Tenneco's (TEN) CEO Gregg Sherrill on Q2 2016 Results - Earnings Call Transcript

| About: Tenneco Inc. (TEN)

Tenneco, Inc. (NYSE:TEN)

Q2 2016 Results Earnings Conference Call

July 29, 2016, 08:30 AM ET

Executives

Linae Golla - IR

Gregg Sherrill - Chairman and CEO

Brian Kesseler - COO

Ken Trammell - CFO

Patrick Nolan - Deutsche Bank

Matt Stover - SIG

Analysts

Colin Langan - UBS

Brian Johnson - Barclays

Joe Spak - RBC Capital Markets

Rich Kwas - Wells Fargo Securities

Brett Hoselton - KeyBanc

Operator

Good morning and welcome to Tenneco's Second 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

Thank you. Good morning. This morning we released our second quarter earnings and related financial information. On our call today to take you through the results, are Gregg Sherrill, Chairman and CEO; Brian Kesseler, Chief Operating Officer and Ken Trammell, Chief Financial Officer. The slides related to our prepared comments are available on the investor section of our website. 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 attachments. The earnings release and attachments can be found on our website.

Additionally, some of our comments 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 second quarter results which demonstrate continued top line growth, margin expansion and value creation. In the second quarter, we exceeded our outlook for revenue growth in access of industry production, delivered our highest ever quarterly EBIT, continued to expand margins and reported record high second quarter earnings per share.

Taking a closer look at these results on Slide 5, beginning with revenue, on a constant currency basis, total revenue was up 6% with growth outpacing industry production by 3% on the strength of our structural growth drivers and supported by balance across our business.

Light vehicle revenue was up 9% against industry production growth of just 3%, led this quarter by higher light vehicle volumes in Europe, China and India. Light vehicle represented 73% of total revenues on the quarter which reflects how well we are positioned with leading OE customers globally and with content on a strong mix of platforms.

Commercial truck and off-highway revenue was 12% of our total revenue. Our Clean Air commercial truck and off-highway business was up 9% in the second quarter despite continued industry weakness in this markets while Ride Performance was in line with industry production and further reduced by the sale of our Marzocchi specialty business.

Overall commercial truck and off-highway revenue increased 1% on a quarter. And finally we also had a good quarter in the global aftermarket where we matched very strong revenues at the year ago. The aftermarket accounted for 15% of total revenue.

In addition to outstanding execution on our strategic plans, our revenue growth continues to demonstrate the effectiveness of Tenneco's four structural growth drivers. The first is the strength of our position on light vehicle platforms globally. Second, emissions regulations continue to drive Clean Air content growth with light vehicle and commercial truck and off-highway customers.

The third is a growing demand for Tenneco's Monroe Intelligent Suspension Technologies and the strength of our conventional right performance business. And fourth, we continue to benefit from our leadership in the global aftermarket with outstanding brands, products and distribution capabilities.

In summary, a very solid revenue quarter outgrowing the industry by a higher percentage than expected and keeping us on track to meet our expectations for full year revenue growth.

Turning now to earnings on Slide 6, where you can see we are doing an excellent job of converting our growth to the bottom line with record high second quarter EBIT. Higher light revenue, the Clean Air content growth on commercial truck and on off-highway programs and operational improvement all contributed to adjusted EBIT increasing 12%. The EBITDA comparison includes a negative currency impact of $11 million due to the relative strength of the U.S. dollar.

I also want to highlight our success in continuing to improve profitability as we delivered the 13th consecutive quarter of margin improvement. Adjusted value add EBIT margin increased 90 basis points to 10.8% including strong Clean Air improvement and Ride Performance about even with last year. Our focus is on delivering profitable growth and we're doing that with a launch of higher content products, strong execution and a disciplined process approach across our operations.

In addition, we are converting our earnings into cash to support our capital allocation priorities as summarized on Slide 7.We continue to fund growth, implement initiatives to improve cost competiveness and maintain a strong balance sheet. We are also well positioned with the flexibility to evaluate strategic opportunities and provide additional returns to shareholders.

This quarter we repurchased about 773,000 shares. So all-in-all a great quarter with continued revenue growth and margin improvement, strong cash flow and we are well-positioned for accelerated growth beyond 2016.

Before I turn the call over to Brian, I'd like to thank our global team. After this call, we’ll conduct a live webcast with our sites around the world something that we do every quarter. We share our results, celebrate accomplishments and most importantly show our appreciation for everyone's hard work.

Developing talent, building capabilities and doing everything necessary to ensure a high performance team is an important part of our success. Our teams winning attitude and excitement about Tenneco's future are all reflected in our quarterly results.

And with that, I would like to turn the call over to Brian.

Brian Kesseler

Thanks, Gregg and good morning. I want to add my thanks to the entire Tenneco team for delivering on the quarter, great effort and I appreciated the teamwork and good execution throughout our operations.

I’m going to give a little more color on our results by product line but first Slide 8 gives you a sense of a production environment in the second quarter. North America had moderate growth, India and China a bit stronger, Europe up 8% and South America still lagging down 15% versus last year, all adding up to a total increase in aggregate industry production of about 3%.

Now taking a look at our revenue in this environment, keeping in mind that I'm referencing value add revenue and at constant currency. Beginning with Clean Air on Slide 10, the team delivered an excellent quarter, outpacing industry production with a total revenue increase of 10%.Clean Air light vehicle revenue was up 10% on stronger volumes in all three reporting segments led by Europe, South America and India segment.

In Europe revenue was driven by the ramp-up on programs launched last year including Chevy Cruz, the Opel Astra, the Jaguar XE and XF models and the Daimler A&B class vehicles. We also benefitted from a new program launched this year with Daimler and strong volumes on the VW Golf and Ford Focus platforms.

India contributes to the segment increase with higher volumes on programs with Ford, BMW and Mahindra. Light vehicle revenues in North America and Asia-Pacific primarily China also increased on volume strength. We’re also pleased with the 30% increase in Clean Air commercial truck and off-highway revenue including gains in all three reported segments.

Key drivers for the quarter include content driven growth in North America and Europe Tier 4 final and Stage IV off-highway programs with Deere and Caterpillar. The continued ramp-up on our Ford medium duty truck business in North America and an increase in Asia-Pacific commercial truck and off-highway revenue due to the continued ramp on off-highway programs with Kubota and higher commercial truck volumes in China for expanding our share.

To summarize Clean Air, excellent light vehicle revenue growth of species the strength of our customer base and platform position and growth driven by incremental content and commercial truck and off-highway programs in the phase of markets that remained very weak globally.

Turning now to Slide 11 in total Ride Performance revenue which increased 2% mainly driven by an 8% increase in light vehicle revenue. Light vehicle had a very strong contribution from the Europe, South America and India segment. Europe is where we’re seeing a content growth in Ride Performance, as we continue to launch and ramp up Monroe Intelligent Suspension programs on VW, Renault, Nissan and Ford. Additionally the Europe revenue includes the ramp on programs with Daimler and Jaguar.

Ride Performance light vehicle revenue also increased in the Asia-Pacific segment and higher volumes in China including conventional shock business with Hyundai and on platforms with elastomer content.

Our Ride Performance business with commercial truck and off-highway customers is much smaller than we have in Clean Air and this quarter was down 21%. We’re still seeing very weak commercial truck volumes in North America and revenues were down in Europe on a year-over-year comparison due to the sale of the Marzocchi business.

And finally some color on the Ride Performance aftermarket, we are pleased with revenue gains in South America and Europe and we had a solid quarter in North America with sales roughly even with a year ago when you exclude the impact of last year's Car Quest inventory.

So to recap Ride Performance, excellent growth from Advanced Technologies in Europe, growing conventional shock and elastomer business in China and solid contributions from our global aftermarket.

Now turning to our earnings and margin performance on Slide 12. Clear Air totaled adjusted EBIT was up 25% to $135 million including $7 million in negative currency. Clean Air value add adjusted EBIT margin improved 190 basis points driven by light vehicle volumes, incremental constant on commercial truck and off-highway programs and operational improvements.

In Ride Performance adjusted EBIT was roughly flat at $76 million which includes $4 million in negative currency. Ride Performance adjusted EBIT margin was about even with last year but improved versus the first quarter. In Europe we launched a number of Monroe Intelligent Suspension programs in the first half of the year which have gone well.

Cost related to those launches are coming down as reflected in the sequential margin improvement and we expect that will continue. This quarter’s margin also reflects higher light vehicle volumes in Europe, China and India and stronger aftermarket sales in Europe and South America.

With margin expansion the key focus we have a clear vision on improvement opportunities in both product lines. This begins with anticipating and understanding our customer's needs and then optimizing how we communalize, develop, source, manufacture and deliver our products.

Specifically our key drives for continued margin expansion include leveraging technology content and volume growth in both product lines, optimizing component design and process complexity, constant review and investment in the design of our regional and global supply chain networks to deliver the best cost, and then driving our continuous improvement methods across every element of our business.

With very specific plans and processes in place to leverage these drivers, we’re confident that we can continue to capitalize on our growth and improve margin performance.

With that I’ll turn it over to Ken.

Ken Trammell

Thanks Brian. First let me take your through the adjustments in the quarter on Slide 14. We recorded restructuring and related expense of $5 million for cost improvement initiatives primarily in Europe related to adjusting headcount and in South America in response to the ongoing light vehicle and commercial truck production weakness in that region. We also recorded charge in North America Ride Performance related to manufacturing footprint improvements.

In addition to restructuring charges we recorded $16 million in debt refinancing costs as we took advantage of favorable interest rate conditions in the quarter. Finally, we also recorded $2 million in tax expenses related to changes in prior year tax estimates.

Now let’s move on to taxes in more detail on Slide 15. This quarter our effective tax rate was 27% before adjustments. That brings us to 29% year-to-date. In addition to the structural tax rate improvements I discussed back in February we’ve achieved a reduced tax rate in several China jurisdictions related to our designation as a high technology enterprise and for our entities that are operating in China’s western providences. Based on these additional improvements to our tax cost structure we now expect full year effective tax rate will be between 29% and 30%.

Cash tax payments were $37 million in the quarter. We currently expect that our full year cash tax payments will be at the lower end of our 2016 guidance range of $140 million to $160 million.

Moving on to debt and cash on Slide 16, this quarter we refinanced our 6 7/8% notes that were due to 2020 with new 5% notes that will be due in 2026 resulting in ongoing annual interest savings of $9 million. I am also happy to report that we continue to increase our financial flexibility with our new note terms. In fact the terms of these new notes are consistent with what we would expect to see if the rating agencies had us at investment grade.

In July we completed the redemption of the remaining 6 7/8% notes that were not tendered in June and we will record additional refinancing cost of about $8 million in the third quarter. For the full year we now expect interest expense will be about $70 million.

Turning to cash flow on Slide 17. Cash generated from operations in the quarter was $129 million as consistent with last year. For the first half of 2016 we have generated a 22% increase in cash from operations driven by higher earnings and strong working capital management. As of quarter end our last three-month working capital metrics show our accounts receivable days sales outstanding at 61 days. That’s an improvement of one day. Days inventory on hand increased by one day to 37 days and days payable outstanding was better by one day at 72 days.

We made capital investments of $65 million in the quarter primarily to support new programs in Europe and North America in both product lines. For the full year we expect capital expenditures of about $360 million with higher investment in the second half for new or expanded business including light vehicle, light truck and crossover vehicle capacity extension in North America and increase capacity in China to support a significant business win earlier this year that launches in early 2017.

And as Gregg said in the second quarter we repurchased about 773,000 shares for $41 million. Since announcing the program in early 2015 we’ve purchased 5.4 million shares for $270 million. This represents 9% of the shares that were outstanding when we announced the program. We have $280 million remaining on the share repurchase authorization which we expect to complete out of free cash flow by end of 2017.

Now with that I’ll turn the call back over to Gregg.

Gregg Sherrill

Thank you, Ken. Before I get to our outlook I would like to turn through a quick recap of our performance for the first half of the year. Year-to-date we’ve delivered an 8% increase in revenue at constant currency and 11% increase in adjusted EBIT, a 21% in adjusted net income and a 30% in earnings per share, a 60 basis point improvement in value add adjusted EBIT margin and a 22% improvement in cash flow from operations.

Additionally we’ve purchased 1.1 million shares under our share repurchase authorization and we’ve also successfully refinanced $500 million of notes reducing annual interest expense by $9 million. All in all an outstanding first half.

And now turning to our third quarter outlook on Slide 19, excluding currency we expect our revenue growth to outpace industry production by 2 percentage points resulting in a 7% increase in total revenue. This outlook assumes forecasted aggregate industry production growth of 5% in the third quarter reflecting a 5% increase in light vehicle industry production and 1% decline in commercial truck and off highway production.

Stronger light vehicle volumes globally and the launch and ramp up on new programs will fuel our revenue growth in the third quarter. We also expect a solid performance by our global after market and commercial truck and off highway revenue is expected to reflect industry production in those markets.

For the full year we still expect to outpace industry production by 3 percentage points resulting in total revenue growth of 6% at constant currency and assuming industry production grows at a rate of 3%.

In addition to this positive revenue outlook for 2016 it’s worth noting we’ve already secured the necessary business including new platforms and incremental content to meet our targets for out growing industry production in 2017 and 2018 and of course we’re heavily involved in future programs in both product lines and are very confident that we’ll continue growing revenue at a faster rate than the industry a track record we’ve established over the last 15 years.

And finally we expect continued year-over-year margin expansion in the third quarter and for full year as we execute on opportunities in both Clean Air and Ride Performance.

In summary, an outstanding first half of the year with great momentum going into the second half. We’re capitalizing on growth opportunities in both product lines, improving profitability, and strengthening our position for accelerated growth in the future.

And with that we can open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first question, please state name and company name. Your line is now open.

Colin Langan

Hi, it's Colin Langan, UBS. Thanks for taking my question. Any color on your exposure to Ford obviously as they guided pretty conservatively for the second half. Is that something that you are considering in your guidance, any color there and what you are seeing in terms of second half, given further cautious outlook yesterday.

Gregg Sherrill

Yes, everything that Ford has got in their schedules and their forecast is included in our guidance that we just provided.

Colin Langan

And any color on the commercial vehicle and off highway market, it sounds like - any signs that they are starting to stabilize, it look like their outlook is pretty modest defined in Q3, I think those may actually starting to recover?

Gregg Sherrill

That one is really kind of hard to say, Colin. I mean to me the sense is they’ve certainly bottomed - bottoming we don't see further large deteriorations I mean, we’ve been through quarters of it being 25% down 30% down and now we’re kind of flattish, if you will, in those markets. As you aggregate them around the world I mean there's puts and takes here and there but overall kind of flattish.

And how long it stays here is anyone’s guess right now. But I do sense that we are kind of at least at the bottom of the thing. And you know as we can see recovery obviously we will be as excited as anyone and we’ll be talking about at the future. But right now, we don't see the big further reductions that we've had in the past that’s for sure.

Colin Langan

And what is the utilization of your commercial business at this point there are lot of leverage into buyback bottom as compared to pretty low – pretty limited edition?

Gregg Sherrill

There is certainly going to be a lot of leverage there. We’ve talked about that in the past and I think the utilization is in the mid-50s or something like that percent.

Colin Langan

Got it. And lastly can you just remind us of the rules that are rolling in Europe and U.S. next year for admission and what is the potential admission on - in that period?

Ken Trammell

So it is Euro 6C in Europe and its U.S. Fed Tier 3 here. They phase-in over an extended period of time you know well into the next decade. The EPA estimate I'm trying to remember the number I think it was around $72 for the total cost to meet the regulations and all of that necessarily winds up an after treatment but certainly probably a pretty decent percentage of it does. And our estimate is that it probably is in the same range for the vehicles in Europe as well.

Colin Langan

Okay, all right. Thank you very much for taking my questions and congrats on a good quarter.

Gregg Sherrill

Thank you.

Operator

Thank you. Next question, please state your name and company name.

Brian Johnson

Brian Johnson, Barclays. I've got a couple of questions. First, if we talk about the revenue outlook, just want to understand the cycle time on some bids in terms of you talked about already securing business outpace industry production in 2017 and 2018. Is it any possibility of additional business coming into the backlog before those two years especially the out year?

Brian Kesseler

Yes, Brian there’s couple places - this is Brian Kesseler. A couple of areas where there might be some more opportunities. As we see our elastomers business has a much shorter cycle time from award to production so there’s opportunity there. And then obviously any growth that we - new customers that we can add in our aftermarket around the globe contribute more there.

There is always kind of the program that pops up there you know may be awarded because of trouble in the development and there’s a switch being made. But we’re pretty confident in what we - we are very confident with what we’ve already got secured and there might be some upside to that over the next 12 to 18 months.

Brian Johnson

Okay. And turning also on the growth side - turning over to light vehicle and then I’ve got a margin question there. How long can the strong light vehicle Ride Performance growth last in particular it seems like Europe is not only driven by healthy overall volumes but by the launch programs with Monroe Intelligent Suspension. Are those launches going to continue and as will those programs be coming to the U.S.?

Brian Kesseler

Yes, those programs, new programs are going to continue to launch in this timeframe through your timeframe that we’re talking about. And there will be programs that will be launched in North America from an overall Ride Performance perspective to what have been very good success in gaining business in China both on our conventional business and our elastomer business there.

So we're seeing good growth across the board in all regions both on the Monroe Intelligent Suspension Technologies but also in our conventional business.

Brian Johnson

Okay. And then related to that, when do you expect that to help with margin expansion given that the higher technology content higher price point product?

Brian Kesseler

Well, we continue – our guidance shows that we will see continued margin expansion through this year. And we expect a sequential improvement as was stated in the discussion in our Europe operations which we’ve been discussing and continue to deliver on.

So with everything else it’s kind of driving the business, technology, the volume, the network redesigns and refootprinting. We’ve continued to see a lot of runway on Ride Performance.

Brian Johnson

And final Ride Performance question, more of a curiosity, seem to be seeing more Monroe advertising, is that just – it's being more effectively placed where I can see it, like baseball games or do you actually increase some of the selling investment there and are you seeing any return from it?

Brian Kesseler

Well, we opted a little bit this year because of our 100th anniversary and also trying to get very targeted on where we put it so glad to hear you’re seeing it.

Gregg Sherrill

Yes, I suspect the 100th anniversary is what’s kind of ramp up your visibility of it because we’ve made a pretty big splash over that. So…

Brian Johnson

And any signs of the paying off in the…

Gregg Sherrill

Yes, I mean - it’s hard to directly tie initial advertising to that. But it just continues to run extremely strong. Everything is very well received you know we’ve --part of those has been testimonials by customers et cetera. So you know that Monroe brand is not only being strong for 100 years it’s probably never been stronger in its hundred year's history. So we're pretty happy there.

Brian Johnson

It’s also got a clear call to action if you’ve got a 50,000 mile car I have noticed?

Gregg Sherrill

If you have one go get your shocks changed.

Brian Johnson

Thank you.

Operator

Thank you. Next question is from Joe Spak. Please state your company name.

Joe Spak

Thanks. It's RBC Capital Markets. Congrats on a great quarter everyone. Just a follow-up on the third quarter guidance and on the Ford commentary with that program which I think is 4% of your sales down sounds pretty big it puts you on a hole. And so I know you talked about the launch of the ramp-up of a bunch of new programs, can you give us any indication as to what some of those programs are or where we should find those launches?

Gregg Sherrill

Well, we’re kind of handcuffs a little bit on what we can talk about launching a new business. What I can give you insight on is this year we’ve got 39 new launches in North America Clean Air next year looks to be about the same. And most of what we will see in most of those are heavy, heavy launches last quarter and this quarter that will start ramping at the back end of this quarter and then into fourth quarter in Q1 and Q2 of next year.

So we’re - while we see downtime reductions in pretty critical program. We’ve got other programs that are ramping right in line with that which is kind of typical as we as we have been flow through the year.

Brian Kesseler

Yes, the other ways to look at it I think is you look at our first half that outperformance has been – I mean I don’t have a number in front of me but it's been pretty big, right. And we’re still going to - we kind of always held to that guidance of 3% because in the back half obviously you do have a big part program going down et cetera but we're still overcoming that and it’s due to what you’ve already seen in our numbers just continuing to flow through and kind of the ebb-and-flow of these launches.

But you just net, netted all out around the world. And you know we’ve got sufficient growth to overcome one platform going through a significant change over. But you know it does have the effect. So we will probably be around the 2% out growth in the third quarter still an outgrowth with the big platform down that will come back. All the part will help us as we go into next year as well.

Gregg Sherrill

Joe, remember and we’re probably on launching 50 or 60 platforms at any given time around the world at any one time with the presence that we have on them. So certainly it's an important platform but remember that with the change over the super duty we went to the exchange over the F-150 last year certainly dampened some of our revenue growth. But we still grew faster than the market last year. So we don't expect that that the super duty as any different than what we saw last year with the F-150.

Joe Spak

Are you also on the 450 [part] or is it just the two – and is the content higher than the outgoing program?

Gregg Sherrill

I don’t think the content change as much because there’s not a lot of change in the engine. Yes, we are on the medium duty trucks. Remember that we launched those starting midyear last year and so those have been ramping up in production the first half of the year.

Joe Spak

And that goes into your commercial vehicle.

Gregg Sherrill

It does.

Joe Spak

Okay. This is just to follow on Brian's question. The language about secured business I think that’s a little bit of a change in the language. I mean, I was just trying to understand was the business before this quarter previously not secured. I was just curious by the language there.

Gregg Sherrill

That’s not I meant by it. I mean, it’s just verification. By this point you would expect it to be secured and we just confirmed that, that’s all.

Joe Spak

Okay. And then last one, so as we go and think about the regulation coming in when do we start actually shipping the gasoline particular filters and how much of a driver of the overall growth is out in your 2017 guidance?

Gregg Sherrill

So I think there will be some gasoline particular filters that are added next year but remember that there is a five-year phase in of those regulations in Europe so again it’s nice sized volume, not a huge content increase but noticeable and phasing in over those volumes over the next five years. So you’ll begin to see a nice increase next year and that will just build as go through the early part of the next decade.

Joe Spak

Okay, thanks a lot guys.

Operator

Thank you. The next question is from Rich Kwas. Please state your company name.

Rich Kwas

Hi, Wells Fargo Securities. Good morning, nice quarter. I wanted to just followup on Europe so the margin seemed to break out here this quarter and in this 5% neighborhood that’s really one the highest levels if not the highest level you’ve seen in some period of time.

Is this a sustainable trend as we think about going out to next year and that in terms of restructuring savings have started to really flow through in a significant manner and just assuming kind of normal volume cadence, there is benefit that’s sustained and then if you can comment also on maybe some of the launches and how that maybe helping you in terms of the Ride Control piece?

Brian Kesseler

Rich, Brian, is your question specifically related Ride Performance of both…

Rich Kwas

For both, I mean on a consolidated basis when you look at Europe both segments but just in terms of pulling out what you had highlighted as the most important drivers of it.

Brian Kesseler

The restructuring that we completed last quarter or the quarter before last obvious it’s going to continue out as we bring this new technology online and fill that capacity that’s going to continue to add some tailwind for us on the Ride Performance side given really good operational performance out of our Clean Air side capitalizing on the light vehicle growth that’s inside that market. So for both product lines good execution on launches, good leverage of the volume as it is coming in and then as the content continues to grow on both Clean Air and Ride there is no reason to believe that is a continuing trend for us.

Rich Kwas

Okay. So it sounds more structural than going forward.

Brian Kesseler

Yes, right.

Rich Kwas

Okay. And then just on the CapEx Ken the increase here $30 million versus prior does this all affect the programs launching in 2017 or 2018 or is there stuff that’s going to go even beyond that in terms of what you’re investing here for the rest of this year?

Ken Trammell

For the most part it is programs that we’re launching in 2017 and 2018. In fact the increase a decent percentage of that is attributable to a platform that was awarded on a fairly short time frame earlier this year in China and is actually going to launch in first or second quarter of 2017. So it is mostly near term launches.

Rich Kwas

And then just on 150, so inventory is a bit higher there. Have you factored in any cushion as it relates to your back half outlook for your guidance.

Ken Trammell

So and remember what Gregg said we got factored in what Ford is anticipating their bills will be which I think on year-over-year basis is down around 14% or 15% so there is certainly some amount that are factored in there assuming the bill rate is down a bit on the F150.

Rich Kwas

Okay. And then last one Gregg on in terms of Daimler they are going SCR fully on a light vehicle basis by 2019. Are your discussion with OEM in Europe or otherwise picking up as

Discussions with OEM in Europe or otherwise picking up as it relates to moving to more robust after treatment systems.

Gregg Sherrill

Yes, I am going to leg Brian answer that, it’s a little bit closer to the specifics of the program.

Brian Kesseler

We’re seeing an increased pace of and frequency of the conversations to get in front of some of that regulations. Remember the real driving emissions testing is also going to be driving some changes into the overall system to make sure that the compliance is met there. So we’re seeing 2018, 2019 we’ll start ramping into it pretty heavy.

Rich Kwas

Have you secured anything, or is it just still getting just deeper in the conversation?

Brian Kesseler

Inside our 2018 numbers and the work we’re working out for 2019 we’ve secured some for the 2018. 2019 is really where those programs are kind of in the process right now.

Rich Kwas

Okay. Thank you.

Operator

Thank you. Next question is from Brett Hoselton. Please state your company name.

Brett Hoselton

KeyBanc. Good morning. I was hoping if you could provide a little bit more detail on the Clean Air margins on a year-over-year basis obviously we’re seeing some very nice improvement there particularly in Europe, North America and India and Asia-Pac. I know you’ve got the drivers down here or kind read through the drivers but I guess it’s not quite clear to me exactly what’s driving such a major improvement in each of these.

Gregg Sherrill

Well on the European Clean Air side if you remember last year we talked about adding a plant in capacity in the UK obviously that spending and that launch is behind us and we’re launching a lot of volume with Jaguar and Land Rover so we’ve got good growth there.

With all the operations team inside Europe Clean Air doing a great job of continuing to optimize the cost structure there up and down kind of the operations expenditures so we’re – and we got the content that’s coming in with each of those. So it’s kind of more the same as you see all of those drivers and consistent inside each region and inside product lines just varying in stages of launches and activity on improvement pace.

Brett Hoselton

And I think this question may have been asked earlier but I just want to make sure it’s tied to your comments here. So then when we look at these margins the 13% margins for Clean Air and so on and so forth, how do we think about the margin progression going forward.

I mean, you saw a 200 basis point improvement on a year-over-year basis for overall Clean Air just on the value added revenue so how do we think about that, given this pace of launches as you move into 2017, 2018 are you able to sustain that 13% margin, is it possible that the margins could kind of take a little bit of a hit as a result of the additional launches or could they actually potentially accelerate. How do we think about the timing of launches and the impact on the margins.

Gregg Sherrill

Well launch costs in the every year that we do, sometimes a little heavier, sometimes little lighter and quarter-to-quarter phasing can vary depending on what’s going on but for sure maintaining but our goals are always to continue the expansion and looking at each of those four key drives on the margin expansion there is run way in all the product lines in all the regions on each of those drivers.

Brett Hoselton

Let me kind of ask a 30,000 foot perspective here. You an expert in operating efficiency and so as you kind of come in and had an opportunity to evaluate the business model here at Tenneco and you think about the operating efficiency at Tenneco, on a scale of 1 to 10 and I am looking for what’s the opportunity for improvement but on a scale of 1 to 10 how you say that they compare to some of the best operators in or how does Tenneco compare to some of the best operators in the world and again I am trying to gauge do you think that you’ve picked all the fruit or do you think that you are kind of half way there, what are your thoughts?

Gregg Sherrill

Well I am going to avoid the 1 to 10 question deliberately but let me tell me what I see. What I see is a great opportunity across our operations and across our design operation to leverage the best practice. We’ve got pockets or really, really great performance throughout the Tenneco network and you’ve got improvement opportunities through pockets of the network bringing that best practice mentality and metrics to the organization has already to unlock visibility to more potential.

And so the good news is I think we’ve got a lot of room to go. The great news is that the team is embracing us and we’re asking them to pick up their clock speed and pace of change and run.

There is no reason to believe that you won’t be asking somebody else a question around why Tenneco, how they rate, how they stack up against Tenneco here in the near future.

Brett Hoselton

Okay. Excellent. Thank you very much.

Operator

Thank you. The next question is from Patrick Nolan. Please state your company name.

Patrick Nolan

It's Deutsche Bank. Good morning, everyone. Good quarter. Most of my questions have been answered but I just had two more follow-ups just may be first on the increment -- the margin improvement on value added basis, really good performance year-to-date up 60 basis points year-over-year, could you may be put in context the pace of margin improvement relative to the first half you expect in the second half this year?

Gregg Sherrill

Well I think if you go back and look at over history over the last six years, the margin improvement that has been made, I would believe that will be very consistent with that pace of improvement year-on-year that we’ve demonstrated for the past six years and again all driven by a lot of those drivers that we highlighted and have discussed.

Ken Trammell

Patrick, we're not going to go sleep in the second half of the year. We don’t give specific percentage guidance but like Brian said we should be able to continue to improve our margins. Obviously there is ebb and flows for launch cost and everything else that we've talked about, but I think what you’ve seen over the last six years, over the last 13 quarters or however you want to everyone to measure it is the strength in the balance of the business, even we have high launch cost in one region, we’re stride in others on something that’s already been launched. So we do expect to continue to expand the margins.

Patrick Nolan

And Ken, could you may be expand on the updated tax rate guidance and how we should think about it going forward? Has your tax rate basically structurally changed and come down by that 200 basis points going forward?

Ken Trammell

Yes, that's exactly what I was trying to say. So I think you probably said it more specifically. But at the end of the day we've made a lot of structural improvements. You'll remember because you follow us for quite a while, the days when we were in a low position in the U.S. and the goal was to use that up.

Now that we have we've got more latitude to work on, optimizing our global tax rate, because we've been able to take advantage of that asset we had in the U.S. and that's what you're seeing us do now. And so that 29% to 30% that I talked about is not just for this year. It's a structural change in where we think we'll be for the next several years

Patrick Nolan

Thanks very much. Good quarter again.

Operator

Thank you. And our last question is from Matt Stover. Please state your company name.

Matt Stover

Thank you. SIG, Most of my questions have been asked, but I wanted to just clarify a couple things. The first was to follow on Brett’s question, could you offer some color as to where you do see the most opportunity from an efficiency and margin perspective on a global basis?

Ken Trammell

Well let me take a shot at this one too because when you -- and Brian was describing extremely well. When you've got a global manufacturing network and a level of growth like we have, going into that, there are continuous efficiencies that you can generate if you're focused on it properly with a very disciplined mindset, continuously improving utilization, continuously improving write-down into the manufacturing cell operations and cascading that around the world and that's where we're focused.

We're focused on efficient launches, growing that business, continually utilizing a footprint and optimizing that footprint both regionally and globally and all of that works into this growth. It's just a tremendous opportunity and in one sense that growth and complexity of the business affords you the opportunity to really drive continuous improvement in efficiencies in your business from where you stand.

It's just the approach is that way it becomes a mindset as Brian said, our teams are really getting engaged with that. We've got internal competition going, it generates and we've demonstrated it now for what 13 straight quarters.

I'm not saying there's going to be infinite number of quarters out there that would be ridiculous to say. But over the long haul, year-in and year-out, we will -- we have got a lot runway, the business changes every year with that growth to continuously drive those margins.

And that’s the mindset we take and we're very confident in it and you're just going to see that performances as the world moves forward, I think just getting better and better. So I don’t know if that answers your question, but it really isn’t a nutshell the way you leverage that growth with the right process, operational disciplines and footprint analysis as you go forward.

Gregg Sherrill

Well I think another opportunity to build on to that is we also -- you’ll see opportunities to optimize our designs from a complexity standpoint at the component level that leverages the tune and capacity that are on board already.

We also see opportunities in consolidation and location of our supply base and where that -- we're there and how they serve us. So it’s a comprehensive look up and down that whole cost structure, which one plus margin is a bottom line but also gets us in a position to be very competitive in the market on price too where we can continue to set ourselves apart.

Matt Stover

What’s then about the growth? If we look at the improvement in a relative growth above markets from the three percentage this year to 3% to 5%, do you maybe bucket regionally or by business where you see that acceleration realizing itself most significantly?

Brian Kesseler

I would say its spread across. Obviously, China like vehicle growth over the next five or 10 years is going to be where the majority of the overall global idea can grow. We're very well positioned there. So obviously we've got to make sure that we’re paying very, very close attention.

But with the cost network optimization activities, continues improvement activities, the South America, North America, Europe, India they're all running and they're all getting themselves a very good position.

Gregg Sherrill

Let's not forget the biggest regulatory driver over the next five to seven years, is the Tier 3 and Euro 6C light vehicle stuff in North America and Europe. So you're going to see a very steady tailwind on content growth over that timeframe.

China as Brian just mentioned and Asia Pacific in general major growth region, China still -- China still though the wild card to the upside as they drive further and further enforcement and how they approach all of that.

And then the other thing that I would simply mention and we talked about it briefly on this call, but at some point there is a recovery and that commercial off highway and on-road business that we have and that could be a tremendous turnaround as that recovers.

Matt Stover

And I just want to make sure, I am being able to figure out my question too, but I am the last one might be, I look at the Asia margins and it’s like you're not going to cover off the bond, a nearly 20% margin and I think there is natural growth that should occur there.

So there should be -- you could, I guess you could envision that there would be some room for operating leverage, but boy 20% is the real thresholds for -- that just seems like extraordinarily high and that shouldn’t be the place that I should be looking for the margin expansion?

Gregg Sherrill

We said time and time again, one of the things that we're looking for in Asia, particular China, which is the bulk of that right is that we are certainly driving to maintain, sure we’re always after improving margins, but those are significant as you point out, right.

So you would expect the bulk of I think the margin improvement if you sum it all up at the corporate level to be in the other regions. All right.

Matt Stover

Okay. Thank you very much guys. Appreciate it.

Gregg Sherrill

No problem, no problem. Thank you.

Linae Golla

All right. Thank you.

Operator

Okay. That’s the last question in queue.

Linae Golla

Yes. That’s the last question. So 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 via 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

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

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