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Edited Transcript of TEN earnings conference call or presentation 14-Mar-19 1:00pm GMT

Q4 2018 Tenneco Inc Earnings Call

LAKE FOREST Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Tenneco Inc earnings conference call or presentation Thursday, March 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Kesseler

Tenneco Inc. - Co-CEO & Director

* Jason M. Hollar

Tenneco Inc. - CFO & Executive VP

* Linae Golla

Tenneco Inc. - VP of IR

* Roger J. Wood

Tenneco Inc. - Co-CEO & Director

* Ronald T. Hundzinski

Tenneco Inc. - EVP of Finance

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Tenneco Inc. Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Linae Golla, Vice President of Investor Relations. Please go ahead, ma'am.

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Linae Golla, Tenneco Inc. - VP of IR [2]

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Thank you. This morning, we released our fourth quarter and full year 2018 earnings results and related financial information. On today's call to discuss our results are Brian Kesseler and Roger Wood, co-Chief Executive Officers; Jason Hollar, Chief Financial Officer; and Ron Hundzinski, EVP Finance.

A presentation corresponding to our prepared remarks is available on the Investors section of our website. After our comments this morning, we will open the line for questions. Before we begin, please be aware 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 are available 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. In addition since closing the acquisition of Federal-Mogul, we have taken the opportunity to review and align the accounting policies of the 2 remarkably similar companies. We identified an historical error in the capitalization of expenditures and inventory, which we have revised within our prior period financial statements. The impact was not material for any individual period. More details on the revision will be provided in our Form 10-K.

With that, I will now turn the call over to Brian.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [3]

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Thanks, Linae. Good morning, and thanks for joining the call today. I'm pleased to be joined by my co-CEO, Roger Wood. And I will start off with highlights from the quarter. Ron and Jason will cover the reporting segments and financial details, and then Roger will take you through the outlook, and we will all participate in the Q&A. Just about 11 months ago, we announced our plans to create 2 stand-alone publicly traded companies through the transformational acquisition of Federal-Mogul. Since that time, we've continued to execute our growth plans and set strategies in motion that are preparing us for an exciting new chapter for this great company.

In the fourth quarter, we reached several significant milestones in our transformation. We completed the Federal-Mogul acquisition and continued to accelerate the transformation of our combined business. With company cultures that are far more alike than different, the teams have aligned very quickly and are focused on getting the most value from the new combined organization. Most of the senior leadership for both future companies is now in place, and we continue to make excellent progress in the integration process and have high confidence that we will achieve our synergy targets.

In the fourth quarter, we announced our plans to acquire Öhlins Racing, and the acquisition was completed in January. Öhlins premium technology and brand reputation will strengthen our OE and aftermarket portfolios while enhancing our position in the global advanced suspension system space. This transaction is an example of our strategy to leverage key technologies that will better position the company to take advantage of secular trends in intelligent suspension, autonomous driving and mobility. We also look for strategic opportunities to optimize our product portfolio to help it grow leaner and stronger, and we found such an opportunity in the DRiV business. This month, we completed the sale of our wipers business. The wipers product category represented a very small portion of our portfolio, and the sale of this business will help strengthen our focus on our core product offerings related to chassis and suspension systems and engine and powertrain aftermarket.

Continuing now with financial highlights on Page 4. We delivered another strong quarter with revenue increasing to $4.3 billion. This increase reflected the completion of the Federal-Mogul transaction as well as continued strong organic growth. In fact, excluding the acquisition, revenue for the fourth quarter was up 4% in constant currency, outpacing industry production by 10 percentage points. Our outperformance continues to be supported by the favorable mix of SUVs and pickups that we have in our light vehicle business and strength in both our commercial truck and off-highway business, which was up 12% in the quarter and our light vehicle business, which was up 3%. Value-added adjusted EBITDA margin in the quarter was 10.9%, and adjusted EPS was $1.30 per diluted share. As expected, we ended the year with a pro forma leverage ratio of 3.0x following the closing of the acquisition and we are on track to achieve the acquisition synergy goals.

Turning to Page 5. We're walking our fourth quarter revenue to the $4.3 billion, which is consistent with our previous expectations. We had 4% organic growth, despite global light vehicle production that was down 6% in the quarter year-over-year. Currency had a negative 4% impact and the 2 Federal-Mogul segments generated $1.9 billion of revenue.

Value-add revenue shown on Page 6 was up over 100% in the quarter to $3.6 billion. The right side of the page lists the value-add revenue in each of the 5 reporting segments for this quarter as well as the year-over-year comparison. For the 2 new segments, we've included a pro forma comparison that reflects year-over-year performance as if the business was owned by Tenneco in the prior period. Our solid revenue this quarter demonstrates the fundamental strengths of our business that have fueled our consistent growth, including our diversified profile in terms of product applications with well-balanced revenue streams from OE light vehicle, commercial truck, off-highway and industrial and the steady countercyclical aftermarket businesses. The strong and positive mix trend in the North America with pickups trucks and SUVs, which account for more than 80% of our light vehicle revenue and our strength in commercial truck, off-highway and industrial applications that position us well to capture global growth opportunities, which continued to drive higher revenue in the quarter.

Earnings for the quarter on Page 7. Adjusted EBITDA was $399 million for a value-add adjusted EBITDA margin of 10.9%. In the quarter, EBITDA margin was impacted by unfavorable market mix due to lower volumes in our higher-margin China business and the aftermarket and the related impact on manufacturing efficiencies. We also continued to face headwinds from tariffs, steel and other material economics. Adjusted EPS for the fourth quarter was $1.30 per share with the diluted share count of 80.7 million shares.

Before I turn the call over to Ron and Jason, let me take a minute to recognize the global Tenneco team for their hard work delivering the quarter, and the results in the fourth quarter and 2018 reflect a high level of commitment, passion and a focus on always improving our business. Thank you to the entire team for everything you are doing to make tomorrow better than today.

With that, I'll now turn the call over to Ron Hundzinski and Jason Hollar who will take us through the segment results in more detail.

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Ronald T. Hundzinski, Tenneco Inc. - EVP of Finance [4]

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Thank you, Brian. I'll be starting with Clean Air and Powertrain results, and a reminder that all revenue numbers are value-add with year-over-year performance calculated in constant currency. Beginning with Clean Air on Page 8, value-add revenue was up 1% in the quarter. Some of the highlights include 41 program wins and about a half new business and a half replacement, including 16 awards with light vehicle and CTOH customers in Asia-Pacific region. 16 hybrid programs awards in the quarter with 11 in Europe and 5 in Asia-Pacific. In light vehicles, Tenneco's global Clean Air revenue growth outpaced global industry production by 4 percentage points in the fourth quarter, declining 2% while industry production fell 6%. Our light vehicle revenue growth outpaced industry production in all regions except for North America due to the timing of new program launches and platform replacements. Light vehicle revenue in EMEA outpaced industry production by 5 percentage points, driven mainly by the ramp up of new content and recent launches for Daimler, BMW and Ford. We continued to benefit from hybrid powertrain growth as we launched 6 hybrid programs in the quarter for a total of 9 hybrid launches in 2018. In commercial truck and off-highway, strong revenue growth continued, driven by the Americas and EMEA regions with higher volumes, new program launches and regulatory-driven content, all contributing to 15% revenue growth versus last year. CTOH revenue in Americas was up more than 30%, with higher volumes on our medium-duty on-road truck program with Daimler and strong increases with CAT and Deere. In EMEA, similar to last quarter, new programs and volume strength are existing programs with Daimler, MAN and CAT drove higher revenues. The Asia-Pacific region was down slightly with lower commercial truck volumes in China, offsetting double-digit growth in India on new on-road commercial truck business and off-highway applications with Deere. Clean Air adjusted EBITDA was $151 million in the quarter, and value-added adjusted EBITDA margin was 14.7%.

Now turning to Powertrain segment on Slide 9. Powertrain value-add revenue in the quarter was $1.1 billion, which was basically flat year-over-year on a pro forma basis. Global light vehicle revenue performed slightly better, with the industry production down 5% in the quarter. Content launch in North America on light truck and SUV platforms included pistons, bearings, seals, gaskets and heat shields. CTOH and industrial revenues was up 10% versus last year, driven by strong demand in commercial truck, off-highway and industrial applications as well as growth in 3 geographic regions. In Americas, stronger volumes with Daimler, Cummins, PACCAR and Volvo drove growth in commercial truck business while revenues with Deere and Rolls-Royce were higher on off-highway and industrial applications.

During the quarter, the powertrain group received 2 finalist nominations for the Automotive News PACE Award, the industry's highest recognition of innovations for suppliers. We received a product nomination for our DuraForm pistons and a process nomination for software that helps reduce component development time. Powertrain adjusted EBITDA was $134 million in the quarter, and value-add adjusted EBITDA margin was 12.1%.

Now for a look at the Ride Performance, Aftermarket and Motorparts segment results, I'll turn the call over to Jason.

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [5]

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Thanks, Ron. Turning now to Ride Performance on Page 10. Revenue in the fourth quarter was up 3%. Some of the highlights in the quarter include ongoing secured revenue growth from intelligent suspension systems, including a new incremental system win in Europe, our NVH performance materials team was recognized by one of our largest commercial truck customers, and we announced the acquisition of Öhlins, which significantly enhances our technology position as a developer and supplier of advanced suspension systems. Light vehicle revenue was up 1% globally, with each region outpacing industry production. Revenue from advanced suspension systems was up 8% with 3 launches in the fourth quarter, 2 of which were incremental program.

In China, industry production was down 15%. But our team delivered a strong quarter, holding revenues flat versus last year supported by our strong platform positions with leading global OEs. Similar to last quarter, CTOH revenue increased by double-digits, up 17%, powered mainly by growth with commercial truck customers in the Americas.

Ride Performance adjusted EBITDA was $38 million, and value-add adjusted EBITDA margin was 8.1%. Steel costs have impacted margins, particularly in Ride Performance, and we made good progress throughout the year on recovery mechanisms. As of the third quarter, we had agreements in place with all but one customer, and we completed that agreement during the fourth quarter. We are investing in restructuring actions to optimize the footprint of our conventional shock and strut operations in North America, strengthening our competitiveness in this critically important region, we expect those actions will lower our fixed cost structure, resulting in annual run rate savings between $20 million and $25 million, which we would expect to be realized by the end of 2020.

The Aftermarket results for the quarter are on Page 11. As a reminder, this segment represents the legacy Tenneco Aftermarket business. Global Aftermarket revenue for the quarter was flat versus last year. Aftermarket continues to win new business and expand product coverage. Some fourth quarter highlights include: we continued to expand our product portfolio and coverage reach in North America and have launched more than 800 new SKUs year-to-date; in China, we added 12 new customers and expanded coverage with 70 new SKUs introduced in the quarter. For the full year, we've added a total of 74 new customers, introduced 390 new SKUs and increased our product coverage to about 74% year-to-date. Aftermarket revenue in Americas was flat with double-digit growth in South America, and North America revenue slightly down. Out-the-door sales at North American retailers continue to trend up, but certain customers continue to reduce their inventory position. The EMEA region sales were down 1%, with results that varied by region and product. For example, Ride Performance revenue was up in most emerging markets, excluding Turkey and flat to down in established markets where we saw the continued impact of customer consolidation. Good growth continued this quarter in the Asia-Pacific Aftermarket, with double-digit revenue increases in China as we benefit from channel consolidation as our top customers gain share. Aftermarket revenue in India grew 6% versus last year. Aftermarket adjusted EBITDA was $30 million, and value-add adjusted EBITDA margin was 11.2%. Full year 2018 Aftermarket segment margin was 15.2%. The fourth quarter was impacted by the Argentina functional currency change and manufacturing inefficiencies due to launch of new product into our low-cost manufacturing plant in Poland and retiming of certain costs consistent with the change from the revision.

Motorparts results for the quarter are on Page 12. Global Motorparts revenue for the quarter was down about 5% on a pro forma basis. Commercial highlights for the fourth quarter include a number of new business wins for OE breaking, including the best-selling pickup truck in North America, 2 luxury SUVs from Germany and a top-selling small car and a mid-sized SUV in Asia. We also completed a multiyear agreement with The Network in the North America Aftermarket and expanded our distribution with new partners in Latin America and Asia. The OE portion of the Motorparts segment, primarily breaking products, was down 3% versus last year. The strong position on SUV and truck platforms in North America made positive contributions, and our mix of business with leading global OEs in China drove revenue growth that significantly outpaced industry production. In EMEA, OE business outpaced light vehicle industry production by 3 percentage points. Aftermarket revenues were down 6% in the quarter due to lost business from previous periods. We expect this trend to continue until it normalizes by the end of the year. In the Americas, we saw inventory reductions at several large North American customers and business losses from previous periods. Despite some market softness in Western Europe, EMEA revenues were up on new business wins and improved service levels from the recent expansion of our distribution footprint. In Asia-Pacific, a temporary sales impact from consolidation in China offset growth in India driven by increased consumption. Motorparts adjusted EBITDA was $70 million, and value-add adjusted EBITDA margin was 9.0%.

Moving on to Page 13 for the summary of fourth quarter adjustments. As you can see we have a number of items to take you through as a result of the acquisition closing in the quarter. That affect year-over-year comparability of our results. In Q4, we recorded restructuring and related expense of $20 million primarily related to the North America Ride Performance footprint restructuring and cost for the accelerated move of our Beijing Ride Performance plant. In China, as of year-end, all production lines are in the new plant and 2 remaining manufacturing processes will be on site by the end of Q2. Related to the Federal-Mogul acquisition, we incurred $102 million of costs in the quarter, including $53 million of transaction and acquisition advisory costs and $49 million of costs to achieve synergies, primarily for the reduction of salaried headcount.

In addition, we have adjustments for purchase accounting and other writeoffs related to the transaction. $106 million for purchase accounting adjustments was primarily related to the step-up of inventory values. We also recorded $10 million of debt extinguishment costs as we replaced both bank facilities at Federal-Mogul and Tenneco with the new senior credit facility on October 1. More on that in a few pages. Also in the fourth quarter, we took a one-time charge of $16 million for the retroactive application of an anti-dumping duty that is now being applied by the Department of Commerce to historical purchases from a supplier in China.

Turning to taxes on Page 14. Before adjustments, fourth quarter tax expense was $43 million for an effective tax rate of 26% in the quarter and 24% for the full year 2018. As expected, our higher tax rate in Q4 reflected the addition of the Federal-Mogul business in our results. Cash tax payments in the quarter, including Federal-Mogul, were $34 million, bringing full year cash taxes paid to $113 million. For 2019, including a full year of Federal-Mogul results, we expect an effective tax rate of 28% to 30% and cash taxes in the range of $190 million to $220 million. Tax planning considerations are underway for long-term improvements to the effective tax rate with the objective to improve them in a manner consistent with what Tenneco has experienced over the past several years.

Moving to cash flow on Page 15. Cash generated from operations in the fourth quarter was $402 million. I would also like to point out that an additional $72 million in proceeds were received from a subset of our factored receivable programs and is classified in the investing section of the cash flow statement. Capital expenditures in the quarter were $248 million, and we paid $0.25 per share dividend to stockholders, totaling $20 million in Q4, bringing total dividends paid in 2018 to $59 million. In February, the Board of Directors approved a $0.25 per share dividend in the first quarter.

Turning to Page 16. At year-end, net debt was $4,791,000,000, reflecting the impact of the Federal-Mogul acquisition and progress on working capital synergies I will discuss next. Interest expense in the quarter was $71 million. On a pro forma basis, our net leverage ratio was 3.0x as of December 31, 2018, calculated on 2018 pro forma adjusted EBITDA of $1,597,000,000 for the combined businesses.

On Page 17, you'll see a summary of our progress on acquisition synergies, which we are on track to achieve. Earnings synergies at $200 million have been targeted in the areas of G&A, engineering, supply chain and sales force cost. Reducing the number of corporate structures from 3 to 2 generates most of the G&A savings, and as we have previously communicated, you can see the split between the 2 future companies. At the end of the fourth quarter, we have achieved an earnings synergy run rate of approximately $100 million and are well on our way to meeting the 75% run rate or $150 million by Q3.

$250 million is our target for one-time working capital synergies from inventory reductions and adjustments to accounts payable terms. We have already realized our goal of reaching 50% of the target within one year of closing and expect to fully achieve the total goal by the third quarter of 2020 about 2 years after close. To date, we have realized significant savings in both inventory and accounts payable, giving us confidence in our ability to reach the $250 million goal. Our estimated cost to achieve these synergies over the first 2 years is approximately $150 million, and to date, we have incurred $62 million. In addition to the synergy costs, in 2019, we anticipate incurring around $70 million in tax friction cost to achieve the tax-free spin-off to shareholders, and an additional $60 million in advisory costs related to the spin.

On Page 18, we have laid out what to expect for Q1 reporting as we transition to the spin. We will revise our reporting segments in the first quarter of 2019 to reflect how we are managing the businesses as of January 1. As you can see, we will have 4 segments: Clean Air and Powertrain for new Tenneco, and Motorparts and Ride Performance for DRiV. As part of Q1 financial results, we will recast prior periods to match the same cost allocation method that we are using for our go-forward businesses, including how headquarters costs will be reported for each business.

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

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [6]

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Thanks, Jason. The full year summary on Page 19 highlights another year of strong growth with total revenue of $11.8 billion, including the Federal-Mogul acquisition since October 1. Excluding the acquisition, we delivered organic revenue growth of 6%, outperforming industry production by 7 percentage points, with organic revenue growth of 5% for light vehicle and 24% for CTOH revenue. We have included a full year revenue pro forma on Page 20, showing what the combined businesses would look like on a full year basis. The key takeaway here is the strength of our diversified profile both by product application, which is shown on the upper pie chart, and by geographic region, which is shown on the lower chart. The full year 2019 revenue outlook is on Page 21. The pro forma revenue growth is measured at 2018 constant currency rates and includes Federal-Mogul acquisition revenues in prior periods. On a pro forma basis, we expect full year revenue growth of 4% to 5% for the combined company, outpacing light vehicle industry production by 6 to 7 percentage points. Production is expected to be down 2% in 2019. Revenue in 2019 is expected in the range of $18.2 billion to $18.4 billion. For new Tenneco, we expect pro forma revenue growth of 6% to 7%, and for DRiV, we anticipate revenue growth of 1%, a 3% outpace. Brian already mentioned the DRiV portfolio rebalancing, and I'll just add that as we prepare for the spin later this year, we are always keeping our eyes open for opportunities to strengthen the new Tenneco portfolio as we work to make each business ready to succeed as a stand-alone company. We expect currency rates to have about a 2% year-over-year negative impact on 2019 revenue.

On Page 22, you'll find guidance details on value-add adjusted EBITDA margin and other key financial metrics.

The outlook for the first quarter is on Page 23. We expect revenue in the range of $4.4 billion to $4.5 billion as a result of pro forma revenue growth of about flat. With light vehicle industry production expected to be down 6% in quarter, we anticipate growth over market of around 6 percentage points. In the first quarter, we continue to expect unfavorable market mix in earnings due to lower volumes and higher-margin China business and the Aftermarket.

An update on the leverage and financing is on Page 24. The expectation for combined Tenneco net leverage is approximately 3x by the end of 2019. For the future companies after separation, our mid- to long-term net leverage goal for DRiV is to be around 1.5 to 2x, and for the new Tenneco, around 1 to 1.5x. Regarding financing for DRiV, as a reminder, the current credit facility and bonds will remain with new Tenneco. Proceeds from new financing for DRiV will be primarily used to reduce debt on new Tenneco. We expect the financing activities for DRiV to begin in the third quarter and will likely include a bank facility consisting of a revolver and term loans as well as a bond.

Turning to Page 25 to wrap up. Since closing the acquisition in October, we've been realigning the combined organization to prepare for the spinoff, and we are on schedule to spin in the second half of this year. The left side of the page summarizes some of the next steps along the way, and the right side shows the SpinCo name and a new branding for both companies. This month, Brian and I have begun rolling out the new identities for both companies with our employees, and we look forward to telling you much more about the opportunities we see ahead for each business in the coming months at our Investor Day that will be scheduled before the spin.

Before we get to the Q&A, let me close by adding my thanks to our employees around the world for delivering another strong quarter and working hard always to make our customers and Tenneco successful. Thank you for your continued interest in Tenneco and for joining us this morning.

And with that, we're ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question will be from Armintas Sinkevicius of Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [2]

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When I look at the growth above market, it's been impressive here, particularly given the uncertain macro environment we have been in. Can you discuss some of the drivers that allowed you to deliver on the revenue growth despite some of these headwinds?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [3]

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Yes, this is Brian. So really 4 key factors on the outperformance. The mix of our revenue in light vehicles across the regions contributed about 2 points. The -- we won a lot of business over the last couple of years. So new business and content on those platforms contributed about half of it, say 5 points. And the CTOH revenue was 2 points worth. And because there was such a drop off in production, the Aftermarket was relatively flat, and so that was a 1% -- it drove 1% improvement to that.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [4]

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Okay. And then separately, when I look at the leverage guidance, that's about 3x by the end of the year. I think at the spin announcement, you were targeting 2.5x by the time of the spin. Can you talk about the delta there? Where is the free cash flow going in 2019? And then how do we think about the timing of the leveraged targets you outline for each business?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [5]

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Maybe I'll hit maybe a couple of the drivers and then the rest of team will jump in. So obviously, light vehicle production market is a lot different than what we thought last year. It's down 5 points from when we talked in the beginning of the first quarter last year when we made the announcement. So that's a big driver, and obviously, it's coming out of some pretty profitable areas for us relative to others in China. So that's the primary driver. I mean, we've been doing better as we talked about on the working capital synergies, and so that allowed us to get to the 3x. And we're going to continue to work to get those as fast as possible and get to that goal and better if everything moves along as we hope.

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [6]

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So everything, as Brian highlights, in terms of the working capital synergies has been accelerated a little bit, what we have in the 3x target, for the end of the year 2019 is the same level. So we accelerated that we're targeting the same level there. So anything in the balance sheet is largely the same. It's that volume effect flowing through from the original assumptions that is the key driver of the EBITDA, that impacts, of course, both the net debt level as well as the actual EBITDA level on the calculation. So those are definitely the key drivers.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [7]

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Okay. And then just given where you are with working capital synergies, any likelihood that we could see some upside going forward?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [8]

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Well, we're -- probably it's still a little bit too early, been at it as a combined entity only about 5 months. But we like the pace that we're on from the inventory reduction. We need to make sure we flex down hard with the light vehicle production moving away from the industry. So we're always going to be trying to get it as fast as we can and make the improvement as large as we can.

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Operator [9]

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The next question will be from David Tamberrino of Goldman Sachs.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Can we just go through what you're seeing from a regional production standpoint? And what's basically embedded within your guidance for the $18.2 billion to $18.4 billion?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [11]

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Yes, so I'm going to talk to one of the Appendix pages in the presentation. For '19, we're looking at North America down about 1%, same with Europe. And we know IHS has -- God, I think there's new numbers coming out here shortly, but we know that IHS thought 1% or so up year-over-year in China. And like a lot of our peers over the last few weeks, we're not sure we see the same thing. And so we've embedded a minus 8% production growth for China. And so that math, I think, gets us down to that minus 2% overall year-over-year.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Okay, got it. That's helpful. And maybe you can help me just confirm if I'm doing this correctly looking at your value-add or value-added adjusted EBITDA margin for 2019, essentially, what you're saying, it should be flat at that 10.4%. I think that implies something like maybe total EBITDA margin of maybe 8.8% to 9% over your total revenue. Is that -- that sounds directly -- directionally correct looking at the substrate revenue?

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [13]

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Of the total revenues.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [14]

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Yes, directionally. And then if you take a look at the way we broke out the revenue, David, you can see what our assumptions are for value-add revenue and substrate revenue for '19. It's $2.8 billion in the substrate revenue, and that will float a little bit depending on CTOH mix and some of the other big drivers of substrate content.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Okay. And then maybe just lastly because looking through this walk here from the gross synergies to some of dyssynergies. As we get past 2019, is there going to be an opportunity for more cost takeout to lean both the businesses as you go through the split? How do you think about some of that incremental costs, ultimately your separation costs dissipating? We've seen a couple auto spins over the last few years, and a couple of them -- actually all 4 so far have had some issues. So just trying to get an understanding of how you're thinking about incremental costs and then how you burn through them as you get past '19 into 2020 and 2021?

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [16]

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Yes, this is Roger. I can speak for the Powertrain side of the business, and I think as we get past 2019 and into 2020, obviously, we'll further refine the business model, if you will. The synergies that we've accomplished and will be accomplishing so far are generated just as a basis of the units coming together and us being able to take the obvious synergies as we're putting these things together. But there's no question, and as we move forward, we'll be able to control these -- the incremental costs that we had to put in to establish the separate organization and embed those into the improvements that we're going to make going forward, and we anticipate that we'll be on a continuous improvement path that'll pretty beneficial for the organization.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [17]

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Yes, and here, we highlighted the $30 million to $40 million in dyssynergies in '19, a lot of that is related to getting set to spin. It's getting the 2 senior leadership teams in place, a lot of the IT work that needs to be done to be able to get the systems separated, and obviously, those would dissipate as we spin because we've got to get all that work done. And then once we spin, we don't need to do that work. So there's a little G&A costs that are going to come there. And remember, when we kind of put out that $200 million target, we wanted to make sure, A, it was net of dyssynergies. So we'll work through netting those off into 2020 because then we wanted to make sure that, that 2-year number was something that we were confident in or could gain confidence in as we go. So there's a lot of things we didn't include because we just didn't know what we didn't know. And so there's some operating best practices that I think both companies, DRiV and new Tenneco, are going to be able to benefit from. And as we uncover and get to see the business operating here, I'm confident that there's going to be more things that we drive from the continuous improvement and even a simplification of the business, especially with the Aftermarket side of our business.

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Operator [18]

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The next question will be from James Picariello of KeyBanc.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [19]

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Just starting with Aftermarket. Can you just talk about the margin performance in the quarter? It looks like there was a pretty notable step-down in profitability. But maybe I just want to confirm my numbers on that. And then I know you called out manufacturing inefficiency, some currency headwind. Can you maybe quantify what the magnitude of those headwinds were and how you're thinking about this year?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [20]

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I'll let Jason get into the magnitude, but the drivers are really -- we had a change in the functional currency in Argentina with all the volatility down there. And that was a pretty big driver for us in year-over-year comparison. And hopefully, that dissipates, and we can get to a little bit better comp comparison as we go. We have been moving, and we will continue to continue more and more product into our low-cost footprint in Poland for our Aftermarket shock and strut business. In Europe, so it's just a little bit of bringing those things up online and getting that transfer done correctly. So those are the major drivers. Obviously, they're a little softer than we would like to have seen in the North American market. I think for those of you that follow the Aftermarket, one of our larger customers continues to work to rightsize their inventory position to get it to where they want it to be, and that gives us some bumps in road with them. And we're working really closely with them to make sure that we see what they're trying to get accomplished and partner with them to get there. So a little bit of that softness reflects some pretty good costs. Getting at that in real time was a little bit more difficult.

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [21]

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Yes, in terms of the order of magnitude there, the Argentina functional currency issue is about 100 basis points year-over-year. The inefficiency, as Brian described, are 200 to 300 basis points, and then the balance is just some timing associated with certain costs that kind of go quarter-to-quarter.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [22]

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Okay. And then those inefficiencies do they go away by the middle part of this year or any line of sight to that improvement?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [23]

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I think from an overall standpoint of moving product in and out, I think by the middle of the year, those will balance out. As we're continuing to watch the Aftermarket in all regions, as we flex with any movement there, I think there's generally a little bit of softness in the Aftermarket even this quarter as we go through in certain spots. And so it's -- we'll just have to make sure we flex that as hard as we can, and then we're always looking for the opportunity to take our fixed costs to a better, call it, breakeven point as we go.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [24]

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Got it. That's make sense. And then just on the RemainCo side, what's driving the 6% to 7% growth for the combined businesses in 2019? Clean Air and Powertrain, I mean, similar to a lot of other folks, based on your 1Q guide, it does look like there's a second half-weighted ramp to the year. Just wondering what's the level of visibility that gives you the confidence in the step-up? Can you speak up to any particular programs or end markets that drive that?

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [25]

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Yes. This is Roger. We can kind of delineate between the 2 pieces. Clean Air is continuing to launch business that have been won over the past years. And as Ron had mentioned in his talk, they continue to win new business in that segment. And so Clean Air is driving a predominant portion of that. Powertrain is growing as well. It's offset a little bit by some of the China and diesel -- the diesel issues in Europe and a little bit in China. So they are growing, but that's a bit offset. Clean Air is making up the predominant portion of the growth that we're talking about.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [26]

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And that was consistent with what we talked about. When we gave guidance last year in '18, we started talking about the kind of that range of 5% to 7%, and when it was just the Clean Air in the old Tenneco side, the 6% to 8%. So we're right in the ballpark where we thought we were, and that was all driven off of new program wins and replacements and better content.

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Operator [27]

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(Operator Instructions) The next questions will be from Joseph Spak of RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [28]

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The first question is just -- over the past few days, we saw this FCA recall on catalytic converters. How does that impact you at all, if at all? And is there an opportunity for replacement business? Is there -- is any of that considered in guidance?

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [29]

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Yes, Joseph, this is Roger. So no, it really doesn't -- that doesn't impact us. We saw that with -- we don't have the hot-end components on those vehicles that are affected. So time will tell if -- obviously, we'll try to see if we can help in any way that we can. But that's not an issue that affects our business currently.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Okay. On Slide 8, it looked like there's a good amount of a new business that's on the hybrid side. Can you just give us a little bit more color on the profile of that business? Because -- and correct me if I'm wrong, but I always thought the rule of thumb was that content was pretty linear with horsepower. And I would assume that the hybrids have smaller engines. So is there a CPV headwind? And then how does the profitability of those programs look? And I guess, if there is a content headwind, is there an opportunity to gain some of it back on those programs from the Federal-Mogul portfolio?

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [31]

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Actually, the hybrid programs are really good for us actually. As we've talked a number of times, they provide an opportunity for us going out into the future because the systems have to be engineered in different way. Obviously, with the vehicle platform in hybrid application versus a traditional just internal combustion engine propulsion system, the same amount of work has to be done in a much, much, much reduced space on the vehicle platform. So the system has to be engineered in such a way that we're able to accomplish the objectives, and it provides us a bit more content to put into the vehicle. So it's not a negative issue for sure. And we see that as a real positive development as we look out into the future over the next 10 years with a significant amount of hybrid applications that'll be coming out. And it's coming to fruition in these business awards that we're seeing.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Okay. I guess, last one maybe for Brian. I think last quarter, you talked about on the Aftermarket side potentially reopening some U.S. capacity. I was wondering if there's an update there. And I think you also talked about what you viewed as a couple hundred million dollar revenue opportunity from regaining some of that customer leakage from Federal-Mogul. Is there any update on either of those initiatives?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [33]

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Yes, we're on track for bringing back some extra capacity that we had in China. Obviously, the tariffs have -- create a headwind, but also opens up an opportunity for us to bring that back, and we're on schedule to get that up and running here later this quarter and into next, and so that team has done a nice job of getting that up in line. As far as the couple hundred million dollars, it seems to be making good progress, and I'll update the group here with first quarter results. But we're having good conversations, and there's a customer or 2 here that we already have or are going to be real close to entering some new agreements for business that's coming back. So I think the team is doing a very good job of regaining that and reearning that business.

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Operator [34]

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The next question will be from Ryan Brinkman of JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [35]

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I think we can pretty readily monitor the trend in new vehicle production in China, which is experiencing some obvious cyclical headwinds. But can you help us understand the trend in the China Aftermarket, which you've commented before should be subject to significant structural tailwinds? I presume you are just as optimistic as before regarding the long-term aftermarket growth in China. But how do you sort of see those structural tailwinds netting out against the cyclical headwinds over there for the China Aftermarket in 2019?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [36]

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Yes, well, for the Aftermarket perspective, it's really probably going to be in the early 2020s, into the mid-2020s, where we're going to see that step-up is. If you use miles and age kind of in tandem miles driven and age, we'll grow from a average vehicle age today in the 4.5 years old range. Remember that compares to 11 to 12 years of age in Western Europe and North America by 2025, and then that just gets to be linear math that age -- average age goes to 8.5 years, which is as we cross over that 5, 6-year old vehicle and miles driven on or kilometers driven on it, that's when we start to see a lot of our product lines kick in for their first replacements. And we're actively involved with the leaders that are materializing over there from installer base and the service base. So yes, we're very optimistic and bullish, and we think our portfolio with its number of different product lines and with the brands because the brand importance in China is even more sought out than even some of the markets that we're -- that we currently serve. So absolutely, one of the great growth opportunities for us.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [37]

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Okay, great. And can you discuss the rationale for the Öhlins' acquisition, including after, I think, you divested the fairly similar Marzocchi business? Is this an example of a portfolio move that maybe you wouldn't have done under the old Tenneco structure, but which makes more sense for the separate DRiV business? And how should we think about capital allocation at DRiV? Is this acquisition relatively indicative of how you might look to allocate your cash flows?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [38]

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Yes, I think we'll have very, if not identical, very similar capital-allocation priorities. First, we're going to make sure we get organic growth and our core competitiveness funded improvement and stability funded. Then we'll get our debt down where we want it to be, which is in that 1.5 to 2x range, as fast as possible. And then we'll be looking at kind of a trade-off between strategic opportunities if they are there versus shareholder returns. The Öhlins acquisition is really a consummation of a 20-year partnership that we've had with them. They've been great technology partners for us on the intelligent suspension side of the business as they do the electronic valve, and we've -- they've developed and we've codeveloped that over the last 20 years. So bringing that technology under the roof completely is a great opportunity. Plus their presence in certain markets, especially around racing where that high-performance, high-precision technology is really on that cutting-edge, is a great input to our product planning for intelligent suspension, which as you know is one of the great growth opportunities we have on our OE side of the business. And now that we have that kind of whole around the corner capability in chassis, NVH solutions, shocks, struts, and now we're bringing more and more technology to the intelligent suspension. That is where our interests lie in continuing to build that technology portfolio to the place to be to take a market-leading position.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [39]

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Okay. And then just very lastly from me. I'm sticking with capital allocation. I think previously, there was some discussion of potentially reallocating the cash that's currently being allocated to dividend to share repurchase. What's the latest thought on that?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [40]

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Yes. So in the first quarter after the board meeting, we -- at the board meeting, the board approved another dividend. We're going to continue to look at that every quarter, and then we'll make -- each of the boards and each of these leadership teams will make the decisions on what that's going to look like post spin.

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Operator [41]

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And ladies and gentlemen, this will conclude our question-and-answer session and will also conclude our conference call for today. We thank you for attending today's presentation. And at this time, you may disconnect your lines.