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Tenneco Inc (NYSE:TEN)
Q2 2019 Earnings Call
Aug 6, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Tenneco Inc. Second Quarter 2019 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Rich Kwas, Vice President of Investor Relations. Please go ahead.

Rich Kwas -- Vice President of Investor Relations

Thank you. This morning, we released our second quarter 2019 earnings results and related financial information. The earnings release attachments and presentation are available on our website under the Investors section. 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. Also note that all pro forma comparisons are measured at 2018 constant currency rates and include the Federal-Mogul acquisition in prior periods.

We will discuss year-over-year comparisons on a pro forma basis. Unless specifically described otherwise, margin refers to value-add adjusted EBITDA margin. 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.

Now on to the agenda. Co-CEO Brian Kesseler will provide Q2 enterprise highlights and our updated enterprise outlook. Brian and CFO, Jason Hollar will review DRiV business and segment performance, and offer updated guidance for drugs. At that point, Co-CEO, Roger Wood will review New Tenneco's performance. And then EVP Ron Hundzinski will discuss New Tenneco's segment financial performance and provide updated guidance as well.

Roger will provide summary enterprise thoughts before we take your questions. With that out of the way, I'll turn it over to Brian.

Brian Kesseler -- Co-Chief Executive Officer

Thanks, Rich. Good morning, everyone and welcome.

As we reached the midpoint of the year, Tenneco is making solid progress, both in achieving our long-term strategies and on strengthening our business fundamentals day by day, and month by month. We talked last quarter about expectations for sequential earnings improvement and the importance of capturing the synergies identified in our integration work streams. And this quarter, I'm pleased to report that we achieved both. As a New Tenneco and DRiV teams continue operating as distinct divisions in preparation for the spin off, Roger and I remain united in our commitment to deliver Tenneco's strategy and outlook.

Let's review some of the Company's second quarter highlights on Page 4. In the second quarter, Tenneco generated $4.5 billion in revenue, which was at the midpoint of the outlook we provided last quarter. On a constant currency basis, this performance represented growth of 1% year-over-year, outpacing light vehicle industry production by 9%. Second quarter adjusted EBITDA margin increased 240 basis points sequentially to 11.1%, which was even with the prior year.

Considering the relatively flat revenues from Q1 to Q2, this is a notable demonstration of the effectiveness of our cost management and synergy capture efforts. During the quarter we continued our commitment to driving growth through innovation, quality and performance across the business. Highlights include our announcement that our Ohlins advanced suspension technology will be featured on a performance package for the all-new Polestar 2, the first all-electric model from Volvo's new electric vehicle brand.

In June, we signed a strategic cooperation agreement with New Carzone, a leading China aftermarket channel and retail service company to further expand our motor parts business in China. In North America, our Clean Air team won conquest light duty diesel pickup business with a leading automaker and our new global exhaust valve technology was evident during the highly visible launch of the first mid-engine GM Corvette in July.

On Slide 5, we provided our enterprise outlook for the third quarter and the full year. Later on today's call, Jason, Roger and Ron will provide more details around that outlook as it pertains to the DRiV and New Tenneco businesses specifically. Starting with the third quarter, we expect enterprise revenue in the range of $4.3 billion to $4.4 billion. This would represent pro forma year-over-year revenue growth of 3% at the midpoint of that range and in constant currency.

In terms of profitability, we anticipate adjusted EBITDA will be in the range of $390 million to $410 million with the year-over-year margin improvement of around 100 basis points in both the New Tenneco and DRiV divisions. We remain on track to complete the spin of DRiV in mid-2020 and are confident that a separation will create significant value for our shareholders. We are making progress with the physical separation of the two divisions and have a clear path to separating the internal processes and systems by the end of 2019. Operationally, we achieved our targets in Q2 and continue to anticipate leverage to be at that 3.3 times by year-end. As we are keenly focused on driving operating performance improvements, we also continue to evaluate additional alternatives to further reduce leverage and accelerate the separation of the businesses.

As you saw last quarter with the Wipers business, we will consider options for businesses that are not core to our strategic portfolio and we'll continue to look for opportunities to reduce leverage and create value for our shareholders. Let's now take a look at our full-year 2019 enterprise outlook, which we are adjusting to reflect market conditions.

We anticipate achieving between $17.6 billion and $17.8 billion of revenue for the full-year 2019, up 1% year-over-year on a constant currency basis, strongly outpacing expected light vehicle industry growth by 6%. On this revenue outlook, we expect value-add adjusted EBITDA margin for the year at the higher end of the previously given range or from 10.4% to 10.6%.

That tightens the adjusted EBITDA dollar range to $1.515 billion to $1.565 billion. In addition, we are improving our outlook for interest expense, and capital expenditures to the low end of the previously given guidance ranges. For the progress we've made this quarter and year-to-date, I want to thank the 80,000 hard-working Tenneco team members around the world. They bring their passion and commitment to work every day to find new ways to satisfy our customers, grow the business, improve quality and efficiency of our processes, and ultimately create value for our shareholders.

Now turning to results for the DRiV division on Page 6, beginning with an overview of revenue and adjusted EBITDA for DRiV's two segments. Total revenue for DRiV was 5% lower year-over-year in the quarter. This comparison includes the sale of the Wiper business and the Ohlins acquisition, both of which closed during the first quarter.

Excluding the portfolio changes, DRiV revenue was lower 4% and Ride Performance revenues outpaced industry production by 7 percentage points, mainly due to higher NVH solutions and advanced suspension revenue. In the Motorparts segment, higher aftermarket revenues in China and India were offset by lower year-over-year sales in Europe as well as North America. In North America, we're beginning to see stabilization in the second half of the year in the aftermarket. The positive headline for the second quarter is the strong earnings improvement with adjusted EBITDA dollars up year-over-year in total and in each segment, resulting an DRiV's EBITDA margin rate expanding 110 basis points to 9.8%. This improvement was driven by effective cost control and the benefit from the acceleration of synergy actions. We are now on track to have the full earnings synergy savings of $115 million annually implemented in our run rate by the end of 2019. Our core growth drivers remain strong and we continue to deliver a unique set of technologies, brands and services to satisfy our customers' needs.

Some of the highlights in the quarter include, we continue to win new aftermarket business, gaining new customers and launching new products in all regions, and the Ride Performance team continues to capitalize on our advanced suspension technologies to drive new business wins. In fact, during the second quarter, we were pleased to announce that our CVSAe intelligent suspension technology will be available on the 2019 BMW 3 Series, as well as the new Toyota Supra GR sports coupe.

Now I'd like to invite Jason to take us through the Motorparts and Ride Performance results in a little more detail.

Jason Hollar -- Executive Vice President, Chief Financial Officer

Thanks, Brian. Turning to Page 7 for a closer look at the Motorparts segment with the charts on the right showing a walk from Q2 2018 pro forma to Q2 2019 actuals. Starting with revenue. Volume and mix were the main drivers of results this quarter and included inventory adjustments by two retail customers in North America and overall soft market conditions, mainly in Western Europe. As we mentioned on last quarter's call, we did deliver sequential growth from Q1 for both regions. Asia-Pacific region delivered another good quarter with growth in China and India. In China aftermarket, growth continued from e-commerce customers and large national accounts. We continue to expand our presence in China, adding 247 new Monroe shock installers and 281 new brake installers in the quarter. But as Brian said, the key takeaway here is the earnings improvement.

In the second quarter, adjusted EBITDA margin was up 170 basis points year-over-year to 15.1%, with higher earnings driven mainly by synergy achievement, cost control and other operating performance improvements. With our earnings performance in the second quarter, adjusted EBITDA margin for the first half of 2019 was 50 basis points higher than the first half of 2018.

Ride Performance segment results are on Page 8. Revenue in the second quarter was 2% lower on a constant currency basis, strongly outpacing global light vehicle production and declined 8% versus last year. Light vehicle revenues outpaced the market, driven by advanced suspension system content and ramp-up of NVH performance materials business with an electric vehicle customer in North America. Commercial truck revenues were up slightly in the second quarter. Ride Performance adjusted EBITDA was $50 million and adjusted EBITDA margin rate improved 100 basis points year-over-year to 7.1%. Improvements in operational performance included the benefit of synergy actions and timing of certain customer recoveries. I'd like to wrap up the DRiV comments with the outlook on Page 9.

Starting with revenue, we expect third quarter revenue of around $1.5 billion or around 3% lower in constant currency, with new aftermarket business wins in North America beginning to offset previous year's channel conflict losses. The North America team continues to make good progress on resecuring that business in the medium term. Ride Performance will benefit from additional new program launches in China while managing lower volumes in North America due to the planned rationalization of low margin programs that exit over the next several quarters.

For the full year, we anticipate revenue to be in the range of $6.0 billion to $6.1 billion, lower by 3% to 4% in constant currency. In terms of profitability, we anticipate year-over-year adjusted EBITDA margin improvement of around 100 basis points in the third quarter and an improvement of 20 to 40 basis points for the full year. In terms of EBITDA dollars, at the midpoint, this is consistent with our prior full-year guidance. We expect earnings improvement in the third quarter and second half of the year to be driven by our focus on maintaining disciplined cost management, and continuing to ramp up on synergy actions. In fact, we now expect to achieve the full synergy run rate by the end of 2019. Finally, for full year, we expect capex to be in the range of $250 million to $260 million, which is an improvement to the lower end of the previous range.

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

Roger Wood -- Co-Chief Executive Officer

Thank you, Jason. Please turn to Page 10.

In Q2, New Tenneco generated $2.2 billion of value-added revenue, down 2% year-over-year on a constant currency basis. New Tenneco modestly outperformed global light vehicle production and realized good growth in the CTOH business. FX represented more than 3% headwind to revenues on year-over-year basis. Adjusted EBITDA was $263 million, and value-added adjusted EBITDA margin was 12% versus 12.7% in the prior-year period.

On a sequential basis, division margin expanded 150 basis points, which exceeded our guidance for 100-basis-point increase. The Clean Air group had a strong operating quarter and propelled our performance. More on that in a little bit. On year-over-year basis, excluding FX and incremental corporate costs for our division, decremental margin was approximately 16%, which was significantly better than our Q1 performance and better than our target decremental range of 20%. Taking a step back and looking at the intermediate to long term, we continue to win new business. During Q2, we won conquest business for a light duty diesel pick-up truck platform in North America with a major customer. The Clean Air business is quoting a significant number of programs in the second half and we intend to preserve our record for above-market growth for that business well into the future.

In the near term, we are focused on flawlessly executing customer launches and capitalizing on emissions content opportunities in China and other markets as we move into 2020 and beyond. Now I will turn it over to Ron for a review of New Tenneco segments. Ron?

Ron Hundzinski -- Executive Vice President, Finance

Thank you, Roger, and good morning to everyone. Please turn to Page 11 and we will begin our review of New Tenneco's segment performance. The Clean Air segment delivered value-add revenues of $1.05 billion, down 2% year-over-year. On a constant currency basis, Clean Air value-added revenues increased 1%. North America value-add revenues increased year-over-year and more than offset slight declines in EMEA and APAC. On an application basis, light vehicle revenues were flat and CTOH increased modestly year-over-year. Adjusted EBITDA was $168 million and increased 4% year-over-year. Value-add adjusted EBITDA margin approximated 16%, which represented 90 basis points of expansion year-over-year. On a constant currency basis, Clean Air EBITDA contributed $11 million of EBITDA growth against $8 million increase in sales. The business benefited from a step-up in engineering recoveries year-over-year and improved labor efficiencies in the developed markets, which enabled us to nicely outpace our incremental margin target of 15%.

Now turning to Page 12. Powertrain sales were $1.13 billion in Q2, down 9% from the prior-year period. On a constant currency basis, sales declined 5% year-over-year. OEM volume declines and unfavorable mix including lower diesel volume were contributors to the organic decline. Adjusted EBITDA measured $118 million, down 20% from $148 million in Q2 of 2018.

Adjusted EBITDA margin was 10.4% and fell 150 basis points year-over-year, but did increase 50 basis points sequentially. On a constant currency basis, we experienced a year-over-year decremental margin of about 31%. China sales declined year-over-year and was a headwind to our profit mix in the quarter. Powertrain also experienced continued sales decline in light vehicle diesel products, which impacted margin performance versus Q2 last year. We expect restructuring actions and lower year-over-year inflation headwinds to benefit the second-half adjusted EBITDA margin performance relative to our first-half actual.

On Page 13, we have updated New Tenneco's full-year guidance and introduced Q3 forecast. For Q3, we estimate the New Tenneco value-added revenues on a constant currency basis to be in a range of negative 1% to plus 1% on a year-over-year basis.

We estimate adjusted value-added EBITDA margin to expand approximately 120 basis points year-over-year. This performance would represent about 50 basis margin increase versus Q2 sequentially. For the full year, we reduced our constant currency value-add revenue to be flat to negative 2% year-over-year from our previous guide of 1% growth at the midpoint.

Our revision is driven by incremental light vehicle production declines in China and Europe since our last update. Our substrate revenue estimate has increased due to business mix changes. On the margin front, we slightly reduced our value-added adjusted EBITDA margin forecast to a decline of 40 to 60 basis points year-over-year compared to 30 to 50 basis points year-over-year decrease previously. We have trimmed our CapEx forecast by $10 million compared to our prior guidance.

And now, I'll turn it over to Roger for summary. Roger.

Roger Wood -- Co-Chief Executive Officer

Thanks, Ron. Turning to Page 14, here are the key takeaways for the enterprise. First, we increased margin from Q1 without a meaningful lift in revenues. Synergy and cost actions are becoming more impactful to our results. Second, we feel good about our second-half outlook and we'll continue to manage our cost structure carefully in a changing demand environment. Third, we're committed to the spin and preparing diligently.

We plan to be operationally ready by the end of 2019. We are working to put the divisions in the best possible balance sheet position ahead of the spin. As Brian mentioned, we continue to evaluate additional alternatives to further reduce leverage and accelerate the separation of the businesses. We are incurring one-time costs in 2019 approximating $200 million. That should decline by about half next year and benefit our cash flow. We believe executing our margin improvement plan coupled with lower integration and transaction spending next year will provide a meaningful improvement to our free cash flow performance in 2020. 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

[Operator Instructions] Our first question today will come from Colin Langan with UBS. Please go ahead.

Colin Langan -- UBS -- Analyst

Okay, great. Thanks for taking my questions. Any color, I mean overall margins are expected to improve in the second half. Were does sort of the broad drivers of that just continuation of what we've seen this quarter? Or anything additional helping, because sales I think look relatively flattish?

Brian Kesseler -- Co-Chief Executive Officer

Yeah Colin, this is Brian. I think what you'll see is the continued cadence of the synergy capture coming through as we mentioned. And on the DRiV side, we're expecting to get that fully into our run rate -- our target fully into the run rate by the end of the year, and other cost management items that we've been doing. And then obviously we've been rationalizing some of our -- some of the portfolio around which has begun to lift margins too.

So a combination of a bunch of different things. Roger, I don't know if you see it.

Roger Wood -- Co-Chief Executive Officer

Yeah, much of the same around the New Tenneco side, Colin. And some of the cost actions that were implemented through the first and second quarter haven't been fully realized when they were implemented, but they get realized more and more as time goes on throughout the year. So as those things come in more and more, that's helping us to achieve the expectations that we have out in the second half.

Colin Langan -- UBS -- Analyst

And when I look at the segments, I think the only one I believe that's down year-over-year is the Powertrain. What -- I mean, obviously that's a lot of diesel. I think in the past you said there were operational issues in Europe and the prior issues. Are those operational issues effect -- should we start seeing that recover by the end of the year?

Ron Hundzinski -- Executive Vice President, Finance

Colin, this is Ron. I think through the second half of the year, the sales growth in the Powertrain business is down more than it is in the Clean Air. So really it's a function of the volumes in the second half of the year and we're taking some restructuring activities, but they're not getting the decrementals to where we're at this point. They're still slightly high in the quarter, it's like 30%, 31% I believe what it was.

So that's where it's coming from. The Clean Air business had shown a little bit more top line growth, slightly flattish, where the Powertrain business is still seeing some decline in the second half of the year.

Roger Wood -- Co-Chief Executive Officer

Yeah, to complement Ron a little bit, Colin, this is Roger, the operational issues that you were talking about were largely accomplished throughout the second quarter. The actions that we're taking were meaningful to the results that we have in the second quarter, we believe they're going to continue to help us throughout the rest of the year. The Clean Air side, as Ron said, came on strong and Powertrain improved greatly in the second quarter over the first quarter. If you recall, the first quarter decrementals were much higher. They did a great job of getting them more in line but they're still working on continuing to improve on that front. So those European issues are getting resolved for us.

Colin Langan -- UBS -- Analyst

Got it. And just lastly, any benefit in Clean Air from the China emissions there pull-forward? Is that actually helping the rest of your outlook, or was that kind of anticipated?

Roger Wood -- Co-Chief Executive Officer

Yeah, there is a benefit to that. In the light vehicle side we -- the content per vehicle is the real story with both the light -- both in the light vehicle and the commercial. On the light vehicle, we're seeing about 30% content per vehicle increase and commercial is significantly higher than that. Commercial comes in following, so start beginning into next year, with the light vehicle starting this year. And that is helping us in that side of the business.

Colin Langan -- UBS -- Analyst

Got it. All right, thanks for taking my question.

Operator

Our next question will come from Rod Lache with Wolfe Research. Please go ahead.

Rod Lache -- Wolfe Research -- Analyst

Good morning, everybody. I had a couple of questions. Just a couple of housekeeping first. Roger, you mentioned the one-time costs, which presumably are tax leakage advisory and the costs to achieve synergies and that those would decline by half next year. Could you just remind -- could you just repeat what numbers those were?

Roger Wood -- Co-Chief Executive Officer

I think I'll let Jason answer that for the specific numbers, but I did mention that in the last part of the presentation, where we felt that we would spend about -- they would drop by about half from what this year's run rate was. But I'll let Jason give you the details.

Jason Hollar -- Executive Vice President, Chief Financial Officer

Yeah. So the overall one-time costs, inclusive of transaction fees as well as the costs to achieve the synergies that are specific to the transaction are approximately $200 million. This year, it is going to be more weighted on the synergy work streams. As we highlighted in the prepared remarks, we're pulling ahead some of that synergy activities. So we're spending the dollars associated with our restructuring activity a little bit earlier, than what we normally anticipated. So we're going to pull in a little bit more of that. And likewise, with the timing of the spin being in 2020, we've deferred some of the tax leakage costs until next year. So this year, it's primarily transaction and synergy costs. And next year, it will be more heavily weighted toward the actual tax work, and the leakage associated with the remaining legal entity separations.

Rod Lache -- Wolfe Research -- Analyst

Okay. So it's $200 million for this year and about $100 million -- just different sources this year and next, it sounds like. And just to clarify it sounds like your EBITDA -- for the enterprise, EBITDA minus interest and cash taxes and CapEx, around $250 million. And then you have these friction costs this year, so that brings it down around $50 million. Next year, that would go up by $100 million plus, the rollover of some of those -- the synergies that you're achieving this year?

Jason Hollar -- Executive Vice President, Chief Financial Officer

Yeah. I got a little lost some of the numbers you threw out. But in terms of synergies for this year, our run rate as of the second quarter is the $150 million. So we pull that forward from the original expectation of being at end of the third quarter. And we anticipate that $150 million run rate going to the $200 million by the end of the year. We started this year, if I recall correctly, at about $110 million. And so then, we get the full anniversary effect of that, the run rate effect of that into next year.

Brian Kesseler -- Co-Chief Executive Officer

Rod, you asked specifically around cash flow. So the $50 million...

Rod Lache -- Wolfe Research -- Analyst

Correct.

Brian Kesseler -- Co-Chief Executive Officer

Like I said, at the $50 million plus, the margin improvements will improve free cash flow performance, after we have all those transaction costs and other costs out of the way.

Rod Lache -- Wolfe Research -- Analyst

Okay. And just lastly, you mentioned that you're evaluating alternatives to further reduce leverage. Could you just talk to us a little bit about what you're thinking in terms of realistic balance sheets leverage for each division by the time you guys execute the spin? And how should we be thinking about the downside sensitivity? Just because -- the Motorparts and Powertrain decrementals looked pretty high at around 30% at this point. What -- how should we sensitize this for different macro scenarios?

Brian Kesseler -- Co-Chief Executive Officer

Yeah. I think if you look at the overall business, I think Roger and Ron highlighted the target decrementals, or the incrementals of 15%, decrementals in the 20s. Our Ride Performance business would be something close to that. Incrementals on the Motorparts business would start with something with a two in front of it, and then probably 10% difference on the downside into the 30s, just because of the profitability on those product lines. From an overall portfolio assessment, there is pieces and parts in each of our portfolios that in a matter of rank order, matter less, some matter more. As we take a look at it, if we find very much like the Wipers business that there's a better owner for that in the long term as we prioritize our capex and capital allocation, then we would look at -- we're putting those out or accepting people who want to look at those coming in.

All obviously, have to make sure that it's the right shareholder value increment for the decision. I don't know that we have a specific number in mind for leverage, because there's a lot of moving parts that we'd be looking at. But we like where we're at. And we're continuing to get to that mid-2020 spin date.

Roger Wood -- Co-Chief Executive Officer

Yeah. I think that's key, this is Roger. It's really a key to complement on what Brian just said. We're confident in the direction that we're headed right now, in terms of that mid-2020 spin date that we're on. But that said, given in any business situation, it always has merit to evaluate the portfolio to make sure that we're focused on what we need to be in and the pieces that may not need to be in it. And that would be in any ongoing scenario. It's not that we need to do something of that nature, but we're just in good business management making sure we're focused on continuing to look at that.

Rod Lache -- Wolfe Research -- Analyst

Are the types of things that you're contemplating, could they make a meaningful dent in leverage, or are they relatively small?

Brian Kesseler -- Co-Chief Executive Officer

I think there is a mixed bag in there.

Roger Wood -- Co-Chief Executive Officer

Yeah, I agree.

Rod Lache -- Wolfe Research -- Analyst

All right. Okay, thank you.

Operator

Our next question will come from Ryan Brinkman JPMorgan. Please go ahead.

Ryan Brinkman -- JPMorgan -- Analyst

Hi, thanks for taking my question. Could you help us in terms of what are the big puts and takes relative to total company combined free cash flow as you walk from 2019 to 2020? First, maybe just on the starting point again. Does your 2019 year-end leverage target imply roughly $100 million of negative FCF this year? And then you mentioned the $100 million of lower one-time cash costs in 2020. Can you help connect some of the other dots though, like the ongoing level of restructuring spend, the effect of the cost savings, the general trend in earnings? And then just considering all these things, do you have an estimate in mind of normalized free cash flows for the business either on a separate or combined basis?

Jason Hollar -- Executive Vice President, Chief Financial Officer

Yeah. This is Jason. I'll go ahead and start here and try to provide as much color as I can. We're certainly not providing 2020 free cash flow guidance today, but we can provide some thoughts as to what we think some of the key elements will look like next year. As we've already talked to it a little bit, one of the biggest items will be the reduction of the one-time costs associated with the transaction. So that $100 million difference from the $200 million to roughly half that level next year will obviously be a free cash flow savings. And then our run rate synergies as we talked through earlier, starting 2019 at close to $100 million and ending at close to $200 million, we should get the EBITDA benefit flowing through next year in that regard. In terms of the other elements, I would say it's probably a little -- certainly opportunity on both sides of the business. Specifically within DRiV, we do have some more substantial unusual costs this year that should not reoccur in a "normalized state" which I'm not saying is 2020, but we should get closer in 2020 in those two key areas of restructuring beyond the actual synergy work streams. We did spend a fairly substantial amount of restructuring dollars this year as well as capex to finish or progress, I should say the footprint rationalization for the North America Ride Control business as well as the Beijing plant move. Those two significant activities are going to drive probably somewhere in the -- at least $50 million range perhaps up to $100 million of incremental cash outflow this year that we would not expect next year. We'll define that more precisely later. And given some of the market moves, we had a little bit more restructuring also within the New Tenneco side. I don't think quite at the level of capex that's been associated with that, but there's certainly some opportunity across both businesses further there.

In terms of cash taxes, interest expense, those items I would expect that to be generally the same in terms of taxes from a rate perspective and interest, especially given the current rate environment. I would not expect that to be materially different. And then of course working capital, we will be -- with $180 million to date. By the end of the year, we would expect it to be in that similar type of range. And then within the following 2020, to get the remainder of that for the $250 million target. So, we still have high conviction that by the end of the second year there, within 2020, we'll be able to get the rest of that working capital. And so that is a question of how much do we get out this year versus next year. And certainly, given our progress to date, we do feel good about that and our ability to perhaps effectuate more, but we'll see how the balance of the year goes and we'll go from there.

Ryan Brinkman -- JPMorgan -- Analyst

Okay. That's very helpful. Thank you. And then just lastly from me. I wanted to gauge your comfort level relative to your credit facility covenants. Does the stronger trend to earnings and outlook today mean that you don't need to pursue any relaxation of the required leverage ratio or does it still make sense maybe to look at getting more breathing room there as some other suppliers have recently done?

Jason Hollar -- Executive Vice President, Chief Financial Officer

Yeah. So we continue to feel very comfortable with our current credit facility and everything that we've talked about here is not any different than what we highlighted before, that the credit facility gives us the flexibility to transact. There is the spin covenant you're referring to, that we have to continue to look at, but first and foremost, we need to get ourselves ready to go at those levels. And we feel that credit facility will facilitate that. We also think that there's potentially some flexibility within there, if we feel that's the right thing, but we've not by any means come to that type of conclusion at this point.

So it certainly will help facilitate the rest of this process, but also as a reminder, it's early on in its life. And if for whatever reason this is not the proper moment to spend, it will continue on without needing additional adjustments. So we're well positioned with the flexibility it provides us.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, very helpful. Thank you.

Operator

Our next question will come from our Armintas Sinkevicius with Morgan Stanley. Please go ahead.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Good morning. Thank you for taking the question. The margins suggest that there is, as you mentioned, the operational improvements. I think last quarter, there were some talk that software, integrating that was a bit challenging. I don't know if it's more or less than expected, but maybe you could talk about the integration of Federal-Mogul, how that's progressing, how the software integration has been moving along here from the first to the second quarter.

Brian Kesseler -- Co-Chief Executive Officer

Yeah, Armin, this is Brian. From integration standpoint, we're I think both sides of the divisions were very pleased with the progress we're making. Systems harmonization and separation are on schedule by the end of this quarter. We'll have, as we mentioned in the script a bit there, we will be fully separated operationally by the fourth quarter -- inside the fourth quarter. So, essentially there's really no intertwining of the two divisions after the fourth quarter. So we're really comfortable with where we're at. As you can see the synergies are starting to flow. Overall, I think the teams have come together very well to impact the results.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. And then on the DRiV side, last quarter, the Aftermarket business was a bit of a challenge, particularly for your products. Maybe you could talk to how that has progressed here in the second quarter. And if there is any challenges with the channel side or those are sort of fully resolved?

Brian Kesseler -- Co-Chief Executive Officer

Yeah. I think as we talked subsequent to our earnings call in a few different forms, I think it was better to judge the Motorparts division on the first half performance, because there are a lot of things going on late in the quarter in Q1, and we're starting to see in -- kind of where we expected to get back to early in the second quarter. Our margins in the first half of 2019 are actually 50 basis points higher than the first half of 2018. So making the progress that we would expect. Second quarter started out pretty strong. Started to weaken a little bit again in June, you could hear that in our customers' commentary. July is coming along like we expected it to. And so we'll start lapping some of the previous years' channel conflict losses. This second half of the year would be completely lapped by the time we get out of the year. So our new business wins, the team has been doing a nice job. We lost probably around $300 million in North America in that channel conflict. About 25% of that is what we're feeling this year. And we feel we've recovered about 25% of that already, and regaining and getting the confidence of our customers back. And our intention is to get that business back in North America over the next couple of years in the medium term. So DRiV's moving along as expected. We're making the right long-term place on footprint in some of our more challenged parts of the business, and we like where we're at.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. And last one for me here. Any sensitivity around leverage? You're ending the year at 3.3. As you think about the spin, obviously you mentioned a couple of levers here. But at what point does the leverage become a bit challenging for the DRiV business? It's a bit hard without comps here. But just how you're thinking about it would be helpful.

Brian Kesseler -- Co-Chief Executive Officer

Yeah. From the DRiV perspective, one of the things that we'll be targeting from a performance standpoint is to be 100% free cash flow conversion company in the medium term, on the outside of say the three-year window, beginning to make progress there. So with the changes that we're making and the efficiencies we're gaining and some of the things we'll talk more about in the future around complexity and simplification inside the product lines, we're comfortable with where we could see the leverage coming out on the spin. And if we find other ways to deleverage, we'll be even in a better position. So I guess that we're confident in the direction we're taking.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Much appreciate it.

Brian Kesseler -- Co-Chief Executive Officer

Thank you.

Operator

Our next question will come from Joseph Spak with RBC Capital Markets. Please go ahead.

Joseph Spak -- RBC Capital Markets -- Analyst

Thanks for taking the question. So you guys provided a lot of helpful commentary on incrementals and decrementals, but I guess I just want to better understand the quarter here again, because I guess with the exception of Clean Air, if you look at just sort of the volume factors, it was high 20s, low 30s. That's worse you said than your targets. How much of that was the mix-related stuff from -- are diesel higher margin than sort of gas products? Is that what's the extra pain on the downside?

Ron Hundzinski -- Executive Vice President, Finance

Hey Joe, this is Ron. Yes, that was a contributor to it. We saw that in the first quarter. We continue to see it on the Powertrain business in the second quarter. Also the lost sales in China are higher margin as well. So the combination of diesel in Europe for Powertrain and China sales coming down with higher margins, those are two headwinds that would prevent us from hitting our decremental margins in the Powertrain business. As you know, the Clean Air was tremendous performance year-over-year. But I would say that sequentially, Powertrain did a very good job on the sequential, but the year-over-year was more of a challenge for them.

Roger Wood -- Co-Chief Executive Officer

Yeah. I think it's worth mentioning -- Joe, this is Roger. I think it's worth mentioning to complement what Ron said, that we expect on the Powertrain side, it's going to be a bit more challenging to get down to the targets that we set for the business than on the Clean Air side just because of the fundamental differences in the business. So they made tremendous progress from the first quarter to the second quarter. They continue to work on that. So it's not all that unexpected that -- from our perspective, in my perspective, that the Powertrain side -- the previous Federal-Mogul Powertrain side would be a bit higher than the Clean Air side.

Brian Kesseler -- Co-Chief Executive Officer

Yeah. From a Motorparts side, we're right in the range where we kind of think the decrementals go. But Ride Performance is still a little higher. We're around 30% in the quarter trying to get that down into the 20s or within the 20%. There's two major things that impacted it. One is the China bonds were down. That's a better business for us. And a lot of turmoil there as we wrap up the relocation of the Beijing plant into the new facility. The other thing is we're starting to see the volumes ramp down on programs that we chose not to replace, and did not meet our hurdles from a margin perspective. So we've got to move through those over the next several quarters into next year to be able to get that fixed cost structure out as we move from four plants to two. So that's going to impact it for a while, but we get on the other side of our footprint moves here in North America, then I think we get right back into both the upside and the downsides, where we would expect them to be.

Joseph Spak -- RBC Capital Markets -- Analyst

That's very helpful. I guess maybe to follow on, as we think about the CTOH and industrial business, especially headed into next year, I know you're not exposed to Class 8 as much as some other companies, but there's also a growing concern on some of the other segments that roll into that. So is that -- are the incrementals and decrementals any different on that business versus what you typically see on the light vehicle business?

Roger Wood -- Co-Chief Executive Officer

Yeah. This is Roger. From our side of the business, we would see those a bit higher. The positive thing of it, we're looking at those the increased content in that side of the business that we're currently working on launching for the CTOH business specifically over in China with the regulation changes. Long term, we're really excited about that side of the business, because we see tremendous growth opportunities as those regulatory changes come in all through the world actually. The Americas and Europe increase in the regulatory framework. But in the Asia Pacific arena, over the next 10 years, it's a significant lift in both content as well as volume. So that side of the business is a source of real excitement for us.

Brian Kesseler -- Co-Chief Executive Officer

Yeah. From a DRiV perspective, the commercial truck and off-highway is less as a percentage than it is in New Tenneco, but the margin ins and outs are about the same as our light vehicle, so no difference there for us.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And then just real quick on the capex reduction for this year. Sorry if I missed this, but what was that really -- are there any sort of efficiencies maybe from the merger that you didn't realize beforehand? Is it timing related? Is it a cancellation of any projects or...

Brian Kesseler -- Co-Chief Executive Officer

Mostly the first two, that you mentioned. One, we are getting some benefit of scale off of leveraging the buy, but then there are some programs that have pushed out too.

Roger Wood -- Co-Chief Executive Officer

Yeah. And from the New Tenneco side of the business, we are really focused heavily on that. As we look at increasing our cash conversion efficiency in the overall organization, our capital is an area that we're focused on. We will spend capital where it's necessary to support the business. There's no question about. But we believe that across the enterprise, we have opportunities to be more efficient in the way we do it.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

[Operator Instructions]

Our next question will come from David Tamberrino with Goldman Sachs. Please go ahead.

David Tamberrino -- Goldman Sachs -- Analyst

Thank you. Gentlemen, I think it was a little bit touched on, but I want to get a little more clarity on it. What really needs to be done to hit the target to split the internal operations by year-end? What's still commingled between the two, what will be stand-alone entities, and what's currently already bifurcated?

Brian Kesseler -- Co-Chief Executive Officer

The last step is our IT systems and we're tackling that this quarter. Then we'll work through all the buttoning up of anything we find there. So it really is just that. Operationally, the management teams are already dedicated. We'll have some TSAs between the two organizations that are less than two handfuls that we'll be managing for a very short period of time. But it really is just the IT systems [Indecipherable] and we get that behind us at the end of this quarter, work out anything that we have to in the very beginning of fourth quarter, and we're ready to roll.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. And there won't be any shared plant footprints or plant facilities?

Brian Kesseler -- Co-Chief Executive Officer

A couple here and there, but they're already separated anyway. In almost all cases, it's two separate buildings on one campus. So it's very easy to separate.

Roger Wood -- Co-Chief Executive Officer

Yeah. There's very, very few -- very little of that, David.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. And then just a last one. Steel costs -- pricing in the market has been coming down since the beginning of the year. Is there any benefits coming into the P&L in the back half or as we progress into 2020?

Brian Kesseler -- Co-Chief Executive Officer

Well, those get mixed in with a lot of different tariff discussions, steel discussions. Obviously, on the Ride Performance side, we had our challenges over 16 quarters where we absorbed $60 million, but we got all of the recovery mechanisms in place. And so it's a hand-to-hand combat in those discussions, generally, especially with the OE. So a lot of different moving pieces there, but we don't see it having a meaningful effect one way or the other on the progress we're making there.

Jason Hollar -- Executive Vice President, Chief Financial Officer

Yeah. Within the quarter or the balance of the year forecast, a lot of moving pieces as Brian highlighted, but we do not see anything significant impacting really any of the businesses.

Roger Wood -- Co-Chief Executive Officer

Same thing on the New Tenneco side.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. Understood. And the last one. From a List 4 perspective, is there anything imported from China into the US through your businesses?

Brian Kesseler -- Co-Chief Executive Officer

No.

Roger Wood -- Co-Chief Executive Officer

No. No impact.

David Tamberrino -- Goldman Sachs -- Analyst

All right. Thanks for taking my questions.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Rich Kwas -- Vice President of Investor Relations

Brian Kesseler -- Co-Chief Executive Officer

Jason Hollar -- Executive Vice President, Chief Financial Officer

Roger Wood -- Co-Chief Executive Officer

Ron Hundzinski -- Executive Vice President, Finance

Colin Langan -- UBS -- Analyst

Rod Lache -- Wolfe Research -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

David Tamberrino -- Goldman Sachs -- Analyst

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