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Tenneco (NYSE:TEN)

Q3 2012 Earnings Call

October 25, 2012 9:00 am ET

Executives

Linae Golla

Gregg M. Sherrill - Executive Chairman and Chief Executive Officer

Hari N. Nair - Chief Operating Officer and Director

Kenneth R. Trammell - Chief Financial Officer and Executive Vice President

Analysts

Ravi Shanker - Morgan Stanley, Research Division

Steven Hempel - Barclays Capital, Research Division

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

Graham Mattison - Lazard Capital Markets LLC, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Patrick Nolan - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Elaine Kwei - Jefferies & Company, Inc., Research Division

Aditya Oberoi

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Adam Brooks - Sidoti & Company, LLC

Operator

Good morning, and welcome to Tenneco's Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. 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. This morning, we issued our earnings release and related financial information. In a moment, I will turn the call over to Gregg Sherrill, Tenneco's Chairman and CEO; Hari Nair, our Chief Operating Officer; and Ken Trammell, our Chief Financial Officer. They will spend the first half of the call taking you through a detailed explanation of our third quarter performance. Slides related to our prepared comments are available on the Investors section of our website at www.tenneco.com. We will then open up the call for questions. The conference operator will explain the process for asking a question at that time.

Please note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release attachments. The earnings release and attachments are also posted on our website.

In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements.

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

Gregg M. Sherrill

Thank you, Linae, and good morning, everyone. We're pleased with our performance this quarter, which reflects good execution across our business units to deliver very solid results. These results demonstrate continuing progress on our growth initiatives, while at the same time, effectively managing through macroeconomic challenges. We delivered nearly $1.8 billion in revenue, our highest-ever third quarter EBIT and we had strong year-over-year increases in net income, earnings per share and cash generated from operations, as well as improvement in our leverage ratio.

Now taking a look at what's behind the numbers beginning with revenue on Slide 3. After adjusting for substrate sales and currency, revenue increased 6% to $1.5 billion. The highlights on the revenue line were North America and China, where light vehicle production in both regions strengthened versus last year. We capitalized on this volume strength with the customer base that includes all the leading OE customers in these regions and with products on many of the best-selling vehicles. Our revenue also includes a year-over-year increase in global commercial vehicle revenue, which rose 8% to $184 million or about 10% of total revenue in the quarter. Year-to-date, that brings our commercial vehicle revenue to $632 million. And in addition, the North American aftermarket generated revenue in line with a very strong third quarter last year.

It was a different scenario, though, in Europe and South America, where we faced challenging economic conditions that impacted our revenue, particularly in Europe OE ride control business and in South America. Volumes declined on platforms we supply as customers reduce their production schedules. Conditions in the Europe aftermarket remain challenging as customers reduced inventories and slowed purchases in response to lower consumer demand. We also faced a significant currency headwind this quarter, mostly in South America.

Now turning to earnings on Slide 4. We reported a 32% increase in EBIT to a third quarter record of $111 million. On an adjusted basis, we're up 14% to $113 million. Tenneco's geographic balance helped our results this quarter as we capitalized on the stronger production environment in both North America and China to drive our EBIT improvement, which also benefited from incremental commercial vehicle revenue. Additionally, we continued to effectively manage operational cost, an important driver of our profitability improvement. This means flawless launches, manufacturing as efficiently as possible and making sure our operations are aligned with market demand. Along those lines, we announced in the third quarter, our intention to close an aftermarket manufacturing plant in Sweden in response to the ongoing economic weakness in Europe.

In summary, we delivered record high earnings and improved margins. I'm extremely pleased with our overall performance as reflected in our value-added adjusted EBIT margins of 8.1%, a significant improvement versus 7.2% a year ago.

Finally, I want to highlight our strong cash performance this quarter with cash generated from operations up 48%. Higher earnings and a good job managing working capital were the main improvement drivers.

In closing, I want to acknowledge our outstanding global team. Our employees around the world are engaged and aligned around our plans, completely focused on our customers and working hard to deliver results like these, and I thank them for this success.

And now I'll turn it over to Hari for more details on each reporting segment.

Hari N. Nair

Thanks, Gregg. Turning first to North America on Slide 5. OE revenue was up 11% excluding substrate sales and currency. Our North America team performed well in leveraging higher light vehicle volumes on key platforms, including Ford and Chrysler light-duty trucks and several global ride control platforms. We also benefited from incremental revenue with commercial vehicle customers, including Caterpillar and John Deere. In the North America aftermarket, revenue was driven by higher ride control sales and was in line with a strong third quarter last year. Adjusted EBIT for North America increased 57% to $72 million, including $8 million in favorable currency. This improvement was driven by higher year-over-year light and commercial vehicle revenue, as well as operational improvements across all our businesses, including the OE ride control business. Value-added adjusted EBIT margin increased 3.3 percentage points to 10.8%, a significant improvement versus last year.

In summary, it was an excellent quarter for North America and critical to driving our overall results in light of the challenges we faced in Europe.

Turning to the Europe, South America and India segment on Slide 6. The ongoing economic weakness in this segment, particularly in Europe, and to a lesser extent, in South America, continues to present challenges for us. Despite the negative conditions, total revenue for the segment increased 1% year-over-year excluding substrate sales and currency. In Europe, total OE revenue was up slightly driven by OE emission control revenues, which benefited from new light vehicle program launches with Daimler and Volkswagen and incremental commercial vehicle revenue. However, Europe OE ride control revenues were down significantly on lower volumes. The Europe aftermarket continued to decline with low consumer demand, driving inventory reductions among many of our customers, particularly in Southern Europe. There were revenue ups and downs across the region, but the bottom line is that the Europe aftermarket remains weak with total revenue down year-over-year in both product lines.

We remain focused on continuing to adapt our footprint and cost structure to align with what we believe will be a prolonged weak industry environment in Europe. The varied Sweden plant closing is the first step in our plans to further reduce fixed costs and better align our operations with the market in response to these ongoing economic conditions. In addition, we're flexing our operations and workforce to match our customer schedules and we're prepared to take additional actions as necessary.

In South America, revenues were down on lower volumes and negative currency exchange rates. We stayed focused on controlling costs, implementing pricing actions to help offset inflation and continue to take restructuring actions in response to a slowing economy. India continued to improve with stronger performance year-over-year, helping partially offset the declines in Europe and South America. The team there continues to build on our capabilities and position us for future growth with light and commercial vehicle customers.

Adjusted EBIT for the Europe, South America and India segment declined to $20 million from $37 million a year ago. Over half of the EBIT decline was due to an unfavorable currency comparison with last year, totaling $9 million, most of which was in Brazil. Other negative EBIT drivers were the lower volumes in the Europe OE ride control and aftermarket businesses and lower volumes in South America.

Our Asia-Pacific results are on Slide 7. Excluding substrate sales and currency, revenue increased 20%, reflecting the strength of our China operations. We leveraged higher light vehicle production volumes in China including the Ford Focus and several new Volkswagen platforms.

Adjusted EBIT for the Asia-Pacific segment increased 31% to $21 million. The increase was due to strong production volumes and higher capacity utilization as our new and expanded facilities in China continue to ramp up. In addition, the restructuring we've done in Australia is reflected in our results with improved operational performance. For the entire Asia-Pacific segment, value-added EBIT margin increased by almost a percentage point to 10.1% from 9.3%.

To conclude, despite some tough economic conditions, we remain focused on executing our growth strategies, winning and launching new business and delivering operational performance that grow excellent results overall.

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

Kenneth R. Trammell

Thanks, Hari. You can see the adjustments this quarter on Slide 9. The restructuring charge of $7 million relates to 2 actions: our announced intention to close the aftermarket manufacturing facility in Sweden, where we recorded $4 million in non-cash asset writedowns and headcount reductions we took in South America this quarter to continue to adjust for industry production; second, we recorded EBIT benefit of $5 million that relates to assets we were able to recover that had belonged to the old Coleman company. Tenneco acquired Coleman and its Cleveland Elastomer operations back in 1996. Finally, we recorded a net tax benefit of $74 million or $1.22 per share this quarter.

Now on Slide 10, you'll see that we reversed the remaining valuation allowance on our U.S. deferred tax assets this quarter. As a reminder, the valuation allowance was booked during the financial crisis and the accounting requirements prevented us from considering either an economic recovery or the new business that we'd won at the time that we established the allowance. Since the allowance was booked in late 2008, light vehicle production rates have recovered. We've implemented some significant operational improvements and we've launched significant new customer business, all leading to strong margins and significant profitability in the U.S. In addition, we've taken several steps to improve our financial position and reduce interest costs. All of these actions have contributed to reversing the valuation allowance in the third quarter. I should also point out that we recorded a valuation allowance related to tax credits we have in Spain. Because of the economic situation in Europe, and particularly in Spain, we reached the conclusion that realization of these credits was not sufficiently certain to maintain them on our balance sheet. We will complete 2012 by adjusting fourth quarter income taxes to 35% as we've done since 2008. Beginning with the first quarter of 2013, we will no longer make this adjustment. Prior to establishing the U.S. valuation allowance, our effective tax rate was usually in the 35% to 40% range. We currently expect cash taxes for 2012 to be in the range of $80 million to $90 million.

Now moving on to Slide 11, we incurred interest expense of $21 million in the quarter, a reduction of 22% compared to $27 million last year. The reduced interest expense is a result of our successful refinancing in the first quarter. We expect our fourth quarter interest expense will be similar resulting in 2012 annual interest expense of around $87 million.

Now as you can see on Slide 12, we generated cash from operations of $118 million in the quarter. That's a 48% improvement from last year's third quarter when we generated $80 million in cash from operations. The $38 million improvement was driven by higher earnings, as well as a $27 million improvement in cash generated from inventory. On our last 3 months basis, our days sales outstanding excluding factoring this quarter was 64 days, that's even with last year's metric. Inventory days on hand was 40 days, that's up 3 days from last year. Days payable outstanding was 1 day better than last year at 72 days. We continue to focus on generating cash flow and are pleased with our progress to date. Let me remind you that our fourth quarter is seasonally our best working capital performance, and we expect that trend to continue.

As shown on Slide 13, we made capital expenditures of $65 million this quarter, up $15 million from last year as we continue to strategically invest in growth. You can see how our spending is split by segment on the slide, that's mostly to support OE light vehicle and commercial vehicle program launches, as well as for new customers. For the full year, we expect capital expenditures to be around $250 million. New projects related to recent customer wins and cost-reduction projects are bringing us to the top end of our previous range.

Next, I will take you through debt and available liquidity on Slide 14. At September 30, debt net of cash balances was $1,138,000,000, down slightly from a year ago. Our leverage ratio of 1.8x is the third quarter level. At quarter end, we had $568 million in unused borrowing capacity under our revolving credit facility, including $49 million in letters of credit outstanding. Additionally, cash on hand was $270 million and we had the ability to factor in another $56 million of receivables.

So with that, I'll turn the call back to Gregg.

Gregg M. Sherrill

Thank you, Ken. Through the first 3 quarters, Tenneco has put together a solid performance, continuing to grow revenue and improve profitability despite economic challenges and protracted weaknesses in certain markets. Looking at production in the fourth quarter on Slide 15, industry light vehicle production forecast from IHS Automotive indicates that industry production in total is expected to be relatively flat in the markets where Tenneco operates. Our position on strong selling vehicles in North America, including a number of large global programs and our strong position with leading auto makers in China, will continue to drive revenue on higher volumes in these regions. We also expect our North America aftermarket business to deliver revenue consistent with last year's strong fourth quarter.

The challenges in the Europe segment will continue with industry light vehicle production in Europe forecast to decline 10%. Despite Tenneco's strong OE customer and platform positions, we're anticipating this decline will result in lower year-over-year fourth quarter revenues in both Europe OE businesses. The negative economic environment will also continue to adversely impact the Europe aftermarket. And in South America, stronger year-over-year OE revenue is expected to be offset by weaker aftermarket environment.

In light of the conditions in Europe, we are taking aggressive actions to control costs and restructure our operations in line with the realities of the market.

Turning to the outlook for our global commercial vehicle business. You've heard us and others in the industry talk about the impact of weak economic conditions on both the on-road and off-road commercial vehicle markets this year with lower-than-anticipated industry volumes. In the fourth quarter, we expect our commercial vehicle revenue to be about the same as the third quarter, which would represent about a 25% year-over-year increase for the full year.

Regardless of software industry volumes, our strategy and growth drivers in this segment have not changed. Tenneco's market-leading vehicle aftertreatment technologies and engineering support continue to drive commercial vehicle growth, which is best illustrated by the strong book of business shown on Slide 16. And I'm very pleased that we can now name Kubota and Scania as 2 of our previously unnamed customers. Kubota is a leading global manufacturer of commercial vehicle engines and equipment. We're preparing to launch this aftertreatment business later this year. And to supply Kubota, we opened a new manufacturing plant near Osaka, Japan. As a U.S.-based manufacturer, winning this business and establishing a plant in Japan is a significant milestone and demonstrates our commitment to growing with our Japanese customers. We're also excited about our collaboration with Scania, another very important customer. In Europe, we'll be supplying a system for heavy-duty trucks and buses that will comply with Euro-6 emissions regulations. We're also currently supplying Scania with SCR aftertreatment to meet Euro-5 emission regulations in Brazil.

Our commercial vehicle business is contributing incremental revenue as we continue to launch and ramp up programs. Given our impressive list of leading customers and the business we've already booked, the key takeaway is that Tenneco is well positioned to capitalize on an upturn in volumes when industry production cycles recover.

Now based on the IHS forecast and our expected fourth quarter commercial vehicle revenue, we would anticipate that total revenue for the quarter will be roughly flat year-over-year. Ongoing macroeconomic and political issues are, however, creating an unusually high degree of uncertainty primarily related to the Eurozone and the nearing U.S. fiscal issues. Near term, our primarily concern would be the risk of further production cuts, our extended holiday shutdowns in Europe beyond what is currently reflected in our customer schedules. Obviously, we're monitoring these issues closely and are prepared to respond if necessary.

In conclusion, I'm pleased with our progress in our third quarter results. Tenneco's primarily drivers of growth and profitability are strong. Our advanced technology is driving new and light commercial vehicle business wins. Our global capabilities for engineering, program management and manufacturing are supporting launches with the world's-leading OE's and in the fastest-growing markets. And Tenneco is focused on improving efficiency, managing costs, reducing waste and driving higher quality are working together to improve our profitability.

And with that, we can open this call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ravi Shanker.

Ravi Shanker - Morgan Stanley, Research Division

Morgan Stanley. You typically see a sequential decline in gross margins 3Q to 2Q which you didn't see this quarter -- in operating margins, I mean. Not nearly as much as you typically do. And the thing going on there is that mostly to do with the commercial vehicle ramp, or is there something else going on?

Gregg M. Sherrill

Well -- so Ravi, I mean, it certainly does. The commercial vehicle is a contributor. If you're comparing to last year, we certainly struggled a bit with a plant closure last year that affected the margins going from, if you're looking sequentially, from Q2 to Q3. But if you look over the course of the last several years, I think it's been probably more consistent with what we saw this year.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And also, you've done a very good job with managing SG&A and R&D expenses especially in the last couple of quarters. Do we expect to see the current run rate continue?

Kenneth R. Trammell

Yes. I mean, so, Ravi, we are always very focused on SGA&E. That always moves a little bit depending on customer recoveries and a number of other things like that. But yes, I mean, we're very focused on keeping that in line especially as a percent of revenues on a quarterly basis. So feel pretty good about SGA&E.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And one last one before I jump back in queue. How much visibility do you guys think you have in the CV business? Is it something that's basically into the end of the year and do you think 2013 is going to be better? Or do you think it kind of persists through the maybe first half of 2013 as well?

Gregg M. Sherrill

Yes. I'm not sure that our visibility is all that perfect right now just to be perfectly honest with you. We've kind of laid out what we see in the fourth quarter. I have reasonable confidence in that based on what we see and hear from our customers right now. And I'm not anticipating a big upturn in 2013, certainly not in the first half. And too much of it still depends on some of these uncertain factors that I mentioned and the resolution of those, the fiscal cliff issues and all of that. So I think we're just premature to be talking too much about 2013 right now.

Hari N. Nair

And Ravi, just to emphasize what Gregg said. I mean, we've see weakness globally but particularly in Europe. And like we've said, we think we're probably in an extended downturn just generally in Europe. So we'll get -- as we get a better view about it, we'll certainly give you guys a heads up.

Operator

Our next question or comment comes from Brian Johnson.

Steven Hempel - Barclays Capital, Research Division

This is Steven for Brian from Barclays. In terms of North American CV revenue. I mean, a lot of people are saying commercial truck, it's looking pretty bleak right now. Ag off-highways, actually are showing up a little bit better than some expected. Well, can you give us a sense of the sort of revenue breakdown between ag off-highway for you guys versus commercial truck?

Kenneth R. Trammell

So right now, it's an interesting time. We're in launch on the off-highway business, and we do business with both in the ag and the construction equipment business. So you're seeing really both of those drivers for us. But we're in a launch as the regulations are changing. For us, it is a number of different factors that you kind of have to think about. It is the sales of regulated versus engines that are not yet subject to regulation, and the construction of engines in our market that may be sold in nonregulated markets. So there's a number of mix issues that are driving us on the ag and construction where you can't direct -- relate it directly to what's going on there. And remember, on the on-highway business again in North America, we're primarily medium duty, so a little bit less on or really no impact on the over-the-road business right now. And that really, it's mostly our business in Navistar.

Gregg M. Sherrill

One more just thing on the off-road side, next year is the third year of the phase in of all the engine segments. So the last sort of 1/3 of engines, and I don't know if it's 1/3 by the volume of what they build or not, but it's by horse power size, I believe it's smaller engines that launch next year. So there will be incremental aftertreatment content going into the off-road segment next year, whatever the market conditions are.

Steven Hempel - Barclays Capital, Research Division

Okay, perfect. And then just one follow-up. In terms of any EBIT margins, I think they're looking pretty healthy right now. Do you guys think that approximately 10% x substrate EBITDA level we could -- is that sort of peak margins for now? Do you think there's sort of room for improvement down the line?

Kenneth R. Trammell

Well, certainly, as commercial vehicle revenue continues to come up, that gives us room for improvement. We felt really good about the margin performance this quarter. We did get a little bit of a currency benefit transaction on the margins. But other than that, yes, we feel very good about what we've done and don't see anything usual be on the currency that's in the margin.

Operator

Our next question or comment comes from Rich Kwas.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Wells Fargo Securities. Just a follow-up on the commercial. So with Deer and CAT and some of the off-road headwinds here with mining, et cetera, those are 2 pretty big customers for you. How would you characterize what you saw in Q3 and what you're seeing in Q4 in terms of the decline in the volumes? And I realize it's pretty mixed because you're launching business all over the world right now. But with those particular customers, are you seeing the deceleration increase or do you think it's stabilized, it's close to stabilizing?

Gregg M. Sherrill

I do think -- my sense is, we certainly saw it decelerate into the third quarter, obviously, right? But the fourth quarter, we think now being further level with the third that we're certainly hoping that's indicative of some stability and it's just hard to say going into next year. But right now, it seems to be to me to be flattening out, not continuing to go down. I'm not prepared today to signal any further weakening other than what we've kind of already had done, right?

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay, okay. That's helpful. And then Kenneth, on the tax rate for next year, the 35 to 40 with the valuation allowance reversed. I mean, wouldn't that number come in lower over time with the NOLs going forward?

Kenneth R. Trammell

Well, remember that in fact because we put the NOL asset back on the balance sheet, we've effectively already recognized that benefit. Where we get the benefit is, we're not paying cash taxes in the U.S. as we're making money. But on the book side, we'll be recognizing the expense.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay, so it'll be slightly higher tax rate on a book basis. But cash, cash taxes will be lower.

Kenneth R. Trammell

Yes, there you go. You're right.

Operator

Our next question or comment comes from Joe Spak.

Joseph Spak - RBC Capital Markets, LLC, Research Division

It's RBC Capital Markets. I appreciate the color on North American off-road. I was wondering if you could provide a little bit of an outlook into Brazil, which has obviously been weak all year, and I think you previously indicated that it'll probably remain weak for a couple of quarters. Are there any early indications that you see that 2013, we can start to see a turn there?

Gregg M. Sherrill

Not that what we're seeing right now. It seems to be going to be a run or ordered out. There was clearly a large prebuy that went on last year ahead of these regulations, and we're just not seeing it at this point. And again, we'll update that further in our call in February, I think it is. But right now, it's seemingly going to be running right where its at.

Kenneth R. Trammell

I mean, Joe, we should, because they sold some out of inventory. The old engines at the beginning of the year, we should see a little bit of an increase, but that's really because the content will be on more of the same vehicles, not because we're seeing a change in the overall market.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And then, what about any update on China? I mean, you previously indicated that it seemed like enforcement was still thinking to that middle next year when you were seeing maybe even an uptick in activity. Is there any further update?

Gregg M. Sherrill

No, there's no really further update. I mean, those comments made previously still hold as of today.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And there's -- in the quarter, I noticed in Europe, obviously, a tough situation on the light vehicle market. It seemed like the ride control OE was down a little bit more than even the market would be. Is there any unusual share [indiscernible] going on there?

Hari N. Nair

No. That would just be mix among the platforms that we have on the ride control versus the emission control side.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay, great. And then just one quick housekeeping, if I could. Was there any stock comp impact in the quarter in SG&A?

Kenneth R. Trammell

So the stock price changed marginally. I think maybe $1 or so over the -- $1.02 in the quarter and I think we've said before that that's you got to go to $100 million to $120 million change in our market cap, so something in the $2 share range to get about $0.5 million in EBIT, so not much at all.

Operator

Our next question or comment comes from Graham Mattison.

Graham Mattison - Lazard Capital Markets LLC, Research Division

Lazard Capital Markets. Just a question on the EBIT increase in the Asia-Pacific region. Can you just give us a sense of how much of that improvement was growth and improvement on execution in China versus the restructuring benefits showing group?

Kenneth R. Trammell

But it was really a bit of both. We saw certainly the restructuring improvements in Australia which we're happy to see. And on a margin basis, our Australia's margins improved more than China. However, China is certainly much bigger, so it has the bigger impact from an EBIT and a margin perspective. And so that's a bit better in China and it's because we're absorbing the fixed cost like we said we would as we grow onto that business.

Graham Mattison - Lazard Capital Markets LLC, Research Division

All right, great. And then a question on the CapEx. You said you were moving guidance to the high end of that range on some new product launches. Can you just give a sense of the split between, are those more on the commercial vehicle side or more on the light duty side?

Kenneth R. Trammell

It is actually some light vehicle business that we've won, mostly here in North America that we're going to prepare to launch a little bit quicker than we normally would've.

Operator

The next question or comment comes from Brett Hoselton.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

KeyBanc. As we look at the North American value-added margin improvement of about 330 basis points, Ken, can you kind of characterize what were or how much of that was driven by commercial vehicle versus other things like maybe FX or comparisons or something else along those lines?

Kenneth R. Trammell

And so we told you the FX number, Brett, was $8 million in the quarter and that was mostly transaction. There was a little bit of translation, but mostly transactional benefit. So certainly that hits -- helps us on the margin piece. And when we're looking year-over-year, we certainly had a bit more commercial vehicle revenue, but it's the light vehicle revenue that grew greater, so that's the bigger contributor.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And then, Gregg, to your comment a little earlier on the commercial vehicle, it sounds like your standpoint kind of feels like it's bottoming out here, maybe, if I understood it correctly. And so I guess as I look into 2013 and I'm thinking about the decline in revenue from the -- commercial vehicle revenue from the second quarter to the third quarter, which is about 20%, that kind of suggests that as I look at 2013 that maybe a 20% decline in your expectations for 2013 is kind of a reasonable ballpark. Is there something else that may drive that significantly up or down that I might be aware of or should be aware of?

Gregg M. Sherrill

It really, there's a lot of pieces of the calculation if you try to make it, Brett, because we -- like Gregg mentioned, we've got one more round of engines that launch next year. Those are the lower horsepower engines in North America. We have the expected, currently expected enforcement of regulations beginning in the middle of 2013 in China. Again, our assumption is that enforcement rate is going to be fairly low at least the insulation rate fairly low to begin with, but that will be a difference as well. And so there's a lot of pieces of the puzzle, the calculation to get to the answer that you're trying to get to. We will -- we do that analysis on an annual basis and we're going to get working on it here so that we're prepared to talk about it when we get to the fourth quarter call.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And then with regards to comments about Europe, you've already done a little restructuring. It sounds like you're prepared to do some more restructuring. Is that -- should we expect some additional restructuring announcements or are you just kind of thinking about it at this point in time? And is there any sense as to the timing if you are thinking about something that you might come out with an additional announcement?

Gregg M. Sherrill

Yes, I think we'll have more to say on that in our next quarter call because we're definitely working on solid plans there.

Kenneth R. Trammell

Certainly, fixed cost will need to be taken out of the European business.

Operator

Next question or comment is from Patrick Nolan.

Patrick Nolan - Deutsche Bank AG, Research Division

Deutsche Bank. A couple of questions. The prior expectations were to improve margins in each of the remaining quarters on a year-over-year basis. With your new flat revenue outlook, is that still feasible at this point? Or is kind of flat margins kind of what the bogey is at this point for Q4?

Hari N. Nair

Patrick, that's a great question. Certainly, at the time we gave it, I think we said given the economic additions we saw at the time, that's what we expected. Certainly they've change a bit. I think the good news is, that where we've seen the strength in revenues is also where we have our strongest margins. So we still feel pretty good about certainly year-over-year improvement in margins. If things hold on kind of as we're expecting now in the fourth quarter, we'd certainly hope to be able to do that. But given the uncertainty we see particularly in the European piece, just not prepared to commit that fourth quarter as a definite.

Gregg M. Sherrill

In my comments, we flagged one specific risk. And as I said, we have not had any schedules changed on us yet but we just happen to believe there's clearly risk to production schedules in Europe. So it's really -- it's going to hinge on some of those things.

Patrick Nolan - Deutsche Bank AG, Research Division

That's very helpful. And just one housekeeping question. Substrate revenue fell to about 36% of OEM revenue in the quarter, it'd been tracking in the high 30s in the first half. Can you help us for what should look like in the fourth quarter?

Kenneth R. Trammell

It's going to move around obviously with platinum prices, which I think have come in a bit. Over the course of the last several months, our timing is always different with our customer system, the one that flows through our revenues. So I think we'll probably be a little bit more toward where we were in the third quarter than we were in the second quarter. But I can't -- it's going to just depend on when those adjustments come through from a customer basis on a substrate revenue.

Operator

Our next question or comment comes from Chris Ceraso.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Credit Suisse. I wanted to start by following up on the question about the year-over-year change in margin. You gave us the number about FX and talked about growth and light vehicle which was a bigger driver. You had also mentioned earlier in the call that the year-ago margin was depressed for I don't recall what reason. Can you just remind us what that was and quantify how much of the year-over-year delta was attributable to that?

Kenneth R. Trammell

Sure. Chris, I'm sure you recall the discussion we had last year about the closure of one of our ride control plans and rapid ramp-up in volume in one particular plant where we were moving a lot of that production to. And that challenge that we had, we quantified last year at $10 million. We told you in the second quarter that the ride control business was back on track. So obviously, we don't have that cost this year. I think that answers your question.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. Yes, thank you. In Europe, I think you just hinted at this saying that you do see risk to schedules you put up the IHS number down 10. I guess kind of 2 questions on the back of that. First, if you look at your specific platform and customer exposure, do you expect that you're positioned to be either better or worse than that 10% for Tenneco? And then some other suppliers have been willing to go out and say look, we know that IHS is saying down 10%, but we think it's going be down more than that. Pick a number, 17%, 18%. Are you willing to put a number on how much worse you think it could get on the back of your comment that you do see risk to the schedules?

Gregg M. Sherrill

No. I'm not sure how you do that right now, to put a number on it. Because as we said, it is just risk. There is no firm change in any schedules out there at this point in time. I think a lot of OEs are going through their own analysis of what their production runs are going to be, and I think it's just premature. We flagged it is a risk. We clearly believe it's a risk and I just have to leave it at that today.

Kenneth R. Trammell

In answer to the first part of question, Chris, because of our waiting more towards the German manufacturers for at least the year to date, we've done a bit better than what the IHS production would indicate. And obviously, depending on how that mix changes here in the fourth quarter and taking in some of the risk that Gregg talked about, we still would expect that generally speaking, we are to do a bit better than what the overall market does.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. And then maybe just one follow-up on the same theme. I think Ford this morning was talking about some downtime in the fourth quarter to reduce stock levels. Can you just give us just remind us what your exposure is to Ford in Europe?

Hari N. Nair

Ford is our -- I can't remember right now. It's on my head, Chris, either the third or fourth-largest customer in Europe. So we do have -- it's certainly very significant customer for us over there to the extent that, that's reflected in what's in -- is in IHS that is part of our comments. And that's incremental and that's part of what Gregg has been pointing out as a risk.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. So talking about that -- just to confirm, talking about flat revenue in Q4, that is based on Europe being down 10%. Does it leave any wiggle room? I mean, you're acknowledging that you think there's risk. But is the wiggle room in that flat or it's worse than...

Hari N. Nair

Yes, just to put a fine point on it. Because what Gregg said, and again "It was that we expect it to be flat given the IHS expectations and given what we seen the aftermarket. And then he pointed out there is additional risk beyond that. So I think that answers your question.

Operator

Our next question comes from Brian Sponheimer.

Brian Sponheimer - Gabelli & Company, Inc.

Gabelli & Company. Most of my questions have been answered. I just want to go to the North American aftermarket where I'm still very surprised to see how well you're holding up given with so many of your major customers today put up a negative 9% comp in ride control and a negative 16% in exhaust. Maybe give some color as to why your sales are bucking that trend?

Kenneth R. Trammell

Generally speaking, most of our customers are doing fairly well with our product line. And we've seen the demand hold in fairly strong. Year-over-year, we're roughly flat. Probably said for quite a while that we expect -- I mean, this is not a growth business, right? It's a 1% to 2% GDP minus growth business and that it would eventually kind of go back to normal. That's what we expect. And in the second quarter, we talked with this quarter being roughly flat year-over-year, that's what we were seeing. I think we said in the script that we expect probably the fourth quarter to be sort of in line as well with what last year's comps were. And again, it just depends on the customer mix. I'm not sure which is customer it is that you're referring to. But overall, our customers are generally doing reasonably well with their products.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And just as far as cash collections and how we're thinking about leverage as you end the year. Fourth quarter typically being a quarter where your harvest cash. Should we see that leverage number come down given your expectations for volume?

Kenneth R. Trammell

Yes. The fourth quarter is always our best working capital quarter because of the OE downtime and because of the fact that the aftermarket sales fall off in the fourth quarter. So we take cash both out of receivables and certainly out of inventory to take account of that. So yes, we don't see anything that changes that trend on a year-over-year basis.

Operator

Our next question or comment comes from Peter Nesvold.

Elaine Kwei - Jefferies & Company, Inc., Research Division

This is Elaine in for Peter, it's Jefferies & company. Just a quick question on the EU margins. Would you say that we're at a floor here? Or do you see things potentially getting a little worse in 4Q as the volumes continue to decline and when would we potentially see any benefit from the closures or the restructuring you're doing there?

Hari N. Nair

So our margins are always fairly seasonal in the fourth quarter is usually well among the lowest. So even taking into account just the seasonal changes, certainly, we'll see lower margins in the fourth quarter than in the third quarter. Maybe aftermarket sales fall off in the fourth quarter. I mean, that's a big contributor, plus you have downside from the OEs and we are expecting more downtime and as Gregg pointed out, there's even the risk of further downtime. As far as the benefit, when we talked about the closure of the plant in Sweden, we said that closure will be completed by the third quarter of next year. So we would expect to start to see the benefit after that.

Elaine Kwei - Jefferies & Company, Inc., Research Division

Okay, great. And just on the North American side, were there any discrete cost reduction actions taken there above what you would normally be doing? Or it was just the usual sort of cost optimizing and efficiencies?

Kenneth R. Trammell

Yes. Certainly no restructuring actions in North America, if that's your question. It was just the operation improvement.

Operator

[Operator Instructions] Our next question or comment comes from Patrick Archambault.

Aditya Oberoi

This is Aditya Oberoi for Pat from Goldman Sachs. I just wanted to take your, I would say, thought process here or your opinion on that relationship with the Navistar? And how do you think it's going to pan out longer-term and what opportunities do you see in different regions with Navistar. can you just comment a little bit on that?

Gregg M. Sherrill

I don't really think we'll comment very much at all on Navistar this morning. They're obviously still working through a number of issues on exactly how they're going forward. And it would be more a question for Navistar in my view to really discuss with them what their strategies are, et cetera. They're obviously a very important customer of ours. We continue to support them in every way we can. And really, anything beyond that, I think needs to be discussed with them.

Aditya Oberoi

Got it. Fair enough. The other question I had was in SG&A. I know this was brought up before as well. There's a pretty strong performance from an SG&A standpoint and I know stock comp expense was one of the factor that did not move much based on the stock price. Beyond that, are there any other levers that you think you pulled specifically in this quarter that helped the strong performance? Or are there any levers that you can highlight you want to pull going forward?

Kenneth R. Trammell

No. Again, it's just focused on our cost. And in particular, flexing wherever we can where we're seeing volume declines and we'll continue work on that. If there's anything, anything further, certainly, with the specific restructuring-wise, we would talk about those.

Operator

Our next question comes from Ryan Brinkman.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

From JPMorgan. Can you just help us out on how to interpret the trend in your aftermarket sales in North America and in Europe? I guess in North America, it looks like you slowed there to flat year-over-year in 3Q from up 7% in 2Q. Does this is simply reflect softer end market demand? Or is there any sort of inventory stocking change at the retailer level to also take into account? And then just in Europe, you were down 3% this quarter but down 12% last quarter. Does that simply reflect getting past destocking? Or would you say that there's any sort of stabilization taking place in the end market at all?

Gregg M. Sherrill

I would actually characterize North America as being a leveling off of still very strong demand. I wouldn't reflect it as soft at all. And so we're actually very pleased that this quarter, our revenues were pretty much in line with last year. Because as you recall, the aftermarket's been running strong for some time and in our outlook for the fourth quarter, similar. That it'll hold versus a very strong fourth quarter last year. So that's the way I would characterize North American aftermarket, for us on the strength of that Monroe brand and I think that's the key for us, in keeping it where it's at. As far as Europe is concerned, it just continues to be a very challenging market. We do not think we've seen the bottom yet in the aftermarket there, and it's a complicated issue. I think it probably is mainly in the southern part of Europe. But clearly, all of Western Europe is down to a certain degree, and I think we've even seen some slowing in the central and eastern European regions also.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay. And then are you seeing anything differently in terms of automaker price downs whether in 3Q or kind of going forward relative to what you've seen in recent quarters? Is that tracking any differently by region? For example, is it maybe worse than Europe given the well-publicized problems that some of the automakers are facing over there?

Gregg M. Sherrill

No. We've really not seen any significant changes relative to commercial relationships or pricing or anything like that.

Operator

And our final question comes from Adam Brooks.

Adam Brooks - Sidoti & Company, LLC

Sidoti & Company. Just a few quick questions on Asia. You've been outperforming substantially for a few quarters now. Maybe you could talk to how sustainable that is going forward? And also maybe talk to utilization rates over in Asia, because it seems like there should still be some upside in the margins because of that.

Kenneth R. Trammell

Yes. I mean, certainly, our customer position and our platform position in China has been positive compared to what the overall market has done, and that's been a benefit for us. We've continued to win new business, so we've also had launches certainly to the advantage of that. And so at least based on what we see today, we'd expect to continue to perform better than the market in Asia Pac primarily depending on -- primarily based on, I'm sorry, the China performance. What's your second part of the question? And I already lost them.

Adam Brooks - Sidoti & Company, LLC

Sure. And real quickly on the margins. Maybe where you're at as far as utilization rates and even given you're already at a 10% value-added margin, how much high would that potentially go?

Kenneth R. Trammell

Our utilization rates, we're still filling out the capacity that we've been adding. We've either moved or added 5 or 6 new plants just in the last 1.5 years or so. So we'll continue to absorb that. So that will be a bit of a benefit. But again, since we don't give margin guidance, I couldn't you for sure what the ultimate impact will be on the overall margins there.

Gregg M. Sherrill

And we continue to build facilities out there, and we just talked about the one in Japan which won't really start to go up until going into next year. So the margins are strong, we're very pleased with them. It's hard to say exactly right now to what degree they might accelerate or not, you've got a lot of puts and takes in Asia with Korea and Thailand and Australia, et cetera. But in China, we very, very pleased.

Operator

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.

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