Tsakos Energy Navigation Limited (TEN) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Tenneco's First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] This call is being recorded. If you do have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. Ma'am, you may begin.

Good morning. Earlier this morning, we issued our earnings release and related financial information. In a minute, I will turn the call over to our Chairman and CEO, Gregg Sherrill; Hari Nair; our Chief Operating Officer; and Ken Trammell, our Chief Financial Officer. They will spend the first half of the call taking you through a detailed explanation of our first quarter results. Slides related to our prepared comments are available on the Investors section of our website at www.tenneco.com. We will then open up the call for questions, and the conference operator will explain the process for asking a question at that time. Before I turn the call over to Gregg, I need to note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release attachment. The earnings release and attachments are posted on our website. In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. And with that, I'll turn the call over to Gregg.

Thank you, Linae, and welcome, everyone, and thank you for joining us this morning. On our last earnings call, we talked about some of the industry challenges expected for the first quarter, including lower light vehicle production and tough economic conditions impacting Europe, as well as the commercial vehicle industry. Today, I'm pleased to report that the Tenneco team around the world responded positively to these challenges, delivered an excellent first quarter and put Tenneco on track for another good year in 2013. I want to highlight 2 key takeaways from the quarter. The first is that despite the mixed global industry environment, we delivered record earnings, including adjusted EBIT, net income and earnings per share, all on total revenues that were slightly lower than last year. And the second is how we did it: With strong execution across the operations and a relentless drive to improve our performance. As a result, our adjusted EBIT margin as a percent of value-add revenue held steady year-over-year at 6.7%. Now taking a look at our revenues on Slide 4, total revenue for the quarter was $1.9 billion, down slightly versus last year. Value-add revenue, excluding currency, was $1.5 billion or up 1%. Our OE light vehicle revenue of $1.4 billion was slightly up compared to last year. The increase was driven primarily by stronger light vehicle production in China, where Tenneco content is on 7 of the top 10 best-selling models. OE commercial vehicle revenue was $213 million, and the production environment looked very similar to the end of last year. While the relatively weak economic conditions are still impacting both the on- and off-road markets, we did see some year-over-year growth in commercial vehicle revenue in South America. In the aftermarket business, global revenues were $302 million, down slightly year-over-year. Revenues in North America were fairly steady. And as expected, Europe declined as the negative economic conditions continue. Now turning to EBIT on Slide 5. Adjusted EBIT equaled the previous first quarter record at $97 million and included a $2 million negative currency impact. Our adjusted EBIT results include the benefit of margin improvements in the Clean Air business, driven by higher Asia Pacific light vehicle volumes, mostly in China, and effective operational cost management worldwide. The gain in Clean Air EBIT was offset by lower Ride Performance EBIT due to volume declines in both North America and Europe. Our earnings results for this quarter reflect our ability to effectively manage through uneven economic and market conditions. I am pleased with our teams worldwide are focused on managing costs and improving our operations. During the quarter, we also announced an update to our strategic vision and the formation of our Clean Air and Ride Performance divisions. Since this announcement, I visited with thousands of employees at sites around the world, and I'm very pleased with the way our teams are engaged in executing on their distinct strategic opportunities for long-term growth and profitability. And with that, I'll turn it over to Hari for more detail on the Clean Air and Ride Performance results.

Thanks, Gregg. Turning first to the Clean Air results on Slide 6. Global Clean Air value-add revenue increased 2% to $842 million. Excluding currency, value-add revenue was $855 million. As you can see on the same slide, we show Clean Air revenue by geographic segment. Looking first at North America, value-add revenue was $386 million, down 2%. Higher light vehicle and aftermarket revenues were more than offset by lower commercial vehicle revenue due to volume weakness. Value-add Clean Air revenue for Europe, South America and India was $298 million. Excluding currency, revenue increased about 1%, driven by stronger light and commercial vehicle volumes in South America and slightly higher year-over-year commercial vehicle sales in Europe. Our Asia Pacific Clean Air segment delivered strong performance this quarter with value-add revenue increasing 22% to $158 million, mainly due to a higher light vehicle production in China. Turning now to earnings for the Clean Air business. Staying on the same slide, you can see that adjusted EBIT increased to $78 million, with EBIT improvement in both the North America and Asia Pacific segments. In North America, Clean Air EBIT was $49 million, up 2%, driven by operational improvements and higher aftermarket sales. Adjusted EBIT for Europe, South America and India was $12 million versus $16 million a year ago. The results reflect $2 million in unfavorable currency and the impact of lower aftermarket volumes in Europe, which we partially offset by effectively managing costs throughout the region. Asia Pacific was a strong driver of our earnings results, with adjusted EBIT for the segment increasing 42% to $17 million. The team did an excellent job of leveraging higher light vehicle production volumes at our plants in China with strong operational performance and productivity gains. For the quarter, I'm pleased that in the Clean Air business, we improved our overall adjusted EBIT margin on value-add revenue to 9.3% from 9.2% even in light of the industry challenges in Europe and low commercial vehicle volumes globally. Now turning to the Ride Performance results on Slide 8. Total Ride Performance revenue was $607 million, down 3%. After adjusting for currency, revenue was down just 1%. Looking at Ride Performance revenue by geographic segment. North America revenue decreased 3% to $307 million, primarily driven by lower commercial vehicle volumes and slightly lower aftermarket volume. In the Europe, South America and India segment, Ride Performance revenue was $252 million, a 7% decline versus last year. After adjusting for negative currency, revenue was down 2% on a continuing weak production environment in Europe. Similar to Clean Air, the positive driver of our total Ride Performance revenue this quarter was the Asia Pacific segment with a 26% increase in revenue to $48 million, which is driven by strong volumes in China. Now looking at Ride Performance earnings on the same slide. The total Ride Performance adjusted EBIT decreased to $40 million from $44 million. In North America, EBIT declined $10 million due to lower commercial vehicle and slightly lower aftermarket volumes. In addition, we had a onetime cost associated with the resolution of a 2011 issue related to struts supplied on one OE platform. We did an excellent job in our Europe, South America and India segment, staying focused on delivering very good operational performance, which kept adjusted EBIT even with last year at $11 million. Asia Pacific also delivered strong operational performance and capitalized on higher volumes to improve adjusted EBIT by $6 million. For the quarter, our overall Ride Performance adjusted EBIT margin was 6.6% versus 7% last year. As we've discussed before, it's clear that in Europe, we're operating in what will be a prolonged weak environment as the region works through recessionary economic conditions. We're taking actions to improve our long-term competitiveness by aligning our footprint and cost structure with this environment. The previously announced closing of our Clean Air aftermarket plant in Vittaryd, Sweden is proceeding on schedule for an end-to-production in the third quarter of this year as planned. And work continues on further cost reductions within our European operations. As a reminder, these actions, including the Vittaryd closure, are expected to reduce structural fixed costs by $60 million annually, reaching a full savings run rate in 2016. We anticipate costs related to these actions of approximately $120 million, most of which we expect to record later this year and in 2014. We'll provide more details as we're able to announce specific actions. In both our Ride Performance and Clean Air divisions, our global teams are focused on driving operational excellence and working continuously to increase productivity and improve the quality and safety of everything we do. I'm proud that we were recognized for our efforts this quarter with some prestigious customer awards, including John Deere's Global Innovation Award for our Tier 4 Final after-treatment system; GM's Supplier of the Year honors in Brazil; and in North America, we received plant awards from Toyota for quality performance and Honda for overall supplier performance. In summary, our results demonstrate Tenneco's ability to stay focused on the things we control to drive continuous improvement. Our operational performance helped deliver another solid quarter, with revenue in line with our expectations and strong earnings. Now I'll turn it over to Ken.

Thanks, Hari. Let me make a couple of comments about our restructuring expenses this quarter, then I'll cover interest, taxes and cash flow. Our restructuring charges represent costs to exit the distribution of aftermarket exhaust products in Australia, as well as continuing costs related to our Clean Air aftermarket facility in Sweden that we're closing and some headcount reductions in Europe Ride Performance. Now let's turn to interest and taxes on Slide 11. Interest expense in the quarter was $20 million versus last year's $42 million, which included $17 million in refinancing costs. In the first quarter of last year, we executed a series of refinancing actions that expanded our financial flexibility and reduced our interest expense. On a comparable basis, interest expense was down $5 million in the quarter due to the lower rates that we achieved in the refinancing. We continue to expect annual interest expense of about $80 million in 2013. Tax expense was $12 million in the quarter. That includes a tax benefit of $13 million that is mostly related to recognizing our U.S. tax benefit for foreign taxes. As our U.S. earnings have continued to improve post-crisis, we were able to first reverse the valuation allowance against the NOL last year. And now, we estimate we'll be able to use foreign tax credits in the U.S., so we have recorded that benefit. Before this adjustment, our tax expense was $25 million for an effective tax rate of 34% this quarter. We continue to expect our effective tax rate for the year will be between 34% and 36%, and our cash taxes for the year will be in the range of $90 million to $100 million. On Slide 12, consistent with what we normally see in the first quarter of every year, we used $123 million of cash from operations this quarter. This compares to a use of $85 million in the first quarter of last year. The higher use of cash was driven mostly by timing of tooling and engineering recoveries for future program launch activities. Additionally, we made long-term incentive compensation payments this year that were absent from last year because we had suspended the long-term incentive compensation plan in 2009. On a last-3-months basis, our working capital metrics are essentially unchanged year-over-year. Our days sales outstanding, excluding factoring, was 61 days this quarter. That's improved 1 day versus last year's metric. Inventory days on hand was 39 days. That's up 1 day from last year. And days payable outstanding was down 1 day compared to a year ago at 70 days. We will continue to focus on these metrics to drive our cash flow improvements. We incurred capital expenditures of $59 million in the quarter, that's even with a year ago, and was primarily to support light and commercial vehicle program launches, mostly in our Clean Air division. We continue to expect capital expenditures in 2013 will be in the range of $260 million to $270 million. Now let's go over debt and available liquidity on Slide 13. At December 31, debt net of cash balances was $1,125,000,000. That's improved from $1,165,000,000 a year ago. Our leverage ratio is a first quarter record of 1.8x, improved from 1.9x a year ago. At the end of the quarter, we had $531 million in unused borrowing capacity under our revolving credit facility. Additionally, cash on hand was $242 million, and we had the capacity to sell another $55 million of receivables. And with that, I'll turn the call back to Gregg.

Thank you, Ken. Tenneco has started the year with a solid performance, a strong emphasis on continuous operational improvement and delivered consistent margins in a mixed global industry environment. Now let's turn to the outlook. According to IHS forecast shown on Slide 14, global light vehicle production is expected to improve in the second quarter, up 3% year-over-year. Weak economic conditions are expected to drive lower production in Europe, while higher year-over-year light vehicle volumes were forecasted for North America, China, South America and India. With our strong platform position with the world's leading vehicle manufacturers and our global footprint, both our product lines are well positioned to benefit from light vehicle volume improvement in the second quarter and for the full year. For the full year, our expectations for our commercial vehicle business have not changed. With a continued weak global market and the significant inventory destocking taking place, we anticipate production to remain at low levels in the second quarter. However, as inventory issues are worked through, we expect to see some volume improvements in the second half of the year. And as I mentioned previously, 2013 is a relatively quiet year for commercial vehicle launch activity. Most of our new launches will begin later this year as our customers prepare for the 2014 regulatory changes. Finally, we expect continued solid contribution from our aftermarket business, with steady performance year-over-year in North America and the European aftermarket remaining relatively weak due to the ongoing macroeconomic conditions in the region. As I mentioned up front, we're excited about the strategic direction for each of our product lines. Increasingly stringent emission regulations create outstanding growth opportunity for our emission control technology. Our Clean Air division has the regulatory expertise, a full suite of technologies and the systems integration capabilities that deliver solutions for light and commercial vehicles and locomotive, marine and stationary applications that will drive future growth. And I'm just as excited about the opportunities ahead in our Ride Performance divisions, where we have the global scale of manufacturing more than 80 million conventional shocks and struts per year, the world's leading aftermarket brands and advanced technology capable of delivering award-winning suspensions as we did on the McLaren Supercar. In closing, I want to thank our 25,000 employees around the world for delivering a good quarter and for helping build a stronger future for Tenneco. And with that, we can open the call for questions.

[Operator Instructions] Our first question comes from Chris Ceraso. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Crédit Suisse. Europe margins are obviously lower than they are in North America and AP in both business segments. In your view, how much of that do you think is because volumes are depressed and, let's say, the aftermarket is weak versus some other structural factors, whether it's the number of employees or the number of offices? I guess what I'm driving at is over time, as the economy gets more normal in Europe, do you think you can get margins that look more like they do in North America and AP?

Yes, let me take that one, Chris. I said before with regards to Europe -- but right now, certainly, margins are depressed due to economic conditions and there's absorption issues and all that, I think, we all face in Europe. And hence, we've undergone the fairly significant restructuring that we're going to do this year and into next year and the following year with the $60 million savings by 2016. Having said all of that, when you start comparing Europe to North America, normalized economic conditions with whatever that winds up being, I think it's probably going to be a little smaller than it once was, hence the restructuring. But on a platform-by-platform basis, in other words, if you were to look at a C platform in Europe, C platform in North America, we should have comparable margins between the 2. The biggest difference on a normalized economic thing between North America and Europe is the platform mix. You just don't have the bigger luxury vehicles in quite the same numbers. You certainly don't have the light trucks that you have in North America. So that mix, as far out as I can see, is always going to be fairly positive for North America as a region. But on a platform-by-platform basis, I see no reason that you can't have comparable margins. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So what would you say the headroom is there? If you're running at 4% today and we get to a more normal economic condition, does it get to 8%, but maybe not to 12% or 13% that you have in North America?

It certainly gets better because, obviously, we get better with the restructuring that we're doing because there are structural costs coming out, and there will be some recovery over the period in Europe. I mean, Europe is not going to absolutely stay down like this forever. And then it would just depend on mix. So at that point, it will close the gap, but it's not going to make it up entirely. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then just a housekeeping item. You mentioned that there was a resolution of a strut issue in the North America Ride Performance division. Was that something that you absorbed? And how big was that?

Yes. That was in the year-over-year comparison, Chris, and it was a couple of million dollars. It was not a huge number, but resolved something that we had, I think, first mentioned in the fourth quarter of 2011. So that's now behind us.

Our next question comes from John Murphy.

It's John Lovallo on for John Murphy from Bank of America. I guess first question would be, what are you guys seeing right now in terms of raw materials? And then what are your expectations for the year?

Really nothing significant one way or the other. As you sort of look at the year-over-year comparisons with the economic activity, especially in Europe being a little bit down. Net, it's probably a little bit of a tailwind. But remember that we've kind of worked pretty hard over the course of the last 6 or 7 years to get some good tracking mechanisms arrangements with our customers for some of the most volatile pieces. So net, it's probably a little bit favorable for us in the quarter, but not the most significant item.

Okay, great. That's helpful. And the final question would be, can you just update us on your priorities for cash and potentially the return of shareholder value?

Yes. I mean, certainly, as we've talked about for quite a while and it really hadn't changed, our first priority of course is funding our organic growth. We've got a great growth opportunity on the Clean Air side of the business driven by regulations. And we'll make the working capital and capital expenditure investments that are necessary to fund that, and that's going to be consistent with our historical norms in terms of a percent of revenues. We'll also are going to make some fairly significant investments in restructuring in Europe. That's over the course of the next couple of years here. We said the costs are $120 million, and I think on the fourth quarter call, we talked about probably at least 75% of that being cash. So that's our second priority. We'll also continue to work on the balance sheet, and that would be what's next in line. We built a lot of flexibility into the capital structure last year when we refinanced our senior credit facility, moved some bonds up in term loan and the term loan up into the revolver. So we have a lot more flexibility now than we did before to continue to pay down debt. And we'll continue to work on that. Remember that we've talked about we think a good target operating leverage is around 1x. Then beyond those priorities for cash flow, we certainly will look at any opportunities that can add to our organic growth from a technology perspective, from a geographic or customer perspective in terms of acquisitions. And then that takes us to the opportunities that we would have to return cash to shareholders. We've made some share repurchases in the last couple of years and have announced another 550,000 shares this year, all designed to offset the growth in shares associated with employee compensation arrangements. So we'll continue to do that. And once we get to that sort of 1x level, I think that opens up the opportunity for either larger share repurchases or dividends or a combination of the 2.

Our next question comes from Patrick Archambault.

I guess a couple of items from me. Obviously, the cost performance was to sort of maintain margins relatively flat in this kind of an environment, with commercial vehicle down slightly that, obviously, cost performance was a big piece. Can you kind of tell us a little bit about sort of how much low-hanging fruit you still have in terms of cost performance levers that even before you get to the facility closure, which it sounds as more of an end-of-the-year benefit? That would be my first question, and then one follow-up on China, which I'll ask afterwards.

I think the single -- there's a couple of ways that answer that question. Clearly, as volumes come back in all regions, the absorption continues to improve and there's leverage there. So that's kind of automatic as volumes do come back. And we're not seeing that in Europe right now. It's choppy. I kind of call it bouncing along the bottom, if you will, and it will probably bounce along the bottom for several more quarters. We are anticipating some commercial vehicle pickup in the second half of the year, as we said, because there's been kind of a double whammy there of relatively weak sales, coupled with a lot of inventory destocking has gone on. And that's kind of clearing behind us and the destocking I'm talking about, so production should pick up and help with some of the absorption there, although I wouldn't put it back into a full-blown recovery, but still certainly improving as we go forward, is our anticipation. Then from there, certainly, we've talked about really kicking up our focus on leveraging cost-reduction initiatives in our Ride Performance division across that 80 million shocks and struts that we sell. And we've organized around doing that. Those efforts are underway. I'm not going to say it's really low-hanging fruit per se because it does take a little while to drive across the whole blow of that kind of leverage. But I'm still pretty excited about it, that we're going to be able to drive some improvements there sort of on a continual basis going forward also.

Okay. And then just one clarification. I mean, when do you think the benefits of the closure of the Swedish facility, when should we start to see the benefits of those fixed cost reductions hit your P&L? Is that kind of a fourth quarter timing?

You saw -- I think we've picked up a little bit so far. But the facility will be closed in the third quarter, so we'll really start to see the run rate move in, in the fourth quarter.

Okay, great. And then one last one on China, if I may. The growth rate on the light side has been pretty phenomenal. How are you -- can you just update us on how you're thinking about the timing of the commercial opportunity? What's the level of sort of the advanced engineering ahead of the new set of regulations there? When do you expect that to start to roll off?

We really have -- I can't give you anything more of an update than what I did at the call 3 months ago, to be honest with you. The level of engineering activity we had mentioned had kicked up. Customers were moving into a production prove-out phase, which they have not done in the past. We had told you that China has big refiners. It indicated that by the end of the year, they were going to be moving to the lower sulfur content diesel fuel that's kind of in part in all of this. We know the pressures are still there, and there's been no official word relative to that July implementation date. So I really can't give you anymore of an update than I did 3 months ago. We're just kind of in a wait-and-see mode like you are. When they pull the trigger, we're ready to go.

Okay. I mean I guess just to -- is that -- do you think it's likely that starting in July, you will start to see some content even if it's a small percentage of the trucks being built that have the content on them?

We anticipated a minor amount of content in the back half of this year. Ken, you may...

Yes, something in the 5% to 10% range, sort of penetration rate, installation rate, if you will. But I -- we can't tell you for sure if even that lower percentage is going to occur. And I think that's kind of what Gregg was trying to point out. There's no official word, I think, that certainly people are getting ready. But Gregg also pointed out that with the refining capacity coming on later in the year to supply the lower sulfur diesel fuel that, that may have an impact as well. We're just waiting to see.

Our next question comes from Patrick Nolan.

It's Deutsche Bank. Gregg, I just want to follow up on your commentary on the margins about being able to make progress there for the remainder of the year. But particularly, as I look to Q2, it's your toughest margin comp of the year. And I know typically that's usually a strong aftermarket quarter. But I'm just wondering if you think that's going to -- how that's going to play out this year with Europe being as weak as it is.

Well, I did say last quarter. Last year, particularly with the momentum of a number of commercial vehicle launches going through the year, we had reasonable confidence that bore out that quarter-over-quarter, we were going to drive corporate margin improvement, and we did. This year, because we really don't have that kind of known solid incremental launch activity going on and we're kind of just at the vagaries of the macro out there at the moment, I did say it was going to be tougher quarter-over-quarter. By the end of the year, we should have improved margins. And I did say that, and I still feel pretty good about that. But each quarter's comparison is a tough one to call right now because it's going to have a lot to do with the mix make up of the quarter and that sort of thing. As you were just talking about, we do have a relatively positive mix in the second quarter for the aftermarket. It's not totally clear right now exactly where all our customers are going to be in the second quarter on the commercial side. So it's just a tough call to make on any individual quarter this year.

All right. And if I can just sneak in one housekeeping. Can you tell us what total European aftermarket revenue was down year-over-year?

We're not giving the aftermarket separately by geographic region anymore. As you know, it's split out between Clean Air and Ride, and I'm not sure that gives you a lot. It definitely was down. It was probably down as a percentage, though a little bit less than we've seen the last few quarters.

Our next question comes from Brian Johnson.

Barclays. Two questions, and I apologize if I missed it. Can you roughly quantify the strut issue and to what extent that helped -- how that affected the EBIT?

Yes. Well, we said a couple minutes ago in answer to the question was that the cost was not huge, a couple of million dollars in the quarter. Brian Sponheimer - Gabelli & Company, Inc.: Okay. And in terms of the -- then the decline in profit, to what extent are we still seeing some of the impact of lower content emissions aftermarket and some of the value-based strut products rolling out?

So Brian, I think you've mixed 2 segments. I'm going to..

Right, excuse me. In Ride Performance, it would be the value-priced strut segment.

No. As we said in the second quarter, that issue is behind us. And we don't ever expect to have to talk about aftermarket margins again. What you saw in the quarter was declines in commercial vehicle, including the elastomer business, a little bit of a decline in Ride Performance revenue and the mix issue, as well as the volume issue associated with that.

And is the CV primarily a OE business?

Yes, that's definitely an OE business.

Okay. So that's tied to the OE values.

Right, right.

And on China, with the kind of growth there and the revenue, where you are in capacity utilization? And is there a need to build more factories there or is it just filling the factory space that you've established?

Are you talking about commercial vehicles again?

No, now I'm back to -- no, overall at China emissions control -- Clean Air.

I think we're at reasonably good shape in the very near term in China. Remember, I'm going back I think 2 years now, we built several new facilities all at once because we had to and several things timed out. We had new customers coming on and we had some of our existing facilities that we just absolutely blew the walls out of and had to relocate, obviously, because we don't have any room to add on there. With that capacity installation that was complete a year or more ago probably, put us in pretty good shape in the very near term. But at the types of growth rates for China, I'm not prepared today to say when our next facility may be required. But there will be, in the future, more facilities required in China I'm pretty confident about.

And final question on China. We talked about the commercial regulations earlier. How about anything on the rumblings on the light vehicle side in response to the Beijing smog problem of this winter? When I was over there, I did hear some talk that, that perhaps would force the regulators to get more serious on the light vehicle side.

The only thing that I've seen, and Hari can correct me if I'm wrong, is there has been some talk, although I don't know how near term it might be, of additional scrappage schemes to try to get some of the older polluting vehicles off the road as opposed to incrementing light vehicle -- the currently built light vehicle emission levels, if you will. In other words, those would be a big help, the current level, if they could just get some of the older cars off the road.

You're right. Through some...

So they may focus more there which, of course, would help light vehicle sales. But that's just -- it's only been some speculation in the press over there, and that's all I've seen. Nothing official, nothing from the customers or anything like that.

Our next question comes from Ryan Brinkman. Ryan Brinkman - JP Morgan Chase & Co, Research Division: JPMorgan. I'm curious if there's any progress you can report on during the quarter in terms of either booking business or pursuing business in some of the more nontraditional Clean Air end markets such as locomotive, marine or stationary power that were discussed as long-term opportunities at the Analyst Day in New York.

Really nothing that we can update you on other than the fact that we're continuing to work with a number of customers and working on engineering, working on technology. Good progress, but no particular customers to talk about. Ryan Brinkman - JP Morgan Chase & Co, Research Division: And then I know you don't guide to either quarters or margins, but just based on what you have, you've said that you expect improving results in the back half as the commercial vehicle and end markets -- in other end markets recover. And typically, your second quarter is by far the strongest. So is there anything more you can help us in terms to reconcile that or in way of cadence of earnings or even revenue throughout the remainder of the year?

So Ryan, I mean, certainly, our aftermarket revenue is strongest in the second quarter. Third quarter is the second strongest quarter, then the first and fourth for the aftermarket is the low season. It's a summer driving season driven replacement aftermarket. So that's why you see the revenue is highest there. And that does drive the margins up. Now what Gregg was pointing out on the commercial vehicle side is that we've seen a decline both -- certainly in a little bit of the end market, but even a greater decline in our customers' production levels as they have adjusted their inventory. Based on what we've heard, based on what you sort of seen in some of the discussions out there, CAT would be an example, they expect that to begin to come back, so production to come back even if sales don't pick up in the second half of the year. But that's about all that we've kind of pointed out to you. That's the best information that we have. And we just want to make sure that you had an idea of what impact they may have on revenues for the rest of the year. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Okay, great. Then final question, is there anything you can share with us in terms of the latest trends that you're seeing on the ground in terms of European light vehicle production by way of any of your customer orders or customer call-offs? And is there any difference between what you're seeing there on the ground and maybe what IHS is reporting?

I think -- Ryan, I think it's very consistent with what you've been seeing from IHS. At the beginning of the first quarter, we talked about the IHS expectation, and we said that there was certainly some concern that it might slip further. IHS actually came in -- we were a little bit better than their forecast at the beginning of the quarter. So the good news is that we didn't see that decline. I think they're down 3% in the second quarter, and that would seem to be as good an estimate as anybody has out there right now.

Our next question comes from Joe Spak.

It's RBC Capital Markets. Just getting back to China, I mean it really does -- on the commercial vehicle side, it really does seem like the bottleneck is on the fuel side and diesel side. I know you mentioned some of the refiners are increasing capacity. I mean do you -- I guess a, how available is that fuel in sort of the Tier 1 cities? And do you expect there to be an actual sort of big bang enforcement announcement? Or is it going to just slowly be enforced in the Tier 1 cities and then roll out from there?

I really don't expect a big bang announcement. I think we've been pretty clear on that, that it's going to roll out probably through the big cities initially. But even that could be sort of a phasein sort of thing without what you're referring to as a big bang. And again, we're just exactly where we were a few months ago, which is more confident than we've been in recent years, that we should start seeing an increase in this production, particularly towards the back half of the year and as more and more fuel becomes available, but don't really expect the big bang. I think the only Tier 1 city that really has the fuel today is Beijing, right, and they're essentially kind of there. But I'm assuming that the refining capacity kick up the rest of the cities will have available to them. I don't know what kind of inventories the old fuel is going to be there to play out. But I would expect us to see more gradual improvements as they begin to enforce those regulations and not necessarily step function type things.

Remember that when we make our assumptions too, like we said earlier, while we start at low levels, we still assume even in the fifth year of our expectations that it's only around 50% or 60% installation rate.

Okay, great. And then maybe just a couple more on the commercial vehicle side. I know you mentioned CAT. And clearly, they've talked about the destocking, and it sounds like going forward, maybe a little bit more, but the second derivative improving. Can you sort of confirm that, that's what you're seeing based on what -- kind of what they're telling you and maybe just a little bit more on your exposure there by end market, whether it's construction, ag, mining? And then the final question, that would be, your last quarter, you mentioned a 55% utilization on the global commercial vehicle installs, is it roughly still roundabouts there?

Well, the answer to the last part of the question is yes. I mean the production is basically unchanged since the fourth quarter and is roughly right in that same wheelhouse.

Yes. As far as expectations, I mean clearly, we have as much information as you do from public sources, and that's basically what we're trying to kind of point out to you, what our customers' expectations are. In terms of the end markets that we serve, I mean you can look at our customers and it's Caterpillar, it's John Deere, you've got commercial vehicle customers, engine manufacturers in Europe like Deutz. What we don't know for sure is because we provide the after-treatment for an engine, not for a market, if that engine winds up in agriculture, mining or construction, so I can't tell you for sure what that mix is. It certainly looks a lot like what our customers' mix does though. So if you look at the components of our customers, obviously, CAT much more heavily weighted toward construction and mining, probably less so mining right now, based on what they said on their call. And then on the Deere side, more heavily weighted toward the ag side.

Okay. And what about regionally then, commercial vehicle just North America versus Europe?

Hari said in his call that we saw a slight increase in commercial vehicle in Europe in the quarter. And we also saw that in South America, because remember that regulations begin to kick in, in second quarter of last year in South America. And then we said the commercial vehicle revenue are actually slightly down. So kind of doing the math, that says North America was slightly down as well.

Our next question comes from Rich Kwas.

Wells Fargo. Just a couple of quick follow-ups. So just on commercial vehicle, if I just take kind of where production schedules are and given your customer mix, is it fair to think that Q2 is going to be pretty similar to Q1 on the revenue side? Is that a right way of thinking about it?

Rich, it may be up or down a little bit. I don't think it will be a whole lot different based on what you've kind of heard everybody talk about publicly so far.

Okay, okay. And then Gregg, on the European aftermarket, I think you talked last quarter a little bit about potential that you thought maybe a bottoming was taking place. Has it gotten -- you think it's gotten worse? Where do you think we are in that process at this point?

I guess I still sort of believe it's bottoming. I said Europe is going to kind of bounce along the bottom, so I'm not sure quarter-to-quarter which way the darn ball is bouncing. I was waiting on someone to ask me that, by the way, so I appreciate it, Rich. I'll point that I did say [indiscernible] is bottoming. And I guess I really still do. But you're going to see the sort of fluctuation and what happened a year ago on a year-over-year comparison type of thing. But I really don't see it taking any significant downward turn from here. It's just it's going to be a while before it really improves.

Right. So just -- it could be more of a prolonged recovery period tail?

Yes, exactly.

[Operator Instructions] Our next question comes from Brett Hoselton.

KeyBanc. First one was specialty revenue, looking -- your original guidance just to see it up, what is it, $100 million, $200 million? $100 million to $300 million this year, year-over-year in 2013. It looks like it's entirely back-half loaded with a little makeup from some declines here in the first half. I guess as you stand today, one, are you more confident or less confident that you're going to be able to achieve that based on what you're seeing in the markets today? And then secondly, how should we think about -- I know there's seasonality in these markets here, but apart from the seasonality, are you anticipating some improvement in production? It sounds like you are in Europe. But generally speaking, does your guidance anticipate that we see some improvement in the production?

Yes, it does clearly imply that. Because particularly as the sort of inventory thing gets cleared out of the system, production's going to come back up to match sales. It's still weak sales environment, but at least it brings production back up to that level. And then the other thing that I think we have informed you of is some of the 2014 content begins to launch in the back half of the year. It's not a huge revenue driver to us this year. It's certainly more next year, but nevertheless, some in the back half. So those 2 factors are really why we still have confidence in that range that we gave you back in February, whenever it was, of the total year's revenue for commercial vehicle. And we're simply just as confident as we have been that it's going to come in, in that range. So we see no change to that guidance at all right now.

And then as we look into the second quarter here, it seems like most of the commentary on the revenue, adjusted revenue year-over-year is going to be may be flat, may be up slightly. But anyway, I guess what I'm wondering is what might be different if you performed margins in the first quarter, performed relatively well, flat year-over-year on roughly flat revenue? If the second quarter revenue's going to be flat, is there some particular reason why you think that margins might not be flat year-over-year as well? It seems like your cost performance should continue.

I'm not expecting them to be anything other than but pretty doggone close to where they were last year. I'm just -- given I can't tell you sitting here today exactly what the mix of aftermarket light vehicle commercial is going to be by the time we end this quarter, where that's going to be. So I mean, I'm expecting us to execute well on the margins. And it's simply going to be any mix moving around that would impact them, but I don't -- I'm not seeing anything big here at all. So for me, I'm looking at what we think the second quarter, we're going to have another good quarter, solid margin performance versus last year. Until I know what that final mix comes in, in the macro, I just can't really say if it's flat, up slightly or down slightly is all I'm saying.

Yes, that's fair enough. And then finally, as we look at European and South American, Indian margins relative to Asia and North America, obviously quite a disparity between the 2. You've got the restructuring program, it looks like it would allow you to close the gap by maybe 50 basis points, give or take. But there's still a substantial gap, call it 400, 500, 600 basis points between the performance in Europe and the performance in North America and Asia Pac. I guess what I'm wondering is how should we think about longer-term European margins relative to the performance you're seeing in North America and Asia Pacific? Can you close the gap entirely? Is it structurally different, therefore, the margin is going to be lower for some reason?

I mentioned this before and I think I even mentioned it earlier today. When we clear through the restructuring in Europe, get those costs aligned with what we see as sort of a reasonable market size for Europe, which is still a very large market, it's just down over what it was a few years ago, and it's going to have some recovery in it going forward somewhere over the next few years. We just don't anticipate that happening very fast. But once you kind of equalize the macro between North America and Europe, if you will, the difference will make up some of the margin for sure in Europe versus North America. And on any given platform, if you're dealing with the C platform in North America or Europe, its margin should be virtually the same, no reason for them to be different. But North America has a richer mix. It has the bigger vehicles, sells more luxury. Certainly, light trucks are a big positive mix in North America that you're not going to have in Europe. So that mix advantage in North America is going to be with us for as far as I can see. So if you're just looking at the grand total margins, it will be North America should always be a little bit on the upside from Europe.

Now I guess what I'm wondering is, is there any way -- do you have any sense of how you might be able to quantify that in any way, shape or form? Is that a 50-basis-point differential or is that a 400-basis-point differential?

Yes, Brett, I don't know. There's not a way really to quantify that. Because at the end of the day, like Gregg said, it depends on the mix of the platforms and the mix of the production in the quarter. There will always be a mix difference between North America and Europe.

Our next question comes from Brian Sponheimer. Brian Sponheimer - Gabelli & Company, Inc.: Brian Sponheimer, Gabelli & Company. Just want to talk about North American ride control. We're anniversary-ing against I guess 4 years now of the worst sales figures on record. And we're starting to get into shock and strut replacement intervals. Are you guys thinking about this market as the repopulation of the -- that kind of 4-year-old vehicle population is something that should be a positive going forward for you?

Well, I think it's been something of a positive here recently because aftermarket sales have certainly run fairly strong, and they are still at fairly high levels for us. And whether they're going to go up any further or not, I'm not sure we're anticipating. But I do anticipate them staying at a relatively strong level here for a while. And I think we've been seeing that because you're right. I mean, the fleet age with that recession 4 or 5 years ago and it's still being made up out there with the recovery of the light vehicle lead production. But it's been relatively strong. We expect it to stay fairly strong, but we're lapping some of those strong quarters now too. But from a year-over-year growth sort of thing, I'm not sure. It's just going to stay what I call strong, but it was strong last year too.

Remember that when we talked about the aftermarket, we pointed out that that's probably a GDP, maybe GDP minus growth business over the sort of over the cycle. And we've seen some very strong quarters of growth since late 2009 or early 2010. And we had said and had been pointing out every quarter that eventually, it will kind of go back to trend rate. And what Gregg is saying is that now we're at pretty strong levels and we've seen flat, plus or minus performance for the last couple of quarters in the North American aftermarket.

Our next question comes from Ravi Shanker.

Morgan Stanley. Just had a couple of follow-up questions. Last year, you had a pretty big sequential step-down in R&D and SG&A spending in 2Q and 3Q versus 1Q. Do we expect to see a similar thing this year as well or were there something unusual going on last year?

Ravi, is your question just the absolute value or is the...

Just both that -- I have both the dollar amount and the -- as a percentage of sales, especially for the R&D stepping down sequentially.

Yes. I mean, as a percentage of sales, that's probably more driven by the percentage of sales than -- I mean, by the higher sales in the second quarter than anything else. Because remember that, that is traditionally our strongest quarter from a revenue perspective, the aftermarket is strong. That's the most number of days of production that we have on the OE side during the course of the year as well during the second quarter. So that's when you see a very strong quarter, and that obviously drives the percentage down. SG&AE spending itself will vary a little bit quarter-to-quarter. The engineering research and development piece will depend on recoveries from customers.

Recoveries from customers could be one of the bigger factors in the timing of that.

Yes. Exactly. And so that will be sort of what drives it more so than anything else. Over the course of the year, our engineering, research and development is generally around 2% of revenue. And I think that's a good assumption to use over the course of the year. Quarter-to-quarter, it may vary just a little bit because of recoveries.

Good. That's very helpful. So on a dollar basis, it should stay pretty consistent unless you have unusual recoveries coming in?

Yes, exactly.

Okay, got it. And the other follow-up I had was, you've given the capacity utilization number on install basis. Do you have that same number on a manned basis as well?

On a manned basis, it's probably very close to what the current production level is, which certainly would be low the -- lower than the 45%. I mean it's basically a variable cost. We'll add people as we add production at this point.

Sir, at this time, I'm showing no further questions. I'll turn the call back over to you.

Thank you. This concludes our call. An audio replay will be available on our website in about 1 hour. You can also access the recording by telephone. In North America, you may reach the playback at (888) 562-0525. For those outside North America, the number is (402) 998-1420. This call-in information is also found in our press release. If you are an analyst or investor with additional questions, please follow up with me at (847) 482-5162. Reporters with additional questions can contact Bill Dawson, Executive Director of Global Communications, at (847) 482-5807. Thank you for joining us today.

Thank you. That does conclude today's conference call. Thank you all for joining. You may disconnect at this time.