Tenneco Inc. (TEN) Q3 2018 Earnings Conference Call Transcript

Tenneco Inc. (TEN)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Third Quarter 2018 Tenneco, Inc. Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing *0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your telephone keypad. To withdraw your question, please press *2. Please note that this event is being recorded. I would now like to turn the conference over to Linae Golla, Vice President, Investor Relations. Please go ahead.

Linae Golla -- Vice President, Investor Relations

Thank you, and good morning. This morning, we released our third-quarter earnings results and related financial information. On today's call to discuss our results are Brian Kesseler and Roger Wood, Co-Chief Executive Officers, and Jason Hollar, Chief Financial Officer. Slides corresponding to our prepared remarks are available on the Investor section of our website. After our comments this morning, we will open the line up 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. Needless to say, today's earnings release and our remarks do not include any results from Federal-Mogul for the third quarter, as we closed that acquisition on October 1st. With that, I will now turn the call over to Brian.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Linae. Good morning, and thanks for joining the call today. Beginning with our third-quarter highlights on Slide 4, we delivered another solid quarter with record revenue and adjusted earnings per share, spurred by a strong organic growth across all product applications. Revenue for the third quarter was up 4% year over year or up 7% in constant currency, outpacing industry production by nine percentage points. Our strong organic revenue growth continues to be supported in part by a strength in our Commercial Truck and Off-Highway business, which was up 27%. Value-add adjusted EBIT margins in the quarter were 8.4%, which is consistent with our previous outlook.

Our solid results this quarter come against a backdrop of dynamic economic conditions we are seeing across the industry, including concerns over trade and the impact of tariffs as well as currency fluctuations. The team's ability to execute in this environment demonstrates the strength of our business and how well we are positioned relative to key industry revenue drivers, some of which are shown on Slide 5.

In China, we have a strong platform position with a customer base that includes all the leading global auto makers as well as select domestic manufacturers. Regarding WLTP and diesel declines, our Light Vehicle product mix is relatively insulated from diesel. In fact, approximately 85% of our value-add revenue in Europe is unaffected by passenger car diesel take rates. Additionally, for the remaining 15%, we often have the offsetting gasoline share further mitigating the impact.

In North America, we continue to capitalize on a strong and positive mix trend with pickup trucks and SUVs, which account for more than 80% of our Light Vehicle revenue, and our strength in both Commercial Truck and Off-Highway applications positions us well to capture global growth opportunities, as evidenced by the strong revenue increases this quarter.

Taking a closer look at value-add revenue on Slide 6, value-add revenue was up 5% in constant currency, strongly outpacing light vehicle industry production, which was down 2%. Higher Commercial Truck and Off-Highway revenue was a major contributor to our results, supported by the strength of our diversified portfolio in each of the other product applications.

Earnings for the quarter are on Slide 7. Adjusted EBIT was $149 million for a value-add adjusted EBIT margin of 8.4%, in line with our previous outlook. Similar to last quarter, we were impacted by steel economics and tariff-related costs, primarily in Ride Performance. The overall impact to the company's EBIT margin was about 30 basis points year over year. Currency also had a negative impact on margins of about 20 basis points, mainly related to transactional losses in Argentina. Adjusted EPS for the third quarter was up $0.03 to a record $1.70 per share.

Our results this quarter are a tribute to the hardworking Tenneco team members around the world, and I wanna thank them for all they do every day to make our customers and Tenneco successful. On October 1st, we officially closed the Federal-Mogul acquisition, marking an important first step in this process for us. Since closing day, Roger and I have met and talked with hundreds of employees, who are as passionate about serving our customers today as they are to capitalize on tomorrow's opportunities. Their enthusiasm is truly inspiring and their energy has already begun fueling our transformation into two strong, leading global businesses. With that, I'll now turn the call over to Jason to discuss our results in more detail.

Jason Hollar -- Chief Financial Officer

Thanks, Brian. As we turn to the segment results for the quarter, a reminder that all revenue numbers are value-add with year-over-year performance calculated in constant currency. Beginning with Clean Air results on Slide 8, value-add revenue was up 6% in the quarter. Some of the highlights include 16 platform wins in China, the majority of which are incremental awards with leading global and domestic OEs, seven new platform awards in India, including four Commercial Truck programs, and two additional hybrid wins in the Asia/Pacific region for a total of nine hybrid program awards in 2018 year to date.

In Commercial Truck and off-highway, strong revenue growth continued, driven by the Americas and EMEA regions. Higher volumes, new program launches, and regulatory-driven content all contributing to 25% revenue growth versus last year. In the Americas, higher volumes with CAT and John Deere and the ramp-up on our new medium-duty truck business with Daimler Truck contributed to revenue gains. In EMEA, similar to last quarter, new programs with Deutz and MAN and volumes coming from existing programs with Caterpillar and Daimler Truck drove higher revenues. The Asia/Pacific region was basically flat, with lower Commercial Truck volumes in China offsetting growth in India, driven by the ramp-up of new content to meet the Broad Stage IV regulations, as well as higher volumes on existing Off-Highway platforms for Kubota in Japan.

Turning to Light Vehicles, Tenneco's global Clean Air Light Vehicle revenues in the third quarter were up 2% versus last year. In North America, revenues increased 7%, outpacing industry production growth as we benefited from our strong position in SUVs, crossovers, and pickups. As Brian mentioned, pickups and SUVs represent more than 80% of our Light Vehicle revenue and we continue to benefit from this positive trend. Some of the models contributing to year-over-year revenue growth were Ford SUVs and F-series trucks, Chevy midsized SUVs, and the Jeep Cherokee and Wrangler. South America revenue was down slightly in the quarter.

Light vehicle revenue in EMEA rose 3%, strongly outpacing industry production, that was down 5%. Strong growth was driven by new content and recent launches for Daimler, BMW, and Ford. In the Asia/Pacific region, revenues were lower versus last year. China revenue was down about 4%, which was in line with industry production. The end of OE customer production in Australia had a 500-basis-point impact on the year-over-year revenue results, which accounted for more than half the decline in the region. However, revenue growth remained strong in India, driven by higher revenue in programs with Fiat, Audi, BMW, and Ford. Clean Air adjusted EBIT was $108 million in the quarter and value-add adjusted EBIT margin was 10.7%.

Turning now to Ride Performance on Slide 9, revenue in the third quarter was up 5%. We continue to have steady growth in our secured revenue from intelligence suspension systems, as highlighted by the addition of two new program wins and launches on two new platforms in the quarter. In the Americas, we outperformed the market again this quarter, with growth driven mainly by higher revenue on new Light Vehicle programs with VW and FCA and NBH content growth, including on a recently launched battery-electric vehicle program. EMEA revenue was down 4%, which was in line with lower industry production.

We saw lower volumes in several programs, which more than offset growth on a number of new and existing platforms with Ford, BMW, Daimler, and Jaguar. Revenue growth continued in the Asia/Pacific region as we outpaced industry production in China and India. Growth in India included higher revenues on new programs with Fiat and Tata, as well as growth on current business with Ford, Maruti Suzuki, and Toyota. CTOH revenue increased by double digits again this quarter, supported by growth with Paccar, Daimler Truck, and Hendrickson in the Americas. Year-over-year revenue growth in EMEA was driven by higher volumes with Volvo Truck, Paccar, and Scania.

Ride Performance adjusted EBIT was $17 million and value-add adjusted EBIT margin was 3.7%. Included in these results are steel economics and tariff costs impacting year-over-year margins by approximately 90 basis points. We've talked about the impact steel costs have on margins, particularly in Ride Performance, and we've continued to make good progress with recovery mechanisms and managing our exposure through indexing. We now have formal agreements in place with all but one customer, and we expect to have that resolved by the end of the calendar year.

Turning to last quarter's call, Brian talked about the need to address our long-term cost position in conventional shocks and struts, particularly in North America. Earlier today, we announced plans to restructure our conventional shock and strut operations in Europe and North America, which will result in the closure of two of our four manufacturing facilities in the region. We expect the actions announced today will strengthen our competitiveness in this critically important region by lowering our fixed cost structure, resulting in annual run rate fixed cost savings of between $20-25 million, which we would expect to be realized by the end of 2020. Keep in mind that these operational improvements are completely separate from the synergy-related actions related to the Federal-Mogul acquisition.

The Aftermarket results for the quarter are on Slide 10. Global Aftermarket revenue for the quarter was up 1% versus last year. Aftermarket continues to win new business and expand product coverage. Some third-quarter highlights include continued growth in China with a 44% increase in sales versus last year, 18 new distributors, 430 new Monroe service providers, and coverage expanded with 120 new SKUs launched. We continue to expand our product portfolio and coverage reach in North America with 160 new ride control SKUs, and key new distributors were added in both North and South America.

Aftermarket revenue in the Americas was up 2%, driven mainly by continued double-digit growth in South America. North America revenue was about even versus last year, with continuing improvement in retail customers' out-the-door sales, which we saw beginning in late second quarter. The EMEA region's sales were down 4% versus last year. During the quarter, we saw continued customer warehouse consolidation in established markets and lower revenue in Turkey due to economic pressures. Good growth continued this quarter in the Asia/Pacific Aftermarket, with double-digit revenue growth in both China and India fueled by the investments we're making to build our brands and distribution networks. Aftermarket adjusted EBIT was $48 million and value-add adjusted EBIT margin was 15.5%.

Moving on to Slide 11 with the Q3 adjustments affecting year-over-year comparability of our results, we recorded restructuring-related expense of $12 million, primarily related to costs for the accelerated move of our Beijing Ride Performance plant. We expect all assembly to be relocated to the new facility by the end of the year and the component manufacturing relocation to be complete during the first quarter of 2019. Related to the Federal-Mogul acquisition, we incurred costs in the third quarter including $12 million of acquisition advisory costs and $4 million in structural cost improvements, primarily for the reduction of salaried headcount in advance of the closing of the transaction. This quarter, we also recorded $10 million for costs associated with a litigation resolution.

Turning to taxes on Slide 12, before adjustments, third-quarter tax expense was $28 million for an effective tax rate of 22% in the quarter and 23% year to date. Our tax rate improved this quarter as a result of securing the high-tech designation on our Chinese operations. With the addition of the Federal-Mogul business in our fourth-quarter results, we expect a Q4 effective tax rate in the range of 25-28%. Cash tax payments in the quarter were $23 million. In the fourth quarter, we expect cash payments for the combined business of between $45-55 million.

Although we anticipate providing additional 2019 guidance early next year, it is important to realize that this Q4 effective tax rate range is lower than the anticipated 2019 rate by approximately 200 basis points as a result of the inclusion of a full year of Federal-Mogul results. Tax planning considerations are under way for long-term improvements to the effective tax rate, with the objective to improve them in a manner consistent with what Tenneco has experienced for the past several years.

Moving to cash flow on Slide 13, cash used by operations in the third quarter was $41 million, driven by investment in working capital to support revenue growth as well as cash payments for transaction costs. Capital investments in the quarter were $77 million. That is down from $92 million spent in the third quarter last year, as the timing of capital expenditures is often lumpy from quarter to quarter.

In the third quarter, we paid a $0.25-per-share dividend to stockholders totaling $14 million. As a result of the Federal-Mogul transaction and the resulting higher share count, this quarterly dividend payment will increase to $20 million beginning in the fourth quarter. In view of our current stock price and overall sector valuations, we plan to evaluate the best methodology to return this value to our shareholders next quarter. This may result in a change in the dividend in returning that capital via share buybacks in a comparable amount. Turning to Slide 14, at quarter end, net debt was $1.341 billion. Interest expense in the quarter was $21 million, $2 million higher than last year due to higher interest rates on our floating-rate debt. Our net leverage ratio improved to 1.5x. With that, I'll turn the call back to Brian.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Jason. Turning now to Slide 15 and our outlook for the fourth quarter, because this quarter will include Federal-Mogul results for the first time, we are providing more information than typical for this outlook. Beginning with revenue and looking just at legacy Tenneco revenue, we expect constant currency organic growth of 3% in the quarter, which would outpace forecasted light vehicle industry production growth of 1%. Based on the September month-end exchange rate, we anticipate currency would have a -3% year-over-year impact on revenue.

In addition to this organic growth, we expect Federal-Mogul revenue of approximately $1.9 billion in the fourth quarter, resulting in a total combined revenue of about $4.3 billion for the fourth quarter. On the right side of the chart, you'll see a table of outlook information for the combined Tenneco and Federal-Mogul businesses. Notably, in the fourth quarter, we expect value-add adjusted EBITDA margin in the range of 11-11.4%. Additionally, you'll find other financial assumptions in this table, and a reminder that all these figures refer to the combined companies in the fourth quarter.

For the full-year outlook on Slide 16, we are raising our Tenneco revenue outlook and now expect 6% constant currency organic revenue growth outpacing industry production by five percentage points. Because of this strong organic growth as well as the acquisition of Federal-Mogul, we expect full-year combined revenues of approximately $11.8 billion, which represents the fourth-quarter Federal-Mogul revenue plus a full year of Tenneco revenue. For the full year, we expect combined Tenneco and Federal-Mogul value-add adjusted EBITDA margin in the range of 11.3-11.5%. We expect Tenneco-only value-add adjusted EBIT margin of approximately 8.5%, which is within the previous guidance range.

Because of the unique position we're in, combining the businesses and creating two new companies, I thought it would be helpful to provide some insight as to what you can expect as we report our results for the fourth quarter and first quarter of next year. You'll find this on Slide 17. We will report our fourth-quarter and full-year 2018 results in early February. For the remainder of 2018, we will measure our results under the existing segmentation and add two segments to represent the two Federal-Mogul businesses.

As part of our transition of the operations toward the separation of the two companies, we expect to revise our segments beginning in first quarter 2019 to reflect how the business will be managed going forward. We expect the segments will be Clean Air and Powertrain, which will transition to the new Tenneco company, and Aftermarket and OE, which will continue as segments in the SpinCo. We plan to provide our 2019 full-year guidance when we release our fourth-quarter results in February.

Our results this quarter reflect the strength of our growth strategies as well as our commitment to improve our profitability by continuing to focus on sound fundamentals, including achieving cost leadership, investing in advanced technology, and capitalizing on global trends to drive growth. As I mentioned when we spoke last quarter, I see tremendous upside in growth and earnings potential for the Ride Performance business, and the path to success begins with a cost-competitive manufacturing footprint. The restructuring actions we announced this morning will help us respond to the changing market and capacity conditions in North America, significantly enhancing our operational efficiency and improving our competitiveness in the region.

Our focus on cost leadership accelerates profitable growth by enabling investments in advanced technologies and innovative products and systems. Our Intelligent Suspension portfolio is a technology with the power to set Tenneco apart from the competition and help our customers' products stand out in the marketplace at the same time. The latest example of this is our CBSAE Intelligent Suspension system we're now supplying on the all-new Volvo XC40, a compact SUV that was named European Car of the Year for 2018. We're also well-positioned for steady growth in the global aftermarket, supported by a growing and aging car part, particularly in high-growth areas like Asia/Pacific and China in particular, with the average vehicle age going from 4 years today to 8 years by 2025.

With a stable of industry-leading brands and unmatched capabilities in distribution, training, and service, the combination of Tenneco and Federal-Mogul will be poised to capitalize on the long-term growth of the global aftermarket. Another enabler of our success is our ongoing focus on understanding and aligning with the global market and regulatory trends shaping the business landscape and creating opportunities for growth. Our Commercial Truck and Off-Highway business is a perfect example of this. The results we see today are the product of years of hard work and investment to develop the winning combination of after-treatment technologies and global engineering and manufacturing capabilities to design specific solutions that meet customer requirements in any regulated market anywhere in the world.

Before I turn it over to Roger, I'll summarize by saying that our results during the third quarter are a testament to the strength and diversity of our business. Between our geographic footprint, our strong platform position with the world's leading OEMs, and an unmatched portfolio of technologies, products, and brands, we are well positioned to continue to outperform the industry. With that, I'd like to invite Roger to provide a brief Federal-Mogul update on Slide 18.

Roger Wood -- Co-Chief Executive Officer

Thanks, Brian. As I'm sure you are all aware, the acquisition officially closed on October 1st, and integration teams are continuing the work of combining the best of Tenneco and Federal-Mogul to create two industry leaders in their respective markets. A major focus of the integration team is developing road maps to achieve the financial synergies targeted as part of the acquisition, and I can report that we have a clear line of sight to achieving our targets of $200 million in EBITDA synergies and $250 million in working capital synergies. Brian and I are both putting the leadership teams in place for both companies and working on the brand positioning and identities for both as well. As Brian mentioned, you can expect to hear much more from us regarding our business strategies, organizations, and details about the new companies early next year.

Looking further out into 2019, some of the major milestones as we prepare for separation include the preliminary Form 10 filing, financing for the new Aftermarket and Ride Performance company, and legal separation, complete in late 2019. To sum it up, while I've only been an official employee since October 1, I've been extremely impressed with the engagement and the growing excitement among the Tenneco and Federal-Mogul team members that I've seen firsthand in my visits to plans, technical centers, and offices. We have lots to do. There's teams of talented, hardworking people addressing every challenge, and I'm looking forward to continuing to update you as we accelerate our progress. Back to you, Brian.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Roger. I'm excited to be working alongside Roger during this transformational time, creating two strong, purpose-built, global business. With an increasingly dynamic global landscape, the focus and market-leading positions of the two post-spin companies will become increasingly important. With the close of the transaction now behind us, our teams are laser-focused on the integration and separation late next year. Thank you for your continued interest in Tenneco and for joining us this morning. And, with that, we're ready to take your questions.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. At this time, we will pause momentarily to assemble our roster. And, our first question comes from Rich Kwas with Wells Fargo Securities. Please go ahead with your question.

Richard Kwas -- Wells Fargo Securities -- Analyst

Hi, good morning, everyone.

Brian Kesseler -- Co-Chief Executive Officer

Good morning, Rich.

Richard Kwas -- Wells Fargo Securities -- Analyst

I think Jason talked about the indexing. So, at this point, what percentage on Ride Performance is now indexed for legacy Tenneco? Early on -- I guess Brian or Roger could comment on this, but with regard to capital efficiency, et cetera with Federal-Mogul now under the umbrella, what are you seeing -- I know it's been less than a month, but what are your expectations around trying to rationalize some of the capital intensity of that business as you look forward? Thanks so much.

Brian Kesseler -- Co-Chief Executive Officer

I'll grab the steel indexing and agreements that we have with our customers. As Jason mentioned, we're down to one customer to get to an agreement. Our intention is to have that completed by the end of the year. Right now, with the agreements we have, we're about 75-80% indexed in the Ride Performance business, and with the conclusion and agreement that we reach with the final customer, we'll be closer to 90% indexed and with other formal agreements. So, I think the team has made good progress there. From a motor parts side of Federal-Mogul, we looked at their capital and CapEx spending as a percentage of revenue on the OE side. It's roughly in line with what we see in our Ride Performance, but we'll always look for opportunities to maximize capacity utilization there to lower it off. I think maybe from the Powertrain side, I'll let Roger speak to it.

Roger Wood -- Co-Chief Executive Officer

Yeah, I think it's not that much different, Rich, than Brian's answer for that side of the business. We're looking at that right now, and the real positive news from my perspective is that Federal-Mogul invested quite well in the capabilities of the organization, so, looking out forward, the investments -- as opposed to infrastructure investments -- will be more in line with the business that we're able to capture. So, we're looking at how we can rationalize that right now, and we'll have better data for you in the beginning of next year.

Richard Kwas -- Wells Fargo Securities -- Analyst

Okay. And then, just to follow up on the indexing, with Federal-Mogul, my recollection was when you first announced the transaction, the thought was they weren't as covered relative to legacy Tenneco. Is there a lot more work to do with them under the umbrella on this front on motor parts?

Brian Kesseler -- Co-Chief Executive Officer

I think on the motor parts side, we're pretty well indexed. Remember, on that motor parts business, they're kind of the inverse of us on mix. They're more 30% OE and 70% aftermarket, and as you know, on the aftermarket, with 90-day notice, we go for recoveries there. On the Powertrain side, obviously, they've been hit with steel, but they also have a couple more commodities that come into play, aluminum being a primary one. They've done a nice job of getting offsets, and I know Rainer and the team continue to work for clear, formal indexing as we go. As we look at where they're at to date, there's a lot of movement yet this quarter, and I think we'll be able to give some pretty good insight there when we get into the first quarter.

Richard Kwas -- Wells Fargo Securities -- Analyst

Okay. And then, last one on aftermarket, with Section 301 in effect now for China, how is this going to affect the business for the aftermarket piece, either with cost or competitive?

Brian Kesseler -- Co-Chief Executive Officer

So, two dimensions there. On the cost side, the team has done a nice job. We're working with the customer base and are passing through those costs as they came into the fourth quarter. On both sides, maybe about a 30-day difference between the two business -- the motor parts and the Tenneco Aftermarket side. And then, the 301 -- as it comes into the beginning of the year, there's a lot of moving pieces there. On the aftermarket, it opens up some opportunity for us. We've got some capacity that we can activate and bring back into the U.S., some production that was currently or formerly in China.

And then, we are finding good ways to offset even some of the 232 with duty drawbacks between steel movements between Canada and the U.S. So, a lot of moving pieces there and pretty dynamic environment. We're working with our customers for design changes and reclassification of parts, so I think we'll -- our guidance last quarter was that tariffs would be about a $5-10 million impact. I think on the second half of the year, as we look at it now, we're probably in the lower end of that range, and that's contemplated in the margin guidance that we highlighted in our discussion earlier today.

Richard Kwas -- Wells Fargo Securities -- Analyst

All right. Thank you for the color.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Rich.

Operator

And, our next question comes from Colin Langan from UBS. Please go ahead.

Colin Langan -- UBS Investment Bank -- Analyst

Oh, great. Thanks for taking my question. Just a follow-up on that -- any sense of what percent of the market in Aftermarket is coming from China today, and how much are you sourcing from China for your Aftermarket business?

Brian Kesseler -- Co-Chief Executive Officer

That's a little difficult to get our arms around from a total industry perspective. Probably the best way to think about it is the opening price point lines into the Aftermarket are primarily coming from overseas, and so, there's a lot of pressure there that obviously started on October 1st. From our perspective, on our ride control business, probably in the teens as a percent on the ride control side, so that's an opportunity for us. On the motor parts side, it really moves all over the place based on the product line, so it'd be real tough to give you a number that would make any sense.

Colin Langan -- UBS Investment Bank -- Analyst

So, do you think you have an advantage or disadvantage from the potential for tariffs? They may go to 25% by the end of the year, so do you think you could capitalize because you have a U.S. base and Chinese competition gets pushed out, or is it neutral? Any thoughts there?

Brian Kesseler -- Co-Chief Executive Officer

On several of our product lines, I think it's an opportunity for us. A couple of them where we may not have domestic capacity on the ground will be at least neutral on those, so, no worse off on any of the categories and upside on three or four of them, for sure.

Colin Langan -- UBS Investment Bank -- Analyst

Okay. If we could just cover the overall organic growth, it clearly was a pretty good positive outlier relative to other companies in the quarter. You mentioned a lot of factors. What are the key drivers, in your view, if we were to bucket into just two or three buckets? Was it a lot of customer mix that helped? You mentioned a lot of product. Was there any help from WLTP? Is there some content being added in Europe as a result of that, or was it really like the commercial vehicle and Off-Highway being a big driver? What were the big buckets?

Brian Kesseler -- Co-Chief Executive Officer

I guess I'll sum it up into four. In the U.S., where a lot of the pressure on the reduction in production comes from the cars, we're not mixed there very much at all, so, above 80% of our U.S. business is truck/SUV/CUV, so that's a major factor. Obviously, we had great growth on our Commercial Truck/Off-Highway business, so that was a major contributor. Our Aftermarket business was steady, so, holds there, and that helps the overall mix from a revenue perspective in a declining industry production/light vehicle mix.

And then, from a Europe perspective, WLTP -- we don't see a lot of impact on our business there, and even with the RDE coming into effect -- the first round came into effect last year; the second round, which is coming here in September 2019 -- most, if not all, of our business is already RDE-compliant, and some of them are even more compliant, especially on the new diesel programs coming in. So, with less than 85% of our Europe revenue diesel-impacted, we're not getting hit very hard at all on that, and in fact, as we mentioned, even if there's a switch to gas, in most applications, we'd probably have the gas side too, so it doesn't impact us nearly as much.

Colin Langan -- UBS Investment Bank -- Analyst

Got it. And, just lastly, the Ride Performance restructuring -- margins there are clearly much lower in Ride Performance than the rest of the business. Any color on what is the North America opportunity? Is that a big drag today? Is that driving the overall segment down? Is Europe much better? Any color -- I guess I'm just trying to get at where this margin could go if it went through restructuring. Is there a precedent around the world for hitting a higher margin?

Brian Kesseler -- Co-Chief Executive Officer

I think if you look at Ride Performance as a segment, obviously, we're way overweighted there from the steel and tariff impacts that have happened since the beginning of 2017, so that's been a major drag. You saw with year-over-year, even a lighter impact than it was last year -- 90 basis points of year-over-year margin drag, and that's both U.S. and Europe. We're probably better positioned from a Europe perspective more closely to that 90% today, so, most of our opportunity with the one customer we have left is in the U.S. So, steel is the biggest impact, but you see that $20-25 million fixed cost improvement as we realign our manufacturing footprint -- that is a big drag.

As we mentioned last quarter, very pleased with the profitability that we see on our Intelligent Suspension product line. Our NVH group just continues to do a fantastic job, so, satisfied with where we're at there. The conventional business in China with the investments we're making there -- very pleased with. The conventional business in North America is by far the most challenged business, and by getting the fixed cost out of the system and a couple other moves that we're gonna make in getting that steel commodity wrestled to the ground finally, I think we can get more into a normalized OE margin on that conventional product line.

Colin Langan -- UBS Investment Bank -- Analyst

What do you mean by "normalized OE margin"? It looks like year to date, you're at a 4%, even up slightly year over year. So, to 10% or something like that?

Brian Kesseler -- Co-Chief Executive Officer

I think high singles, low 10-11%, on a product that is maybe lower technology. We would expect higher technology would have better margins.

Jason Hollar -- Chief Financial Officer

Another way of thinking about that, as Brian mentioned, is nearly 100 basis points just this year in terms of the impact of steel. It was twice that amount, roughly, last year. So, just to get it back to where we were a few years ago implies that we need to get at least 300 basis points, and of course, then we have the excess capacity, which these restructuring actions are focused on as well. So, that gets you into the same range Brian was talking about, which also, I think, is going to be the range that's needed to get the right return on invested capital. This business at this level -- we can't justify additional investments, but with that type of margin, we certainly can, and that's where we need to be able to get it to to have a long-term, strong, stable business.

Brian Kesseler -- Co-Chief Executive Officer

Yeah, our intent -- both in Europe and North America -- is to cap our capacity on the conventional product line and make sure that it goes to that customer set that's rounding out the portfolio with our Intelligent Suspension product line and their need, then, for the conventional to round out their platforms.

Colin Langan -- UBS Investment Bank -- Analyst

Got it. All right, sounds good. Thank you very much.

Brian Kesseler -- Co-Chief Executive Officer

Thank you.

Operator

And, our next question comes from David Tamberrino from Goldman Sachs. Please go ahead with your question.

Mariel Kennedy -- Goldman Sachs -- Analyst

Hi, this is Mariel Kennedy on for David Tamberrino. So, I guess the first question we had is it seems like you guys did a really good job mitigating China as well as European headwinds in the quarter. Can you speak a little bit to your customer mix in those regions, and how much of event mitigation would be attributable to better customer mix?

Brian Kesseler -- Co-Chief Executive Officer

I think a lot of it is with our customer mix. I'll start with China. We're very heavily mixed toward the global OEJBs, and we've been pretty selective over the years around specific domestic OEs. There's different characteristics we look at, and there's three or four domestic OEs that we enjoy great business with, and they've been impacted less so than some of the other domestics, so I think that helps. We've also got good content growth with the new regulations that are going in on Clean Air, and we've been growing good share on our Ride Performance business over in China.

If I flip over to Europe, a lot of the movement that we hear and we see related to WLTP and to diesel -- most of our customers, if not all, are already compliant, so they're not having to take product lines out or delay product lines, so I think that helps a lot also. And, don't forget that our Commercial Truck/Off-Highway business had some nice growth both in North America and Europe.

Mariel Kennedy -- Goldman Sachs -- Analyst

Just on the Commercial Truck/Off-Highway, I think that's been a tailwind for you guys for a while. What are your expectations going forward -- for that to continue being a tailwind or to dampen a little bit?

Brian Kesseler -- Co-Chief Executive Officer

We've really been looking forward to the recovery of the Commercial Truck/Off-Highway for a number of years. They're a little stronger this quarter than we initially expected coming in, which is good to see because we were lapping a pretty strong quarter last year, so we see the same double-digit in the 20s in Q4 -- no, I think we're probably slowing down high single digits, at least on a year-over-year comparison, and that's still good because Q4 was a real strong growth for us there.

But, a lot of that is recovery in the marketplace, but we're also launching and lapping some great launches that we had in Europe last year. We had MAN, we had Deutsche lapping, Kubota continues to do well out of Japan, and from a regulated region perspective, the growth with CAT and Deere is also helping us quite a bit, too. So, more and more as the emissions regulations get stricter in that Commercial Truck/Off-Highway space -- especially in APAC -- that is a huge growth engine for the Clean Air business and for the Federal-Mogul Powertrain business going forward. So, that's why we're so optimistic about the growth characteristics in that business.

Mariel Kennedy -- Goldman Sachs -- Analyst

Thanks for taking our questions.

Brian Kesseler -- Co-Chief Executive Officer

Thank you.

Operator

And, the next question comes from Fritz Liu from Alliance. Please go ahead.

Fritz Liu -- Alliance

Morning, guys.

Brian Kesseler -- Co-Chief Executive Officer

Good morning.

Fritz Liu -- Alliance

Two questions. Can you just remind me -- and ideally, as a combined company; if you don't have that, I'll just take Tenneco's -- what proportion of your production facilities are actually based in China?

Brian Kesseler -- Co-Chief Executive Officer

Oh. Proportion... We've got 20-plus Tenneco locations there between Clean Air -- very heavy Clean Air, this is legacy Tenneco -- and a handful on the Ride Performance side in China. I don't have the Federal-Mogul numbers memorized in my head like I do the Tenneco, but it's at least equivalent. It's in the 20-plus range.

Roger Wood -- Co-Chief Executive Officer

It's similar, yeah, 20%.

Fritz Liu -- Alliance

How many facilities in total? The 20 is what percentage of your total globally?

Brian Kesseler -- Co-Chief Executive Officer

Well, if I take tech centers and plants, 20-25%. That's legacy Tenneco.

Fritz Liu -- Alliance

Okay, thank you. And then, can you remind me -- I know the new company is going to split again in two, and you gave a leverage start of 3x and 2.3x at initial spinoff, but can you remind me -- now that the Federal-Mogul acquisition is closed, what is your pro forma leverage now as a consolidated company?

Brian Kesseler -- Co-Chief Executive Officer

What we've communicated in the past was 3x leverage at close, and that's still the best estimate that we have for what the first quarter here of -- remember, that transaction closed within the fourth quarter, so you'll see that at Q4 ending. That's what we anticipate it being.

Fritz Liu -- Alliance

Okay, thank you very much.

Brian Kesseler -- Co-Chief Executive Officer

Thanks.

Operator

And, our next question comes from Joseph Spak with RBC Capital Markets. Please go ahead.

Joseph Spak -- RBC Capital Markets -- Managing Director

Thanks. Good morning, everyone.

Brian Kesseler -- Co-Chief Executive Officer

Good morning, Joe.

Joseph Spak -- RBC Capital Markets -- Managing Director

Just to go back to the possibility to reopen some U.S. capacity on the Aftermarket -- is that initiative taken on your own or is that in conjunction with some customers that have asked you to do so, and if so, are there some secured potential orders with that?

Brian Kesseler -- Co-Chief Executive Officer

Yeah, let me split the answer in two. From the OE side, really not impacted very much at all with the 301. Longstanding policy that Tenneco has had around making where we sell, especially on the OE side -- so, there's really not a lot of impact on our OE side for the 301 specifically on the Ride Performance. A little bit in Clean Air with some of the smaller parts, but all in the process of being mitigated. It's really an aftermarket opportunity that we see, particularly on the Ride Control, so that's really the opportunity that we're doing. We're going to be more cost-competitive with the tariffs now applied to the delivered costs formula, so that's really something that we're doing to be more competitive in the marketplace, also to help our Aftermarket customers be successful and get done what they want to get done.

Joseph Spak -- RBC Capital Markets -- Managing Director

Right. So, I guess those Aftermarket customers -- is that something you're offering to them, or they're coming to you, or they're -- how is that relationship working?

Brian Kesseler -- Co-Chief Executive Officer

Proactively, when we started seeing these coming with all the noise in the system earlier in the summer, we activated the necessary changes to be able to bring in production. We'll be able to have it here in the States within the first quarter.

Joseph Spak -- RBC Capital Markets -- Managing Director

Okay. And then, I guess staying with Aftermarket -- and, correct me if I'm wrong, but I believe on the Fed-Mogul side, when it was under Icahn ownership, there were some customers who moved away from Fed-Mogul as a supplier. I was wondering -- now that it seems to be -- maybe "more independent" is the right way to put it -- is there an opportunity for some of that business to come back, are you seeing any of that, are there discussions about that, and if it's true, can you help us quantify the potential magnitude?

Brian Kesseler -- Co-Chief Executive Officer

I think there was some concern from the big customers inside North America, and this is really a North-America-specific discussion back two or three years ago around the perceived channel conflict and other activities that were going on, and there was a momentum built up to seek alternative sources. That was all contemplated within our discussion during the acquisition, so we think there are a couple hundred million dollars of revenue that, over the last several years, has leaked out of the potential, but all those things are up on the table, and we're talking to every one of those customers to go earn that back.

Our intent is to get it back, but we're going to get it at the right profit margins and the right returns. The Tenneco team and the Federal-Mogul team -- the overwhelming majority -- have great relationships with the OEs, and I think now that that conflict is being mitigated some, it opens the door for us to go back, get that business, and earn it back with each of the customers.

Joseph Spak -- RBC Capital Markets -- Managing Director

Very helpful, thanks.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Joe.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Linae Golla for any closing remarks.

Linae Golla -- Vice President, Investor Relations

Thank you, and thanks to everyone for joining our call today. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone, and the playback information is available in our press release. Thank you. This concludes our call.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 47 minutes

Call participants:

Linae Golla -- Vice President, Investor Relations

Brian Kesseler -- Co-Chief Executive Officer

Jason Hollar -- Chief Financial Officer

Roger Wood -- Co-Chief Executive Officer

Richard Kwas -- Wells Fargo Securities -- Analyst

Colin Langan -- UBS Investment Bank -- Analyst

Mariel Kennedy -- Goldman Sachs -- Analyst

Fritz Liu -- Alliance

Joseph Spak -- RBC Capital Markets -- Managing Director

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