Tenneco (TEN) Q4 2016 Results - Earnings Call Transcript

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Tenneco, Inc. (NYSE:TEN) Q4 2016 Earnings Call February 7, 2017 9:00 AM ET

Executives

Linae Golla - Tenneco, Inc.

Gregg M. Sherrill - Tenneco, Inc.

Brian J. Kesseler - Tenneco, Inc.

Kenneth R. Trammell - Tenneco, Inc.

Analysts

Colin Michael Langan - UBS Securities LLC

Brian A. Johnson - Barclays Capital, Inc.

Joseph Spak - RBC Capital Markets LLC

Rich M. Kwas - Wells Fargo Securities LLC

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Ryan Brinkman - JPMorgan Securities LLC

Richard Hilgert - Morningstar, Inc. (Research)

Brian C. Sponheimer - G.research LLC

Matthew Stover - Susquehanna Financial Group LLLP

Operator

Good morning and welcome to Tenneco's Fourth Quarter and Full Year 2016 Conference Call. This call is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to our host, Ms. Linae Golla. Ma'am, you may now begin.

Linae Golla - Tenneco, Inc.

Good morning, and welcome. This morning we released our fourth quarter and full year 2016 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 Investors section of our website. After our comments, we will open up the call for questions.

Before we begin, I need to tell you that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release 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 M. Sherrill - Tenneco, Inc.

Thank you, Linae, and good morning, everyone, and thanks for joining us today. As you can see from our release this morning, we continued our revenue and earnings growth in the fourth quarter to finish the year strong and deliver another year of record results.

First, taking a look at our fourth quarter highlights on slide five, revenue was up 9% on a constant currency basis, including increases in both the Clean Air and Ride Performance product lines. This record high revenue growth was fueled primarily by a 13% increase in light vehicle revenue versus the industry production growth of 7%.

Together, commercial truck and off-highway revenue was down 7% in the quarter. However, our commercial truck revenue was up 8% outpacing an industry decline of 3% and driven by a higher truck revenue in China.

In off-highway, revenues were down pretty significantly, but in line with what we previously guided, due to the continued industry weakness in North America and Europe. In addition, the year-over-year revenue comparison continues to include the sale of the Marzocchi specialty business. And finally, we had a solid contribution from the aftermarket with about a 1% revenue increase versus last year.

We also delivered record high earnings in the fourth quarter with a 6% increase in adjusted EBIT which included a $10 million currency headwind. Our earnings growth was driven by stronger light vehicle volumes, added technology content in both product lines, higher aftermarket sales, and the benefit from continuous improvement activities in our launches, and manufacturing operations. EBIT margin in the quarter was in line with last year's strong performance at 9.6%.

These solid results in the quarter contributed to an outstanding year, where we built on our track record of delivering consistent top line growth, higher earnings, and improved profitability. And once again in 2016, our revenue growth exceeded industry production supported by sustainable drivers including Tenneco's strong global light vehicle platform positions, tightening emissions regulations, our advanced suspension portfolio and our global aftermarket leadership where we're using our strengths to expand in high growth markets.

And as a reminder of something I just like to keep in front of you, another strength that supports these growth drivers is the balance we have in our business. In addition to multiple product lines, this balances across end market applications, geographic regions, customers and platforms. In 2016, we supported more than 300 vehicle platforms and no one platform represented more than 5% of total revenue. All in all, a diversity that helps us achieve consistent results.

Now taking a closer look at the full year on slide nine. In 2016, we delivered top line growth with our highest ever annual revenues, strong earnings with record high reported and adjusted EBIT, record high reported and adjusted net income and earnings per share. And we improved profitability with our seventh consecutive year of value-add adjusted EBIT margin improvement.

So turning first to revenue, on slide 10. In constant currency, revenue was up 7% to $8.8 billion, consistent with our guidance and reflecting growth in both Clean Air and Ride Performance. Light vehicle revenue was the growth engine, up 10% this year against industry production growth of 5%. We're on leading vehicle models in China.

We have a very strong position on light trucks in North America. And when you look at our largest platforms in Europe, they were all top-selling nameplates. With the strong platform position, light vehicle revenue accounted for 75% of our total revenue in 2016. Commercial truck and off-highway revenue made up 11% of our total revenue in 2016.

Total revenue for these end-market applications was down 4% year-over-year, however, on the Clean Air side, revenue was up 2% with regulatory driven content on truck and off-highway programs. Criteria pollutant regulations around the world remain one of our strongest growth drivers, even if these markets continue to suffer from a deep cyclical weakness.

The Clean Air increase was driven by content in the first half of the year on off-highway programs in North America, Europe, and in Japan with Kubota, as well as in North America on Ford's medium-duty truck. Excluding the impact of the Marzocchi divestiture, Ride Performance revenue was down 10% as we continue to feel the impact of weak commercial truck production in North America and Europe. Finally, global after-market revenues were up 2% with increases in both product lines. The after-market is a steady contributor to our results and in 2016 made up 14% of total revenue.

Now, taking a look at EBIT and EBIT margin on slide 11. Adjusted EBIT increased 9% and EBIT margin was up 40 basis points to 9.7%. These improvements were driven by incremental Clean Air content on light-vehicle and commercial truck programs, the added Ride Performance content we're seeing from our Monroe Intelligent Suspension programs, and higher after-market sales. Additionally, we continue to leverage stronger light-vehicle volumes and drive operational improvements.

And finally, I want to mention our capital allocation strategy and returns to shareholders. Our priorities have been consistent for years and are shown on slide 12. Organic growth will always be our number one priority, and we expect that growth to continue with the strong underlying drivers. We're also making the necessary investments to optimize our operations globally, and continuously improve Tenneco's cost competitiveness.

So with growth and profitability plans delivering results and a strong balance sheet, we are well-positioned with our other two priorities, pursuing strategic opportunities that would enhance the organic growth already in place and providing direct cash returns to our shareholders. And to that end, last week, we accelerated returns to shareholders by announcing a dividend program that will pay quarterly cash dividend.

The dividend represents a consistent and sustainable return and demonstrates our confidence in Tenneco's current strong position, future earnings growth, and the resulting cash generation. In addition to the dividend, we announced another share buyback program, which together with what was remaining on earlier programs, authorizes the repurchase of up to $400 million in shares over the next three years. This, of course, gives us the flexibility to redirect if we want to pursue a higher priority strategic opportunity.

In summary, we're very pleased with our record-setting results in 2016. From our strategic focus to the way we execute in our plants, Tenneco is built to outperform and we continue to deliver. We have a successful business model with two strong product lines driving profitable growth. With that solid foundation and a strong balance sheet, we have flexibility and options in how we move forward to accelerate growth and drive greater shareholder value.

And now, before I turn the call over to Brian today, I'd like to make just a few comments about our announcement last week. For me it has been a great privilege to serve as Tenneco's Chairman and CEO. When I look back over the last 10 years, what really stands out was the opportunity to lead what I consider is the best team in the industry. Every member of this team, regardless of their position or geographic location, has my undying gratitude for their dedication and hard work. I am proud of how together we have put Tenneco on a path for continued success.

And now, as I look ahead, I am confident it's the right time to turn the CEO role over to Brian Kesseler. Many of you have already met Brian and you've seen his contributions as our Chief Operating Officer in our results over the last two years. He is an exceptional leader in driving growth and operational excellence, and I am confident he will be an outstanding CEO. I'm excited to work with him in my role as Executive Chairman, and we are both committed to a seamless transition.

So, Brian, congratulations, and I'll turn the call over to you.

Brian J. Kesseler - Tenneco, Inc.

Thanks, Gregg. I first want to thank you and the Tenneco Board of Directors for the opportunity to serve as CEO. I'm honored to lead an outstanding team as we continue building on the track record of profitable growth, established under your leadership. We're in a great position today, with tremendous opportunities ahead. I'm looking forward to continuing Tenneco's success and serving our team, our customers and our shareholders.

Turning now to more detail on our fourth quarter results, beginning on slide 13 with the industry production environment. Global light vehicle industry production strengthened in the quarter, up 7%. Commercial truck industry production was down about 3% globally, including declines in North America and Europe. And, as expected, off-highway production remained very weak in North America and Europe as well.

Turning now to our segment results, keeping in mind that value-add revenues are at constant currency. Beginning with Clean Air on slides 15 and slide 16, total Clean Air revenue was up 9%, outpacing industry production, and fueled by a 13% increase in light vehicle revenue, with gains in all three reporting segments.

In North America, light vehicle revenue was up 16%, driven mainly by higher volumes on current platforms, including the GM Acadia, Enclave, and Traverse SUVs, as well as the Malibu, Impala, and LaCrosse sedans. We have a great position on light trucks in North America, and the ramp up on several key programs also contributed to growth this quarter, including on the Ford Super Duty, Nissan Titan and Toyota Tundra.

In the Europe, South America & India segment, light vehicle revenue increased 15%, driven by higher volumes on recently launched platforms in Europe, including the Mercedes E-Class, Renault X82 van, Chevy Cruze, Opel Astra, and the new Jaguar F-PACE crossover. Light vehicle revenue in South America and India was also up on stronger volumes in those regions.

In the Asia Pacific segment, light vehicle revenue was up 6% on stronger volumes in China and the ramp up on a number of platforms, including launches with SVW, Beijing/Mercedes, Volvo and FAW.

Turning to Clean Air commercial truck and off-highway, consistent with the expectations we shared in the third quarter, revenue was down 6% in the fourth quarter, driven by a 26% decline in North America as weak off-highway market conditions continue.

Commercial truck and off-highway revenue was 7% lower in Europe, South America & India. Similar to last quarter, we saw lower commercial truck and off-highway volumes in Europe, offsetting the gains in India, as new content continues to ramp up to meet the Bharat Stage IV standards. And finally, Asia Pacific revenue was up 45%, driven by on-road commercial truck programs in China.

Now turning to Clean Air earnings and margin performance, adjusted EBIT was up 6% to $126 million, including the $6 million currency headwind. Value-add adjusted EBIT margin was 12.3%, which was even with our record performance last year. As we said in the third quarter, we delivered sequential margin improvement in North America and we expect that improvement to continue. Positive drivers include the light vehicle growth I just mentioned, new programs, and operational cost improvements in Europe and China, and the increase in China commercial truck revenue.

So to summarize Clean Air, good growth in the quarter with strong light vehicle revenue and consistent margins even as we continue to invest in our growth and in the face of significantly weaker off-highway industry conditions in North America and Europe.

Turning now to Ride Performance results on slide 17 and 18, revenue was up 8% in the quarter and once again light vehicle results drove the improvement with a 15% increase. In North America, our Ride Performance light vehicle revenue declined 4%. Revenue growth from new programs was more than offset by the impact of retired programs on the year-over-year comparison. We expect some impact in the first quarter from those retired programs this year, but for the most part these programs have now been lapped.

In Europe, South America & India segment had a very strong quarter with light vehicle revenue up 21%. Driving this growth were strong volumes in Europe on recently launched programs with Jaguar, Volkswagen, Volvo, and Renault, as well as continued content growth on Monroe Intelligent Suspension programs with Volkswagen, Renault and Ford.

We also continued to have very strong growth in the Asia Pacific segment, where light vehicle revenue was up 43% driven by higher volumes in China on programs with Beijing Hyundai, Volkswagen, and SGM.

Turning to Ride Performance commercial truck, revenues were down 18%. We're still seeing weak truck production in North America, and similar to last quarter, revenues were lower in Europe due to sale of the Marzocchi specialty business at the end of 2015. Excluding the impact of Marzocchi, revenues were down 8%. This now marks a year since the sale, so we won't have that impact in comparison going forward.

And finally, the Ride Performance aftermarket had a good quarter with revenue up 3%. The increase included a 2% gain in North America and a strong contribution from the team in South America, which drove a 6% increase in revenue for the Europe, South America & India segment.

Now turning to our Ride Performance earnings and margin performance, adjusted EBIT was up 14% to $58 million including a $4 million currency headwind and Ride Performance adjusted EBIT margin improved 70 basis points to 9.5%.

A number of factors drove our margins this quarter including technology content on our advanced suspension programs, stronger light vehicle volumes in most regions and higher aftermarket sales in both North and South America. We're also benefiting from operational improvements across the board as we continue to implement a number of initiatives to improve our cost structure.

In summary, a strong quarter for Ride Performance with continued growth from advanced technologies in Europe and conventional shocks in China, a solid contribution from the global aftermarket and substantial margin improvement.

In closing, the global Tenneco team finished strong and delivered another record year with strong execution on our strategies for revenue growth and margin expansion. Our team embraces a continuous improvement culture and continues to execute on building strong partnerships with our customers, achieving product and technology leadership and driving operations excellence. We're focused on these core elements which give us a competitive advantage and drives sustainable results.

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

Kenneth R. Trammell - Tenneco, Inc.

Thanks, Brian. Now starting with the adjustments in the quarter on slide 19. First, we recorded restructuring and related expenses of $10 million for head driving operational excellence count reduction and cost improvement initiatives, primarily in Europe as well as in Australia, where our customers continue to wind down production. We also recorded a $4 million net tax benefit related to tax adjustments to prior year estimates.

Additionally, we made significant progress on the pension buyout program that we discussed earlier in the year. I'm pleased with the result. Of those eligible to participate, 55% decided to take a lump sum payment. This reduced our benefit obligation by $169 million and the number of participants in the U.S. plan by 45%. As a result we recorded pension buyout charges in the fourth quarter of $72 million and we increased our pension plan contributions by $18 million. A portion of this transaction was completed in January, so we will record additional first quarter charges of $6 million and we'll make a final cash contribution of $9 million.

Now moving on to taxes on slide 21. For the full year our effective tax rate is 27%. This is lower than our expectations earlier this year based on the mix of earnings in the various tax jurisdictions where we do business. The lower full year rate reduced our fourth quarter rate to 20%. Cash tax payments are $25 million in the quarter and $113 million for the full year. For 2017, we expect our full year tax rate will be between 29% and 31%. That's higher than the 2016 rate because of the geographic mix of earnings in 2017, and the change to two China JV tax designations, which we expect will be temporary as we apply to renew the designations.

In accordance with Chinese regulations, those designations have to expire before we can renew, and that typically takes 9 to 12 months. We expect our full year cash tax payments will be between $125 million and $140 million. Like everyone else, we will be watching closely as tax reform takes shape in the U.S. and we'll update you on any relevant impact.

The net income impact from non-controlling interests this quarter was $21 million, and that's up $6 million from last year, as a result of the significant growth in our China joint venture operations, as well as the seasonally strong production in China for the quarter.

On slide 22, we have a summary of our debt and cash positions. Our adjusted interest expense was $68 million in 2016, and we're expecting annual interest expense of about the same amount in 2017. Our leverage ratio was 1.2 times at the end of the year, and that's even with the ratio a year ago.

Moving on to cash flow on slide 23, we generated cash from operations of $250 million in the quarter and $489 million for the full year. That's 5% lower than the strong cash from operations performance of $517 million that we reported last year.

More than 90% of our year-over-year fourth quarter revenue increase occurred in the last part of the quarter, resulting in increased accounts receivable of roughly $100 million at the end of the year, and increasing our days sales outstanding by 4 days. I expect this timing effect to normalize during 2017. Our days payable outstanding was better by 2 days at 75 days, and our days inventory on hand was up 1 day at 37 days at year-end.

Also, as I mentioned earlier, we made pension plan contributions of $18 million as part of the pension buyout program, which is reflected in our year-over-year operating cash flow results.

Capital investments in the quarter were $129 million, consistent with the level of investment we signaled earlier in 2016. The investments are for new or expanded business in North America and Europe and increased capacity in China to support a significant launch in 2017. For the full year, capital expenditures were $343 million.

We expect 2017 capital expenditures of between $360 million and $390 million, as we continue to outpace underlying production growth rates. The capital we're putting to work is for new, replacement and incremental awarded business. The business award cycle is certainly not linear. And as we've seen in the past, there are times when the award cycle drives significant expansion within a given year, and 2017 is one of those years.

Included in our planned CapEx this year are five new plants, including two Clean Air plants and then two Ride Performance plants in China and a new Ride Performance manufacturing location in Eastern Europe, serving both the OE and aftermarket customers. As we discussed in the July 2016 earnings call, the two China Clean Air plants are in progress now and will begin construction in this year on the other facilities. They will be launching through 2018 to support new program wins, new customers and aftermarket growth.

Now shifting gears on slide 24, in the fourth quarter we repurchased 1.4 million shares for $79 million. Since our buyback program began, we have repurchased 8.4 million shares for $438 million, or 14% of the shares outstanding at that time. As Gregg mentioned earlier, the Board of Directors initiated a quarterly cash dividend of $0.25 with the initial dividend payable on March 23, 2017, to shareholders of record as of March 7. Additionally, the board authorized the repurchase of up to $400 million in common shares over the next three years, including the amount remaining on previous authorizations.

I'd also like to mention that certain matters relating to the ongoing antitrust investigations are not yet fully resolved in all regions, and we do expect to see some year-over-year pick-up in legal cost in 2017. The total amount will likely be about $5 million or $6 million this year, and it will be recorded in SG&A expense. As a reminder, we don't make an adjustment for these costs.

Additionally, starting in first quarter 2017, we will make a small change in our reporting segments. Our Clean Air and Ride Performance product lines in India, which had been reported as part of the Europe, South America & India segment, will be reported with our respective product lines in the Asia Pacific segments, bringing the high growth markets in India and China under a single reporting segment. This change is not material to the results of any of the affected segments, but in the 2016 10-K, we will be providing for your reference, the comparative results for 2016 to match the go-forward segment reporting.

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

Gregg M. Sherrill - Tenneco, Inc.

Thank you, Ken. So in summary, we're in a strong position with a solid foundation. We have strategies that are working and great momentum as we come off another record year. And we intend to build on that momentum with continued growth in 2017 and in the years beyond.

Turning now to our outlook for the first quarter and full year, starting with the first quarter on slide 25, we're off to a strong start. Excluding currency, we expect to outpace our projected 3% increase in light vehicle industry production by 4% for a total revenue growth of 7%. We anticipate commercial truck production to be up 4% in the first quarter, and we don't expect much change in the off-highway markets with fleet volumes continuing.

As we announced in Detroit last month, for full year 2017, we expect to outpace industry light vehicle production with 4% organic growth, bringing our total revenue growth to 5% in constant currency. Our four powerful and sustainable growth drivers will continue to underpin our revenue growth in 2017.

The first is the strength of our light vehicle position with leading customers, including content on global platforms. Some of the light vehicle programs supporting this growth projection include: the continued ramp-up of the Ford Super Duty Truck and incremental revenue from the Jeep Wrangler in North America; higher Ride Performance revenue on new programs in North America with Fiat Chrysler and Volkswagen; new programs in Europe with Jaguar Land Rover and Volkswagen; and programs in China with FAW-Volkswagen, Nissan, and Shanghai GM.

The second driver is added Clean Air content for emissions regulations. Those also include: content from the phase-in of Tier 3 and Euro VI regulations in the U.S. and Europe for light vehicles; incremental Clean Air content on an off-highway program in Europe; continued growth with the ramp-up of Bharat IV in India; and incremental content growth in China on commercial truck programs.

The third driver is content growth from our advanced suspension technologies where we expect incremental 2017 revenue from five new Monroe Intelligent Suspension launches, including two new platforms and the continued ramp-up on 2016 program launches, including the Infiniti Q50, Volvo XC90, and the Ford Focus RS.

And finally, our fourth revenue driver is the growing global demand for our aftermarket products, driven by strong brands, industry-leading product coverage, and our world-class distribution network. We also expect to leverage our growth and operational capabilities to deliver full year margin improvement in 2017, while continuing to invest in new facilities to accommodate our growth.

Now looking further ahead in 2018 and 2019, the same underlying drivers will continue fueling revenue growth, and we expect to continue to grow above the industry by 3 to 5 percentage points each of those years.

Now, before we open the call for questions, I'll just summarize by saying we are delivering profitable growth, we have a strong balance sheet, we're investing for the future, and we're returning cash to shareholders through the new quarterly dividend and share repurchases. We're not letting up on any way on all the things that are working so well, which gives me great confidence in Tenneco's future success.

And just one final note, I'd like you to mark your calendars for Tenneco's 2017 Investor Day, which will be on Tuesday, March 21 at the New York Stock Exchange. The formal invitations will be sent shortly with more details. In addition to the executive team you are familiar with, you'll have the opportunity to hear from Henry Hummel, who runs Clean Air globally; Martin Hendricks from Global Ride Performance; and Patrick Guo, who leads Asia Pacific. Ben Patel, who will be taking over as Chief Technology Officer with Tim Jackson's retirement at the end of March will also present, and you'll have a chance to see some of our latest Clean Air and Ride Performance technologies. So I hope you can join us.

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

Question-and-Answer Session

Operator

Thank you, speakers. We will now begin the question-and-answer session. Our first question is coming from the line Colin Langan of UBS. Your line is now open.

Colin Michael Langan - UBS Securities LLC

Great. Thanks for taking my questions and congrats, Brian, on your future new position, I think it's as of May.

Brian J. Kesseler - Tenneco, Inc.

Thank you.

Colin Michael Langan - UBS Securities LLC

Yes. I did want to ask about margins. I'm not sure if I missed this in the commentary. North American commercial margins were down, I think, about 200 basis points. Just any color there on the key drivers of the weakness in quarter and how you think that should trend into 2017?

Kenneth R. Trammell - Tenneco, Inc.

Clean Air. Colin, are you talking specifically about the Clean Air margins?

Colin Michael Langan - UBS Securities LLC

Yes. Yes, yes. Clean Air North America. Yeah.

Kenneth R. Trammell - Tenneco, Inc.

Yes, so a couple of things. As we talked about in the third quarter call, we expected good sequential improvement from Q3 to Q4, which is what we saw. A couple to things that are continuing to influence those margins: the significant weakness in the off-highway, 26% down on a year-on-year comparison for Q4 was a significant driver there, as you're familiar with our off-highway business and product lines there.

And as we continue to ramp, specifically, we saw that ramp on the programs, the truck programs in that we experienced in Q3 happened at the very end of Q4; so we started to see that come in. It looks like it's continued into Q1. So we would expect those margins in North America Clean Air to continue to expand sequentially each of the next two quarters in reaching of a more normalized range in the back half of the year.

Colin Michael Langan - UBS Securities LLC

Got it. And how should we think about margin expansion overall? I mean, you've had a good run here. Can you expect increased margins this next year? Or should we consider current levels kind of maybe the final leg, or?

Gregg M. Sherrill - Tenneco, Inc.

As I said in the comments there, we do expect to continue margin improvement for the year. As I've said for the last several years, we're not saying we can deliver it every quarter. That has to do with mix changes and that sort of thing that can get into a quarterly margin, sort of, discussion. But the full year, I think we reported – well I know. We're very confident we're going to deliver another year of margin improvement.

Colin Michael Langan - UBS Securities LLC

And what are the key drivers if we think of margin expansion? Does commercial truck stabilization help there since that's what's been working against you, or?

Brian J. Kesseler - Tenneco, Inc.

Yeah. Well, we're not expecting a dramatic comeback in the off-highway markets, but we are seeing a pickup in the commercial truck segment, which is good for us. The technology content that continues to be introduced and put on both product lines, both Clean Air and Ride Performance, is an obvious help there. And then as we ramp up on the programs and fill the capacity, some of the investments we made last year will help. So we've got a lot of different drivers. And then there's always the ongoing discipline around the continuous improvement activities in all if our existing operations that will help that. So we've got a lot of different drivers of that margin expansion for us.

Colin Michael Langan - UBS Securities LLC

And lastly, any color on the border adjustment risk? It sounded like in the past you seemed pretty confident that you're pretty localized within regions. I mean, do you have any numbers on the percent of U.S. sales that are actually imported from other parts of the world, that people can maybe frame it a little bit? Any color on that front? Thanks.

Kenneth R. Trammell - Tenneco, Inc.

Yes. So Colin, let me try and address it. If I look at our recent history, we have been a small, net exporter out of the U.S. And I want to emphasize small, because that can change depending on our customer sourcing strategies and that sort of stuff, which means that, if you just look from a U.S. perspective, a border tax adjustment would probably be actually a small benefit to us. That being said, obviously if one's put in place, first of all, we would expect to see reaction from our customers, both aftermarket and OE, and we may see reaction from other countries. So I'm not predicting that. If that comes in, we see a benefit. But at least right now, we don't see a huge exposure either.

Gregg M. Sherrill - Tenneco, Inc.

You know, we've had a principle that we've talked about with you guys for a number of years of manufacturing regionally in the regions where we're going to sell our products. And it's just for this sort of thing, right. I mean, tariffs can change. Duties can change, foreign exchange can change, all that stuff at the whims of governments. But you're reasonably insulated if you stick to that principle of manufacturing in the region where you sell your goods, kind of the old adage that all business is local. And we held to that. So I think that's why when you look at the numbers, as Ken said, we're almost net-net even, right. But we are slight at the moment net exporters out of the U.S.

Colin Michael Langan - UBS Securities LLC

All right. Thank you very much.

Operator

Thank you. Our next question is coming from the line of Brian Johnson of Barclays. Your line is now open.

Brian A. Johnson - Barclays Capital, Inc.

Yes. Good morning. And congratulations both to Gregg for taking the company where it is and Brian for taking over. I want to talk a little bit about, if you could just give us some of the factors at the CEO and board level you thought about in terms of setting both the dividend and the share buyback. I add those two together and you're talking about about $188 million a year of annual cash outflow. Can you give us a sense of a few things? What factors did you think in terms of target ratio, debt-to-EBITDA? I think 1.2 is what you've been talking about. Payout ratio versus GAAP earnings, payout ratio versus free cash flow, and then did that leave room for downstream acquisitions?

Kenneth R. Trammell - Tenneco, Inc.

So, Brian, a lot of questions there. So let me try and address it and then come back and let me know if I don't hit one of the ones that you were looking for an answer to. What you saw with our dividend announcement was really the continuation of what we've talked about for the last several years on our capital allocation strategy. And that's once we got the company in a position from a balance sheet standpoint that's a leverage ratio of around 1 times is our target, we felt like it was appropriate then it was the right time that opens up opportunities for us to think about both strategic opportunities, acquisitions that might make sense for the company that would help us drive our organic growth even faster than what we see, as well as returns to shareholders.

Now when we started our buyback program here, gosh, a couple years ago, we said we saw a lot of value in our shares. The multiple was lower, and we've targeted our buyback at – we targeted our shareholder returns at a buyback in order to take advantage of that. But we've also said longer term that we truly believe that the company is in a very solid position, and that at some point it would make sense to initiate a dividend. And that's continue to be on our capital allocation strategies as well.

So we look at the combination of share buybacks and dividends as the return to shareholders over a longer period of time. Dividends should be very stable. The buyback still gives us flexibility to continue to think about the number four item on our allocation strategy, and that's certainly acquisitions that makes sense for the company, but also looks at returning essentially the free cash flow that's necessary to keep our leverage ratio right around 1 times.

Brian A. Johnson - Barclays Capital, Inc.

Okay. So the goal is 1.0, and then free cash flow above and beyond that you're returning to shareholders or using for acquisitions? Is that a?

Kenneth R. Trammell - Tenneco, Inc.

Yeah. Yeah, and I would, the only thing I would say, you said 1.0. I would say within rounding distance of 1.0.

Brian A. Johnson - Barclays Capital, Inc.

Okay. And is there anything we can read into your expectation of 2017, 2018, 2019 cash flow from the dividends?

Kenneth R. Trammell - Tenneco, Inc.

Other than the fact that we obviously see the solid position the company is in and our ability to generate cash as clearly adequate to support that, no question on that. I would also point out, and I think you said it a different way than I would think about it, but over the next three years, the cash returned to shareholders between dividends and share buybacks is very similar to what we've seen for the last, you know, in the last programs that we announced.

Brian A. Johnson - Barclays Capital, Inc.

Okay. And then just over on the aftermarket side, there have been a few announcements; Ford with Omnicraft; Amazon, which I guess has been out there for a number of years, the potential disrupter to aftermarket parts retailing; just retail issues more broadly in other, you know, in non-auto goods categories. Just where do you see sort of these distribution trends taking your aftermarket business? And where's the given the strong Monroe brand, the risk or opportunity there?

Brian J. Kesseler - Tenneco, Inc.

Well, Brian, the opportunity in that is we continue to see probably channel consolidation as we look at the e-tailing trends. And that's not just in the U.S. We're seeing it in Europe, and probably a market that's going to go to it maybe first or second from an evolution standpoint, it'll be China. We view that as a great opportunity for us. And we do business with the major e-tailers in all regions today. So we're pretty well-positioned there.

The brand is extremely strong, so we continue to make sure we invest there. There's a lot of factors as far as how you position the aftermarket. Product coverage is a significant one, where we've made all those investments in the mature markets, in the emerging markets, it's a – that's where your investment strategy to make sure we've got great product coverage there. And then it's a matter of making sure that we continue to build on the distribution networks that we have in Western Europe and North America and South America and putting those in place in China.

The maturing of the China market is probably still a couple years away as the vehicles age there and the car park continues to become the largest in the world, but we're making those investments now for setting up the distribution network, the distributor training, product coverage, and then the brand awareness investments necessary. So we're real happy with our aftermarket position. We see really good upside there.

Brian A. Johnson - Barclays Capital, Inc.

So you are – I just googled you, you are selling through Amazon and would you say the margins and sort of your ability to push Monroe, or preserve Monroe's share with online access to cheap imports? Is that – what's just been your experience there?

Brian J. Kesseler - Tenneco, Inc.

Well, I think our margins – we're confident we can sustain the margins we have as we go there. As we get bigger and get more volume across that, we would expect to leverage that further. From a threat standpoint or any low-cost country entry, the great position we have is that we're the OE manufacturer too in that space. So that wins us some great credibility and a high-quality position. And then making sure that you can deliver it with correct lead times is another substantial advantage. So we've been fending off any threats from a low-cost country for years and we'll continue to do so.

Brian A. Johnson - Barclays Capital, Inc.

Okay. Thank you.

Operator

Thank you. Our next question is coming from the line of Joe Spak from RBC Capital Markets. Your line is now open.

Joseph Spak - RBC Capital Markets LLC

Thank you. Good morning, and congrats to both Gregg and Brian. First, I just wanted to better understand the guidance a little bit because you're saying 3% industry growth, that's a light vehicle number, 4% outgrowth, and then also 2% FX headwind, but you're still saying 7%. So does that – is the implication another 2% from aftermarket and commercial vehicle and off-highway in the first quarter?

Kenneth R. Trammell - Tenneco, Inc.

Yes. So, Joe, just to be clear, when we give our estimates, that's at constant currency, right? So one of the things we've learned very well over the course of the last decade is we can't predict which direction currency's going to go today, much less for a quarter or a year. So we try and give you the numbers in constant currency. And then, if you look at the slide that we presented back in Detroit, and it'll give you some information that you can look at the sensitivity of the revenue to various currency rates.

Joseph Spak - RBC Capital Markets LLC

Right. I specifically meant I guess, for the first quarter where, unless I'm reading it wrong, total revenue growth is 7% and then you also indicated about a 2% headwind.

Kenneth R. Trammell - Tenneco, Inc.

Right, so...

Joseph Spak - RBC Capital Markets LLC

Is that included in that?

Kenneth R. Trammell - Tenneco, Inc.

So again, to be clear, Joe, the 7% is constant currency. Right? So whatever currency – what we're seeing right now, if currencies stay the same place that they are, then there would be a 2% headwind against that, right? But again, whatever sort of number is there for you, expectation that you want to show, currency certainly could be different, but that 7% is at constant currency.

Joseph Spak - RBC Capital Markets LLC

Okay. Then so at current exchange rates you would actually expect closer to 5%?

Kenneth R. Trammell - Tenneco, Inc.

That's.

Gregg M. Sherrill - Tenneco, Inc.

That's right. That's what we did.

Kenneth R. Trammell - Tenneco, Inc.

Yeah, exactly right.

Joseph Spak - RBC Capital Markets LLC

Okay. Okay. Okay. And then, that's helpful. And then Brian, just I think this came up a little bit in Detroit, but strategic opportunities is number four on your priorities now ahead of shareholder returns although I know there's arrows going back and forth. I was just wondering now as we transition to your leadership, should we expect you to try to get more aggressive on some inorganic opportunities? And what exactly what would you be looking for?

Brian J. Kesseler - Tenneco, Inc.

Well, I think what's great about the position the companies in is we've got the options now to consider any strategic options, inorganic options. You know when we're together in March, we'll be talking a little bit more about how we're looking at those options. But in a nutshell, anything that continues to maximize our core business would be kind of the first screen that we would look at to fuel the growth.

We believe we've got great growth potential in the core business as it exists today, so anything that we would look at going out would – we would look to accelerate our revenue growth and margin growth in advance of where we see it in our strategic plan and then set us up long term in the future. So there's a lot of different criteria we're looking at.

We'll highlight a little bit of that when we're together on March 21, but I – we don't have money burning a hole in our pocket. We've got to make sure that we're very deliberate and make the right decisions for the long term of the company. We have an obligation as a senior leadership team to continue the growth that we've seen over the last 10 to 15 years on that same pace and any adjustments we need to make to portfolio, we'll make sure we make them.

Joseph Spak - RBC Capital Markets LLC

Okay. And then Ken, just two quick housekeeping ones. On the legal expense, you said $5 million. Was that an absolute number or was that an incremental $5 million in 2017 over 2016? And then on the answer to Colin's question on border adjustment, you said you're a net exporter. Is that inclusive of all the substrates and how exactly would those be handled, do you believe, under a border adjustment?

Kenneth R. Trammell - Tenneco, Inc.

So Joe, the $5 million or $6 million in legal costs that we referenced is the absolute number and that'll be up year-over-year, we probably had maybe $2 million or $3 million last year.

Joseph Spak - RBC Capital Markets LLC

Okay.

Kenneth R. Trammell - Tenneco, Inc.

On substrates, yes, that's inclusive of substrates. From that perspective, we do own them. However, obviously given it's a directed buy, if that crosses borders, we would expect to be able to get recovery of any border tax adjustment on that.

Joseph Spak - RBC Capital Markets LLC

That's very helpful. Thanks.

Operator

Thank you. Our next question is coming from the line of Rich Kwas of Wells Fargo. Your line is now open.

Rich M. Kwas - Wells Fargo Securities LLC

Hi. Good morning. Congratulations, Gregg, and best wishes, Brian.

Brian J. Kesseler - Tenneco, Inc.

Thank you.

Gregg M. Sherrill - Tenneco, Inc.

Thank you.

Rich M. Kwas - Wells Fargo Securities LLC

As we think about going into 2017, last quarter, you had some truck programs that the launches didn't hit run rate or ramp up as quickly as expected. It sounds like that started to happen towards the end of the fourth quarter. But I guess, Brian, could you give us some color on how we should think about some of these launches and when you should hit full run rate? Will it be first quarter or do you think that seeps into the second quarter?

Brian J. Kesseler - Tenneco, Inc.

Well, I think in the back – say, half of the first quarter we saw them really start to pick up. It looks like whatever constraints they were facing were broken. And so we saw kind of max overtime going in there. We're seeing continued ramping in the first quarter. I would suspect, we suspect that second quarter they'll be up on plane. And then we'll – and I think that's – I believe that some of the things that when we talk about the sequential improvement that we'll continue to see Q4 to Q1 to Q2 and getting at a more normalized range back in North America. That will be a big contributor.

Rich M. Kwas - Wells Fargo Securities LLC

And then when we – so the Q1 outlook, ex-FX, is pretty robust. And if you go out the next few quarters, Q2, Q3, Q4, obviously limited visibility at this point. But do we think of some – it seems like there's some implied moderation in that growth rate ex-FX as we go through the balance of the year. And just remind us is there some comparables in there? Or what else is driving that apart from timing of launches?

Gregg M. Sherrill - Tenneco, Inc.

I think the way I would look at it, Rich, is we said that, our outlook for this year is a 4% outgrowth, right, above production.

Rich M. Kwas - Wells Fargo Securities LLC

Yeah.

Gregg M. Sherrill - Tenneco, Inc.

And the first quarter is right on that. Now production is what's a little bit higher in the first quarter than what the forecasters are calling for in the back part of the year. So the moderation that you would see I think would be in the production. But we're pretty pleased to see coming right out of the chute that we're right on that 4% outgrowth number that we gave you back in January.

Rich M. Kwas - Wells Fargo Securities LLC

Okay. That's helpful. And then last one. Ken, on the 2% FX headwind for the first quarter, if we just cut the line here around rates right now and we try to factor in Q2, Q4, the impacts, should be less than that as we think about Q2, Q4 because the comparables become a little more favorable on a year-over-year basis? Or is that the right way to think about it?

Kenneth R. Trammell - Tenneco, Inc.

So, Rich, I didn't bring my crystal ball today.

Rich M. Kwas - Wells Fargo Securities LLC

Right. But I'm saying if you cut the cord. So let's just say.

Kenneth R. Trammell - Tenneco, Inc.

Yeah, I hear you now.

Rich M. Kwas - Wells Fargo Securities LLC

If it right now happened and rest of the year played out. So.

Kenneth R. Trammell - Tenneco, Inc.

Yes, I hear you. Certainly the euro has strengthened a bit against the dollar from where we were at the beginning of the quarter and we've seen the R&D stabilize. It was very volatile at the beginning of January and we've seen it stabilize a bit. So, yeah, if we stayed where we are, the currency headwinds for the year would probably be slightly less than what we see, but given the drivers of those changes and the things that we've seen, make changes in currency rates just simply based on statements, I'd hesitate to try and predict whether or not that's going to stay the same.

Rich M. Kwas - Wells Fargo Securities LLC

Yeah. Understood. Thank you for the color.

Kenneth R. Trammell - Tenneco, Inc.

Thanks, Rich.

Operator

Thank you. Our next question is coming from the line of Brett Hoselton of KeyBanc. Your line is now open.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Good morning.

Gregg M. Sherrill - Tenneco, Inc.

Good morning.

Brian J. Kesseler - Tenneco, Inc.

Good morning.

Kenneth R. Trammell - Tenneco, Inc.

Good morning.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Congratulations, Gregg and Brian.

Brian J. Kesseler - Tenneco, Inc.

Thank you.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Hard to believe it's been 10 years, Gregg.

Gregg M. Sherrill - Tenneco, Inc.

It is hard to believe.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

First, simple question. What is ride control commercial vehicle and off-highway, what are the products there?

Brian J. Kesseler - Tenneco, Inc.

We have a lot – in North America we have a lot of our NVH, elastomers business that we have there and we also have cabin dampers that are in that commercial truck side, that's a lot of the North America concentrations is where we have that.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Okay. Great. And then, Ken, if you were us or you were me, how would you model the share repurchase going forward? I mean, you've kind of been ramping up as you've gone through 2016 and you did $89 million last quarter, and $79 million this quarter. So it's some pretty substantial numbers. But yet the $400 million is over three years. So how would you consider modeling pace of share repurchase?

Kenneth R. Trammell - Tenneco, Inc.

So, I mean, Brett, when we look at total returns to shareholders, like we mentioned a few minutes ago, we sort of look at the combination of the dividends and the buybacks as an opportunity to make a return that's very similar to what we targeted when we started the buyback program a couple of years ago.

The mix, obviously will give us a good, steady return to shareholders in terms of the dividend and give us an opportunity probably to be a bit more opportunistic on what we think about from a share buyback program. So, I don't have a number to give you on how to model it, but obviously from our perspective, we're still very intent on making sure that we maintain our returns to shareholders.

Brett D. Hoselton - KeyBanc Capital Markets, Inc.

Excellent. Thank you very much, gentlemen.

Gregg M. Sherrill - Tenneco, Inc.

Thank you.

Kenneth R. Trammell - Tenneco, Inc.

You bet.

Operator

Thank you. The next question is from the line of Ryan Brinkman of JPMorgan. Your line is now open.

Ryan Brinkman - JPMorgan Securities LLC

Great. Thanks for taking my question. How do you think that regulation of emissions might change as a result of the new administration and new leadership at the EPA? I mean on the one hand, I guess there's the potential for relaxation of the corporate average fuel economy standards which could benefit sales of internal combustion engines relative to electric vehicles. On the other hand, we don't want any relaxation of noxious gases, right, so you guys want stringent emissions for non-CO2 pollutants. Do you have any sense where the administration might want to take regulations in that area? I haven't seen or heard anything that suggests they want to do anything – they want to relax anything on the non-CO2 side, but I know you would have a better sense than me.

Gregg M. Sherrill - Tenneco, Inc.

Yeah. We've seen absolutely nothing relative to the non-CO2 side. You know, the CO2 piece is kind of the controversial one. And it was also one where the regulation was put into effect with a review period stuck in it right, so that they had a chance to take a look at it.

You know, the other regulations falling directly under the Clean Air Act, the ones that we deal with have been through all of the rule making, the public review, the scientific review, et cetera, et cetera, and I believe you'll find that if you did want to undo those, and we've seen no evidence that anybody does, you would have to go back through all of that which can take years, and you would literally have to come to a scientific conclusion that particular matter or NOx is in fact not harmful to you, which would probably be like saying smoking's not harmful to you.

So look, this is not something that I'm sitting – we would obviously – we watch the regulations. We have a whole department that does nothing but work with regulators, watch the regulators around the world, not just the EPA. And we're simply seeing nothing on that front. Just, the only thing is the CO2 piece and that's up in the air as I understand it, so.

Ryan Brinkman - JPMorgan Securities LLC

Okay. Great to hear. And then just maybe the last question on the industry outperformance. You know, you expect it to kind of accelerate from sort of 2 points of outperformance in 2016 to 4 points in 2017. Can you remind us again of the drivers for the incremental outperformance? And to what extent is that really driven by increased content on existing platforms due to the regulatory tailwind? Or to what extent is it maybe conquest from other suppliers?

Gregg M. Sherrill - Tenneco, Inc.

You know, I kind of took you through some of it and I know it was a lot as I was going through, but we kind of broke the drivers down to the four. We have got some great light vehicle platform strength going right now. With the truck situation here, high Ride Performance revenue coming in in North America, new programs launching in Europe and China.

When you look at Clean Air content, this was one of the big drivers that we did mention. You've got the Tier 3 and Euro 6 regulations phasing in. This is essentially the first year. They phase in over the next five to seven years depending on if you're in Europe, the U.S., or China. So that's a very nice tailwind. We continue to win new business in the off-highway segments. We mentioned we're launching a new program in Europe this year. We can't name the customer yet.

We're seeing continued commercial vehicle revenue improvements in India with Bharat IV and China, some of which is just their commercial truck production recovering. If you'll recall, it was down very significantly last year. But we're also winning some new business in China that's a big help. We've got the Monroe Intelligent Suspension programs going that we mentioned, with five new ones coming online this year, and our aftermarket continues to perform quite strong. So it's really all of those things. That's what gives us a lot of confidence. We're not sitting here hanging on just one thing, right, as we look out. And those same drivers are pretty much in play – or not pretty much – they are in play for 2018 and 2019 as well.

Ryan Brinkman - JPMorgan Securities LLC

Great. Thank you.

Operator

Thank you. Our next question is coming from the line of Richard Hilgert of Morningstar. Your line is now open.

Richard Hilgert - Morningstar, Inc. (Research)

Good morning, everyone. Thanks for taking my questions and let me add my congrats and say, Gregg, I hope you have a good time out on the beach or out on the golf course, whichever it is you choose to do in your retirement, sir.

Gregg M. Sherrill - Tenneco, Inc.

Thank you.

Richard Hilgert - Morningstar, Inc. (Research)

I wanted to ask a little bit longer-term product mix type of question for the Clean Air group. We're seeing some of the forecasts longer term increasing for the amount of powertrain volume in hybridization. And I'm curious to know the exhaust system for a hybridized vehicle, how is that going to impact the Clean Air group going forward? Because you're dealing with primarily smaller engines. Because it's a hybrid, you're bringing down the engine size and gaining more efficiencies out of the powertrain that way. Is that a plus or a minus for Tenneco? And what are you seeing in terms of quoting in some of the out years right now? Is there more of that actually hitting in your quote process at this point?

Gregg M. Sherrill - Tenneco, Inc.

Let me answer in a couple different stages. So, the hybridization of the vehicle build is, we believe at worst neutral to us. At best, might be a slight pick-up as you look at the kind of period of time where the emissions abatement technology has to go to work. It's in the first 90 to 120 seconds, and if a vehicle's internal combustion engine is stopping and starting over for an extended period of time cooling down, you got to get the heat back up. So there's likely to be more content required to be able to abate those emissions at those points in times of the engine turning off and on. So we think it's neutral to us at the worst case.

And then as the regulations continue to tighten around the world, and actually get to more regulations in the commercial truck space, where the largest markets are in China and India, we see that continue to actually grow the population of regulated internal combustion engines over the next decade. So hybridization of fleet is neutral or good for us. The continued regulation tightening around the commercial truck space in Asia Pacific is also good for us.

Richard Hilgert - Morningstar, Inc. (Research)

And are you seeing a pickup in quoting activity for these kinds of powertrains in the outlying years right now?

Gregg M. Sherrill - Tenneco, Inc.

No. In the early part of last year, or late part of last year, and so far this year, not a lot of it in the quoting phase at this point. A lot of those investments where the hybridization are probably still sitting out there a number of years and would be on the horizon for us. So we've got pretty good visibility, actually very good visibility through 2019. And so we haven't seen them coming in quite yet at any meaningful shift.

Richard Hilgert - Morningstar, Inc. (Research)

Okay. All right. Great. Thank you very much.

Operator

Thank you. Our next question is coming from the line of Brian Sponheimer from Gabelli. Your line is now open.

Brian C. Sponheimer - G.research LLC

Hi, thank you for squeezing me in. Gregg, it's been a pleasure to cover you, and Brian, I'm looking forward to doing so. Congratulations.

Gregg M. Sherrill - Tenneco, Inc.

Thank you, Brian.

Brian C. Sponheimer - G.research LLC

Just with the North American light vehicle side of where 4 million units of inventory sitting on dealer lots, what's your sense from customers as to their own body language about their own inventory situation? And are you seeing any pricing pressure yet because of that?

Brian J. Kesseler - Tenneco, Inc.

Well, from an inventory perspective, I think the pressure-points in the car segments, the truck seem to be holding up pretty good. And the pricing pressure, are you talking more from the consumer side? Or back to the supply base?

Brian C. Sponheimer - G.research LLC

Back to the supply base. OEM to you.

Brian J. Kesseler - Tenneco, Inc.

Yeah. Those were always part of discussions every year. We don't see any shift in tone on that.

Brian C. Sponheimer - G.research LLC

Okay. And just you mentioned seeing an increase in CV within Clean Air, can you just hash that out? Obviously, it's not Class 8 and you're more on medium. But, just talk about that.

Brian J. Kesseler - Tenneco, Inc.

Specific to North America or globally?

Brian C. Sponheimer - G.research LLC

North America.

Brian J. Kesseler - Tenneco, Inc.

I think we mentioned a new platform, that we haven't yet been able to mention the customer, that will launch, I think, probably sometime next year, 2018.

Brian C. Sponheimer - G.research LLC

Yes.

Brian J. Kesseler - Tenneco, Inc.

And Brian, I'm not sure if that's what you're referring to, but that would be sort of the next step change there.

Gregg M. Sherrill - Tenneco, Inc.

And it would only be?

Unknown Speaker

I'd have to go over my notes.

Gregg M. Sherrill - Tenneco, Inc.

We're only looking at the on-roads improving a little bit. Off road we're not really seeing the improvement there yet.

Brian J. Kesseler - Tenneco, Inc.

Right, right, right.

Brian C. Sponheimer - G.research LLC

Right. So what's been improving on the on-road side?

Brian J. Kesseler - Tenneco, Inc.

Production a little bit.

Gregg M. Sherrill - Tenneco, Inc.

Yes. Volume's up just a bit.

Brian J. Kesseler - Tenneco, Inc.

Here in North America, but it's up strongly in China.

Brian J. Kesseler - Tenneco, Inc.

China, right.

Brian C. Sponheimer - G.research LLC

All right. Really, appreciate it. Thank you.

Gregg M. Sherrill - Tenneco, Inc.

You bet.

Brian J. Kesseler - Tenneco, Inc.

Thank you.

Operator

Thank you. Our next question is coming from the line of Matthew Stover from SIG. Your line is now open.

Matthew Stover - Susquehanna Financial Group LLLP

Thank you very much, and congratulations, gentlemen.

Gregg M. Sherrill - Tenneco, Inc.

Thanks.

Matthew Stover - Susquehanna Financial Group LLLP

I guess most of the questions have been addressed, but two questions, or actually just one. If we look at Asia Pacific, the profitability there has been really impressive as you've leveraged that asset base. And as you sort of think about the next couple of years and I recognize you have an aftermarket component there, but you're OE customers are coming under margin pressure. And I'm wondering if you'd expect for that margin to normalize to a normal level because 19%, 23% those are really, really impressive, but very, very high when you look at profitability on a global basis.

Gregg M. Sherrill - Tenneco, Inc.

Yeah. Couple of things. So we've got, as you mentioned, we had a very great, strong position, they've been there for years and have the majority in most of our joint ventures, but that's where you can see our minority interests continuing to increase year-over-year as we get more and more success there. The position, we don't see them shifting to a lower rate over time. We've got great joint venture partners who bring a lot of value to us and we've got a strong, strong, strong footprint and in our investment profiles was mentioned a little earlier that Ken said, we've got new plants in construction or coming under construction this year that would launch and ramp through 2018 and so that ride might get a little bumpy. But we don't see a meaningful shift down in our margins, in fact we continue to have the opposite goals.

Matthew Stover - Susquehanna Financial Group LLLP

Okay. Thanks very much.

Gregg M. Sherrill - Tenneco, Inc.

Thanks, Matt.

Operator

At this point, speakers, we have no more questions on queue. I will now turn the call back to Ms. Linae Golla for closing remarks.

Linae Golla - Tenneco, Inc.

Thank you. This concludes our call. An audio replay will be available on our website in about an hour. You can also access the recording of this call by telephone. In North America, you may reach the playback at 888-568-0148. For those outside North America, the number is 203-369-3900. This playback information is found in our press release. Thank you for joining us today.

Operator

Thank you for participating in today's conference. You may now disconnect.

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