that you are ramping up the restructuring plan. Your margins are still in Europe, both on Clean Air and Ride Performance, below North America levels when you look in Europe. Is there -- what is the structural issues there? And is there any potentials to get those up with the North America level, is there instead of drop opportunity in those market?

Gregg Sherrill

When you look at the difference in North America and Europe, in total the two regions, structurally you going to have some positives in North America that Europe doesn’t have and it's primarily the light trucks or it's a mix issue. We don’t have those platforms in Europe. Okay. On a platform-for-platform basis, a C platform or a B platform those you should be able to drive to very similar margins in either region. So if you look at on our platform basis there is really no reason you can’t have similar margins in Europe to North America. But once you add everything up just because of the richer mix in North America, it's always going to have an advantage there.

Colin Langan

And so do you think there is an opportunities to narrow the gap lower than where it is today, just [Multiple speakers], okay. Thank you very much.

Gregg Sherrill

I think there is operations cost opportunities in the region and we continue to fuel on ourselves as we share most practices across all our regions.

Brian Kesseler

And we are still -- we still have a volume different, right. We are still not have a run rate -- production run rate in Europe that we are seeing in North America, so capacity utilization certainly better here than it is over in Europe.

Gregg Sherrill

Yes, so when I say there is no real -- there is not a structural reason why the C platform versus the Z platform can’t be the same. But still Europe is -- we got opportunities still to bring those up there is no question about it in Europe because they are not equal today for us, all right, and then probably for anybody for that matter. And as for some of these things we are talking about, we have way too much capacity in Europe versus market conditions. It's just little bit more complex market across various complexities and model mixes and what sales in one region versus what sales on another. But we still get opportunity, but -- and we will still continue to grow it, we are absolutely confident on that.

Colin Langan

Okay. Thanks for taking my questions.

Operator

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

Ryan Brinkman

Really I am curious on did developments on the selective catalytic reductions front, I think GM said during the quarter that all future diesels in Europe will be a quick with SCR. So some are already there, like PSA and maybe others now we are going to follow suit. So it’s a big shift toward SCR and passenger cars, is that already incorporated into the accelerating growth in 2017 and 2018 or could it be additional upside?

Gregg Sherrill

There may be some additional upside, again I have to speak qualitatively there because lot of that as we said before, I know what individual customers have been saying, there is still dust to be settled as I keep putting it. SCR I think is pretty much the predominant technology on at least the upper end cars today. So now we’re kind of talking about the lower end cars that were or more of them were use in the lean NOx trap stuff rather than SCR. So it's a segment that's kind of moving now toward SCR, as opposed to the whole sort of diesel marketed Europe, but its positive that's really I like to say right now. I can't quantify it, but we see it as positive towards SCR and therefore opportunities for Tenneco and again reminding you what Ken said a moment ago if we currently have the lean NOx trap system on a diesel and switches to SCR, I'm not sure what that trade-off is contented, on a value add basis it's positive for us, on our total revenue basis it’s probably a little closer.

Ken Trammell

And I was going to say then Gregg hit the point right there, don’t forget that only NOx trap relies on a lot of precious metals content. Which the content in an SCR catalyst is a less expensive it's a ZOi [ph] base coating that goes on it, that changes the mix from a value add perspective for us as well.

Ryan Brinkman

Okay, thanks and was that I think that Ken just said that Europe is kind of more far from normal right, so investors obviously focus on [indiscernible] in the U.S. and sustainability of demand in China, but Europe has been doing quietly like a lot better right, up 10% or something year-to-date. So can you talk about like -- I know your profitability is less there, but just in terms of content per vehicle can you run us through in terms of what's your CPDN U.S. versus Western Europe versus China, I'm guessing that's it's quite a bit higher in Western Europe but maybe you can enlighten us?

Brian Kesseler

Yes, so Ryan like we said we don’t actually track CPD because it's not something that we can make decent management decisions of it. Gregg really hit at the earlier when he talked about the size difference, the content on Clean Air side of the business moves more or less with horse power. So larger engine vehicles which the light truck certainly are, are going to have higher content than the smaller engine vehicles that we generate see in Europe. I would say in China we are sort of in between, vehicles are larger but they are not -- the engines are not as large as they are in the U.S. So again the horse power is what makes the difference.

On the Ride Performance side it’s more the size of the vehicles that matters and then certainly like Brain mentioned earlier as we see more acceptance of the electronic shocks that will make a difference on the content per vehicle as well.

Gregg Sherrill

I would still say that the tailwind for us going into 2017 and 2018 is still these new light vehicle regulations that kind of apply to gasoline and diesel engines, but they are going to pick up some content on gasoline as well. Phasing in over a whole number of years both in the United States and Europe and yes there is some positive tailwind probably to the SCR push on the smaller platforms in Europe, that's obviously not applicable in the U.S. but also on Europe.

Ryan Brinkman

Okay, got it. And then just lastly on diesel penetration Europe, what are you seeing there?

Gregg Sherrill

I don’t think we're seeing any real changes to the power train plans at this point in time. At least not nothing -- nothing that’s being shared with us. So as we said there is a lot of invested capacity there, there is a lot of advantageous particularly in meeting the CO2 regulations in Europe to the diesel versus the gasoline engine and so if there is going to be some shift it's appearing to us to be pretty minor right now because we are not seeing it in the program planning that we are involved in.

Operator

Thank you. Our next question comes from Mr. Pat Archambault of Goldman Sachs. Sir, Your line is now open.

Pat Archambault

I just wanted, Ken maybe on the pension piece the accounting of that transaction I understand that it's not complete, but and let's say you do hit your threshold of a 50% take rate and I'm sorry if I'm quoting that -- not quoting that correctly and you see that big reduction to your funded status or underfunded status, what's the implication there from an earnings point of view in terms of pension expansion.

Ken Trammell

Will take that charge later this year when we get that process completed likely fourth quarter I think the chances of third quarter are probably pretty slum so it's likely fourth quarter and so whatever benefit we get which will be fairly small because our pension expense is fairly small will really sort of flow into 2017.

Pat Archambault

Okay, so you has a big onetime and I guess your projection for this year is 15 million right, so it would be some small amount off of that.

Ken Trammell

That 85 to 90 is essentially accelerating in the next several years worth of amortization of actuarial difference and all other source stock that happens in the pension accounting.

So the ’15 will certainly do go down a bit. I don't think it’s going to be -- it's not going to be huge, that is influenced as much by asset performance and that's where [Indiscernible] and then you also remember that the pension plans for all of our major plans are now frozen. The U.S. plan is one that we're focused on right now in terms of reducing our sort of exposure to volatility around that, this will be our second major activity in the U.S. We did determining invest in two years ago. This is both actives and retirees this year. We're doing the same in Canada, we still have fairly significant pension plans in the UK where we’ll continue to see some variability unless there is opportunity to take that out. And then we do still have unionized plans at a couple of smaller plants in the U.S. that we deal with as well. So it's not like that 15 is half of that that is going to go, it will be something certainly less than that.

Pat Archambault

And then I guess as building on that, I mean once these transactions are kind of nailed down and maybe you've already done this, is the idea to move to like 100% LBI so that there is no variability in the funded status with interest rates or how you're thinking about that?

Gregg Sherrill

Yes, Pat, I mean we will still have some underfunding in the plant when we get there, so it's not, it won't be an immediate but there is certainly other opportunities for us, it could what you mentioned, it could be depending on how the funding looks and opportunities just to annuitize our remaining benefits. There is a number of opportunities for us to look at ways to -- we've made a lot of progress in the U.S. once we complete this transaction. What's left we'll continue to look at those opportunities, but you didn't hit the nail on the head, there is a lot there and we don't think that it’s our job really anymore to manage pension plans or pension assets so our goal is to get that exposure reduce overtime.

Pat Archambault

Yes, it seems to have benefited those who have done it. Just one other question numbers of mine have been answered, but just we've talked about a lot about the diesel opportunity which I think is clear, on the aftermarket -- sorry not on the aftermarket, on the light vehicle side that's gasoline which we've talked less about, can we talk maybe a little bit about some of the drivers I mean one of the things we're hearing more about and you guys have mentioned in the past is gasoline particular filters how big is that and what are their big sources of content growth you see?

Gregg Sherrill

They haven't really quantified that yet clearly that's one of the driver or certain applications is the gasoline particular filters, others are just a more close couple catalysts and there is a lot of work going on to strive some content in cold start related emissions. But again as thing phases in over a number of years, it's going to be on a platform-by-platform, powertrain-by-powertrain basis. The tailwind is clearly there, we've stated repeatedly that it is not a step change like you’ve saw with the commercial vehicle diesel regulations which was essentially coming from nothing to something very rapidly. This just continues to work on the overall level of missions that are essentially quite being today and improving cold starts and aiming at gasoline particular as well which clearly as already become, is already regulated on the diesels. So it's a little bit of a number of things powertrain by powertrain, we've kind of macro quantified it for you in our outlook of ’17 and ’18, but not put a lot of quantitative detail behind at this point.

Ken Trammell

And I remember too Pat that the particular number focused gasoline is Europe only initially. We do expect the U.S. to follow at some point, but that's going to be primarily European and like Gregg said that's specific vehicles, generally larger displacement engines that will need to have a particular filters and the customers do have different to reach and meet the regulations. So that can obviously have an impact on the demand for gasoline particular filters. There is a slide that we have in the investor deck that’s on our Web site, at least gives you the U.S. estimate by 2025 and this is fully integrated. The EPAs they thought it was a cost that's not necessarily all after see my content with cost of $72 a vehicle hasn’t changed in meeting the regulations. And we also said that all of the regulations are somewhat different in Europe, we probably think it's somewhere in the same range in terms of the cost to me to regulations as well. But again that's an in cost not just the after treatment piece.

Operator

Thank you. Our next question comes from sir, Patrick Nolan of Deutsche Bank. Sir, your line is now open.

Patrick Nolan

Most of my big picture questions have been answered so maybe I just had a couple of housekeeping questions, the organic growth guidance for the year of approximately 6% that implies a little bit weaker organic growth in the back half, is that conservatism you're baking in or is it just a matter of the comps that you're comping against in the back half?

Ken Trammell

I think it's more the comps, as we said this is a relatively quiet year, so you don’t really have big build of content going through the year. What you've got is the continuing ramp up of a lot of programs that launch last year. So that kind of implies automatically that the comps get tougher later in the year you go.

Patrick Nolan

And on the incremental margin performance you had a pretty strong performance in Q1, you did closer to 20% incrementals on the value add revenue growth to the EBIT -- to the adjusted EBIT line. I know previously you were talking about something like mid-teens last quarter, you still think that’s kind of in the right realm or do you think you are tracking ahead of that?

Gregg Sherrill

We’ve also pointed out there is volatility, it depends on mix, it depends on what happens in the quarter. From our customer's production schedules and so if you look historically we have averaged in mid-teen for last five or 10 years and so I would say that’s the best indicator.

Patrick Nolan

Got it. And lastly on the buyback, if you kind of spread the remaining buyback authorization over the remaining seven quarters, it would be like 45 million a quarter, I think the combined number this quarter is like 18 million. Does the pace step up in Q2 or is that more of back half weighted kind of event?

Gregg Sherrill

So Pat, we certainly don’t intended kind of give you indications of which quarter we plan to buy. First quarter we were somewhat limited for a variety of reasons to only the transaction that we undertook to up get the pension plan repurchase done. But we are still committed to finishing that body end of 2017.

Operator

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

Rich Kwas

On the Ride Performance side in North America, strong year and your margin performance and just curious I know you have done some work there in terms of the restructuring the business as well as from a potential product mix standpoint. But this type of margin improvement, it seems like it's probably not sustainable but just want to get, Gregg or Ken your thoughts about the balance for the year and the trajectory in Ride Performance in North America?

Brian Kesseler

So I know you addressed to Gregg comments, but this is Brian. So we would expect to continue to see opportunities from margin expansion in North America, I mean there is a lot of network design improvements that we have got laid out productivity improvements that we have led out. So I see to continue upside, inside insight margins in North America.

Rich Kwas

Okay.

Gregg Sherrill

I mean, absolutely we do. It necessarily model in the same rate of improvement every quarter. Don’t forget [technically difficulty] certainly that aftermarket growth that we talked about, contributed in the quarter and now that increase in the Car Quest stuff, wouldn’t assume that the aftermarket continues to contribute a growth at the same rate that we did in the first quarter, although we will continue to improve as well. But there is certainly like Brian said a lot of opportunities lost.

Rich Kwas

I mean, I know the comps get a little more challenging here if you move to the Europe, but you don’t see it going backwards over the run rate for the year?

Gregg Sherrill

No.

Rich Kwas

Okay. And then

Gregg Sherrill

For the record, that was Brian, Ken and Gregg that said no.

Rich Kwas

And then just on just following up on the guidance increase, I know this is asked earlier but was this like truck mix coming in more favorable on your thought or just new program launches that where the volume is hitting coming in better than expected, combination of both obviously Europe looks to be a little bit better relative to January, so just curious that we could bucket that out.

Gregg Sherrill

As I said earlier, it's really a little bit of all of what we are talked about -- I’ll take you back to Slide 19 again, the incremental clean air revenue on watch launches even in Europe with Daimler, Jaguar Land Rover some these others coming up a little bit better, more positive than where we thought. Monroe Intelligent Suspension programs we have been talking about doing very well, on the right. And even pretty good performance on commercial truck and off-highway side and by that I mean incremental to what we recently thought. Kubota coming on pretty well, the Ford medium duty coming on really well and then just the normal ramp ups that we continue to talk about in the Tier 4 final stuffs and there is the little bit in China and India too that we have mentioned. So you kind of all that together which is why I was really pleased with is what drove us to increasing that content growth from 2 to 3, not really any one particular thing.

Rich Kwas

Okay make sense. And just following on SG&A as a percentage of sales that was up year-over-year, anything noteworthy in the quarter and is this should we think of increase on year-over-year basis moderates as we go to the balance of the year?

Unidentified Company Representative

Rich, like we said I think for probably a number of years, really the best way to look at the SG&A as a percent of sales is open to trend over a year as oppose in a particular quarter there is always some volatility in the quarter. So if you take a look at the last 12 month, I think you would see that there is not much different, I would point out that Q1 does reflects sort of normal growth and spending premier, increases and things like that happen in the begging of the year. And also an expectation for some increased incentive consumption expense this year.

Operator

Thank you. Our next caller comes from Mr. Matt Stover of SIG. Sir, Your line is now open.

Matthew Stover

Thank you very much. I wanted to setback on to a couple of questions that have been asked. The first one is that we look at the European Ride Control business. Ken I think you implied that you've accomplished the stable restructuring goal once actions time wise. That the margin profile is still quite a bit lower than what we've seen in the rest of the world and I'm wondering and does that preclude our further anything of so were restructuring to accomplish margin improvement or there are sort of are they manageable that you could implement over the next few years to improve those margins or you sort of subject to the strength of the market.

Brian Kesseler

This is Brain. The kind of last quarter and this quarter impact of the launches on the Monroe Intelligent Suspension programs that we've had if you remember from last quarter we have four simultaneous launches and we have four more running inside this year and so were ramping the four from last year and then were kicking in the new launches and that comes with some cost launch cost as we make sure we are protecting quality, doing the training, doing all the activities are required to have a successful launch.

We do expect and we saw in quarter-over-quarter sequential improvement and now we would expect that to happen through the year as we go forward. Secondly we completed that tranche of restructuring but there are continuous optimization opportunities of what we will always leverage as we look to drive the best delivery cost objectives that we have in each of our products and in each of our regions so there is still opportunities for us to even beyond the launch cost improvements that we are going to see to continue to optimize our cost structure up and downloads to value chain.

Gregg Sherrill

And Matt the only other thing I would add to Brain's note is the point that the aftermarket mix is stronger in North America then Europe as well and that doesn’t impact on our margins.

Matthew Stover

Yes for sure. I guess that lead to the next question, this is on the aftermarkets side, is was a really is a nice quarter plus and you mentioned that it was favorably impacted in Europe South America and North America. Could you kind of give us a thumps up, thumps down was North America better than eight or where they all about eight in terms of those regional markets that contributed to that growth.

Ken Trammell

So I don’t there was significantly different, can’t even speak this morning. In terms of their growth rates North America was helped by the Car Quest which Brain pointed out when he was going through his prepared comments. Then South America was very strong I think but again as the much smaller market so percentages look pretty good and then Europe with some market share gains that we've seen again both Gregg and Brain mentioned those probably somewhere in the neighborhood plus or minus so the North American piece of the market.

Matthew Stover

Then the last question was just, on the NOx traps versus SCR, I understand that the is going to have a higher proportion of precious metals in it. Though if we look at it on a value added basis and then the margin that confirms there, are you indifferent from the margin standpoint or is the SCR little bit higher or little bit lower as we kind of think about this impact longer term?

Brian Kesseler

As a definitive it depends Matt [multiple speakers]. Again without trying to pretend like our Chief Technology Officer. There is a way to tuning engines so that you can either emit more particular matter and less NOx for vice versa and that changes the content and the various components that gets about so it that's my said it's just depends. It's going to be customer specific. Okay.

Matthew Stover

Okay, well thanks guys. Appreciated.

Operator

Thank you. Our next question comes from Mr. Brett Hoselton of KeyBanc. Sir, Your line is now open.

Brett Hoselton

So there has been a number of questions with regards to Europe and European margins which are about half of the corporate margins. My question is where do you think those could ultimately go could they go to maybe 75% of the corporate average margins for example and over what time frame might that be and what would be the steps that you might take to actually get them to where you think they might be able to go?

Gregg Sherrill

That is just a really difficult question to answer to try to put a percent on it -- because and we keep setting here we talk right here South America and India. So let's don’t forget that South America and India are in there as well right and of course South America is well just as a disaster down there right now were completely overcoming it with the balance of all the other regions but in that segment its own its impact.

India is if you look at the mix of vehicles passenger vehicles India would probably be the lower mix even in Europe which is certainly lower than North America right so that's impacting that segment as well. But I'm not sure how I would answer the question. I think there is a lot of room as Brain has stated already on the call for really driving some significant margin improvement in Europe we were seeing it right now and he even mentioned that in the current quarter and even in the last quarter matched to little bit by the Monroe Intelligent Suspensions going on, but we all know those launch costs clear out as we ramp, we've seen that coming time again we have the launch loads. So there is just the margin and I think we've demonstrated a lot of credibility there, are going to continue to improve. To try to say as they're going to get to 60 or 75 or whatever of North America is just depends on so many more macro factors like the mix and how South America is doing and India is doing within that segment as well to try to put a number on that.

Brian Kesseler

But I think a couple of drivers that I would drive go to is the buying continued to improve, we're being very diligent on the capacity, any incremental capacity requirements that maybe there. We've got opportunity inside our capacity utilization today just make sharing best practices around the world to whether some of bad investment requirements if it were the. Second is a lot of the activities that we've had in re-foot printing we still had room to drive efficiency in and we've got network design opportunities across the entire European network in both product lines. So the list of opportunities is not diminished and we would expect to be able to continue to attack those.

Brett Hoselton

Let me ask maybe two follow-on questions, is there anyway Ken that you can isolate the European mergence from the South America mergence and India margins, I mean many of your peers are losing money in South America and that obviously is a the tremendous drag on margins? And then secondly, can we anticipate another larger restructuring program to take place here or is this going to be more blocking and tackling going forward?

Ken Trammell

There is more blocking and tackling as we go forward smaller bites of the apple, but we're generally pretty well situated. But we've got we know where we'd like to end up as far as South American and India.

Gregg Sherrill

Oh yes South America and India, I mean, so we don't break them out so I can't give you anything qualitatively certainly like you've said South America is challenged right now. I wouldn’t say we're losing money, I wouldn't say we're making a lot either.

Brett Hoselton

But you've compared it to our peers and we've talked already our South American aftermarket helps us considerably down.

Gregg Sherrill

Absolutely the aftermarket is important and many of peers operate in other reasons that -- Venezuela in particular that we don't while Brazil is certainly in a really difficult economic situation right now, I'd still rather in Brazil than Venezuela.

Operator

Thank you. Our next question comes from Mr. Joe Spak of RBC Capital Markets. Sir, your line is now open.

Joe Spak

Most of my questions have been answered and maybe two big picture ones, you had the off-road vehicle emissions business in place for a couple of years now and clearly I think we've never go the volumes maybe you originally anticipated, I guess what I am wondering now that there is some installed base if you begin to see any aftermarket opportunity on the off-road side and if so, what's the game plan to participate in that it seems like it could be maybe bigger and certainly a more stable portion of the business?

Gregg Sherrill

Well on the off-road side, first-off I don't think that there is a great deal of service related sales going on here because that's still pretty new and these things do have pretty good durability like to them. As far as the strategy is concerned we've kind of talked about this before and in that off-road segment we're selling to customers who have huge strategies on their own after sales service capabilities it’s a big part of their value proposition. And we don't intent to independently compete with them on that that would be a self-defeating move I think, but certainly provide the components they go into their after sales and service capabilities which are quite extensive. But as something the products that are out there had a material enough to really be getting into that aftermarket if you will in any big way right now.

Joe Spak

Okay so it sounds like still too early, I guess the second one is, I noticed in [indiscernible] Analyst Day they were we’ll try and our try as CN6 customers and obviously those are two customers that you list as current customers in China. So is that a change for [Indiscernible] next decade, is it dual source maybe you could provide some color content on those customers or your share within those customers?

Gregg Sherrill

I don't think we have ever said that they were single sourced, so it's not a change.

Operator

Thank you. [Operator Instructions] Next question comes from Mr. Richard Hilgert of Morningstar. Sir, your line is now open.

Richard Hilgert

The margin expansion was looking pretty good across pretty much all segments, congrats on that. Just another big picture question for me please, looking on the clear air side there is plenty of run ways for growth, they FCR is definitely one of those and diesel engines on the global base with Clear Air legislation in all regions of the world eventually SCR it looks to me like the only technology that’s going to help manufactures actually get to the legislated levels across the entire product portfolio plus the given impact of the investments that they have already put into diesel. But on the Ride Performance side, right now it's digitization of the suspension that’s driving some of the future growth and the little bit less clear on what other opportunities for growth there is on ride performance side.

So two things I was wondering if you could talk strategically a little bit more about what the future of the ride control looks like beyond the digitization? What the digitization looks like in terms of all of these technologies coming out all of these vehicles, I am sure some of them are just going to be a basic suspension system and not get digitized, but then we have got this whole other potential where it could be digitized. What is that look like given all the technologies comings out down to road in the auto industry? And what are some of the other opportunities outside of that in the Ride Control business?

Gregg Sherrill

I look at the ride side fairly straight forward, I mean all of our business still have the one of the fundamental growth drivers being the sheer growth of vehicle production around the world. And clearly in Asia-Pacific where we still got a lot of room to run and I think our market shares are already coming up reasonably nicely out there, particularly in China, we are talking Ride again. So you have got this overall rise in production particularly in Asia underlying both of them. And then we super pose on top of that. As we have already mentioned we won't talk regarding more the Clean Air side, the missions regulations on the ride side it is the technology and that is still in its infancy.

I mean we are talking great progress that’s still in Europe for the most part with other regions still to be penetrated and now we will talk to other two big one which is animus states in China. And we are getting more and more positive of that, it's been sort of a long flux slugging it out there, assumingly catching on just before the ’08, ’09 recession and then kind of get in cut back but now coming on again. And so we see that it's one overlaying the others, we got Intelligent Suspension system overlaying the growth and vehicle production on the ride side, you got a mission regulation overlaying the growth and production on the Clean Air side.

And that’s what gives us a lot of confidents in both our product launch from the growth perspective. And then ultimately on that ride side, but we are looking a way down a road mill is there is more and more the Intelligent Suspension systems in there and with our strength in Ride aftermarkets particularly in the U.S. and in Europe. So that’s -- it is kind of like that’s a second kick of growth that would come in on the aftermarket side.

Richard Hilgert

Okay good. Just a kind of follow on with that, part of the way that vehicle digitization is giving driven in the market place is through the NCAP standards and of course that’s -- and the nitsa authorities their ultimate goal is to take control of the vehicle out of human hands and place it with the computers, Direct quote from rose kind. Does NCAP have anything does NCAP have anything in it, or do you see it ever having anything in it that would help to spur the growth of the Intelligent Suspension system as part of an overall safety program or package for a vehicle?

Gregg Sherrill

So I think the autonomous driving dialogue that is going on does lend itself to the Intelligent Suspension growth opportunity because it would be active and predictive nature of allowing that drive to happen without surprises to the occupancy or the consumer at this point will require, we believe. More aggressive management and predictive activity suspension controls to make sure that because right now if you are driving, you get to see that you can you are not surprised by it, if you not drive them you probably want to make sure that ride becomes smooth as possible and as safe as possible. So it is obviously a moving discussion going forward. But we view it as only upside for our ride performance business.

Richard Hilgert

Okay great. Thanks guys.

Operator

Thank you. As of this time, we no longer have any questions on the queue. I would now like to handle call over to Ms. Linae Golla.

Linae Golla

Thank you. This concludes our call. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone. In North America, you may reach the playback at 866-481-4961. For those outside North America, the number is 203-369-1557. This playback information is 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.

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