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Tenneco Inc. (NYSE:TEN)
February 14, 2013 1:30 pm ET
Gregg M. Sherrill - Executive Chairman and Chief Executive Officer
Neal A. Yanos - Head of Clean Air Division
Patrick Guo - Vice President and Managing Director of China Operations
Josep Fornos - Head of Ride Performance Division
Hari N. Nair - Chief Operating Officer and Director
Kenneth R. Trammell - Chief Financial Officer and Executive Vice President
Timothy E. Jackson - Executive Vice President of Technology, Strategy and Business Development
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division
John Murphy - BofA Merrill Lynch, Research Division
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Douglas Karson - BofA Merrill Lynch, Research Division
Joseph Spak - RBC Capital Markets, LLC, Research Division
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Dan Levy - Barclays Capital, Research Division
Gregg M. Sherrill
Good afternoon, everyone, and thanks for joining us here today. I'd like to take credit for bringing the good weather. So somewhat as I came in, the pilot that flew us out here yesterday told us we are going to hit 3 inches last night and I said, I hope he is a better pilot than he is a better weather forecaster. Certainly, it didn't materialize. At any rate, we got a good crew here today with me. We have looked forward to this, an opportunity to kind to do something a little different this year. As you know, we normally give our revenue guidance with the fourth quarter earnings release. Obviously, we split that this year. We wanted to come out and give you guys a little bit more of a chance to hear us, hear from a little bit broader number of the management team and have a little more time to ask questions just about the strategy and revenue. So you could get all your questions on the earnings release out a couple of weeks ago and now we are here to talk about that.
But with me here, and I'm just going to go right down the line, is Neal Yanos, who has been running our North American business for the last several years and, as you saw in the announcement that I think came out on this morning, will now head up our Clean Air division. Next name is Patrick Guo, who runs our China operations, a very dynamic area for us, as you know, and has been going like leaps and bounds and that's the guy all that's been on the head out there for the last few years, he is doing a great job for us there. Josep Fornos, next, he has been running our European business and, with the announcement this morning, of course, is now running our Ride Performance division. We are going to go into that a little bit more. You know Hari Nair, Chief Operating Officer. You know Ken Trammell, Chief Financial Officer, and on the end you also know Tim Jackson, our Chief Technology Officer. So they are all here to participate today. We also got a few others here in the crowd. Well, now you see her, you all know her. We are got Jane Ostrander, Jim Harrington, Brandon Smith and somewhere I think is Bill Dawson. I don't see him here right now but he was with us earlier. We don't quite have you outnumbered but Ken and I tried.
At any rate, let me get into it here and I'm not going to go through the Safe Harbor. But to start with, just a 1-slide business update. Obviously, we just had our earnings release a couple of weeks ago. We talked a little bit about this. Nothing's really changed from a first quarter outlook for us since then. We know it's a pretty challenging quarter, we said that. But from what we see, there is no change to the outlook we gave you. We also kind of said that we do expect even though the first quarter, the first half is looking tough that we do expect revenue growth in 2013 and, of course, where you got our revenue guidance last night and we are going to go through that here in a little while in a little more detail with you.
We do expect global light vehicle production up total in the year about 3%. That's globally where Tenneco's and Tenneco's markets. The key commercial markets are going to, we see, stay relatively weak. Now North America Class 4 through 7 commercial trucks, which is certainly going to be weak in the first quarter. I think power systems research shows them probably being up around 7% for the full year. Our principal customer in that market is Navistar, and they have obviously had some challenging market share issues. They are looking their way through all of that but we see commercial trucks, relatively speaking for Tenneco, being reasonably weak in North America throughout the year.
Off-road remains very weak. I think we all know that. I had mentioned in the earnings call and our report there, that around the world, and it's all both on-road and off-road, it's principally driven by off-road right now, that we are probably operating at around 45% of install capacity, which kind of, on the one side, shows you it's not really good right now. The other side shows you the upside opportunity that's there. I mean that is the capacity our customers have asked us to put in place. And between sales being low due to the macroeconomic conditions that they face, inventory issues they have, and they have been destocking that, production's just been really down, no question about it. But we do see that beginning to improve somewhat later in the year but we are not anticipating this to be a really strong year. Again, exactly as we said in earnings release.
And also, in 2013, we really don't see many new commercial vehicle launches till towards the end of the year. The more significant ones will be Tier 4 final here in North America, which is a 2014 regulations that's later in the year. Stage 4 being Europe, again similar for off-road and it's later in the year, and I think that's Euro-6 for commercial vehicles also in Europe beginning to launch somewhat later in the year.
But we will stay focused on what we can control, just winning new business as we have been very successful at. Our operational performance, which we have been very proud of. 2012 was a very good operating year for us. We want to obviously keep that focus and keep that going. We will stay focused, of course, on SG&A, and I think we have proven we can control that pretty well on our cash flow. And as we announced, we are accelerating some cost reduction efforts in Europe with benefits beginning in 2014 with the cost reduction program that we did announce again just a couple of weeks ago.
Okay, having said that, the reason we are here today is we want to talk to you about our strategic direction, which is not different than what we have really talked to you about before, but we may put in a little bit different light because we have undertaken a project over the last 1.5 years whereby we wanted to really look at a vision that goes beyond the normal 5-year plan that we put together, which we will continue to do. We always look at 5 years out every year, it's really 5 years. You guys actually get our revenue estimates for that. And but what we wanted to take further look out.
And we kind of put a marker out there in 2025. And so what does the world look like kind of a long, our business in 2025, and where do we think the opportunities lie for Tenneco. And how do we continue to generate top quartile returns? How do we define a long-term strategic focus for the business? Is it different from today or not? And really, the key conclusions from that project is that the 2 businesses that we have, emission control and ride control, are absolutely in need of different strategic imperatives.
We have had sort of a 3-pillar strategy all along. We talked to you guys about it many, many times. You know it's technology-driven growth, it was operational excellence, financial stability. We are building on that because that was kind of a "one size fits all" and we applied that to all of our businesses, whether it was Mission or ride, or whatever. And we want to look more focused down the each of those product lines and see exactly how we can optimize the performance of each. And having not done such a bad job so far, we want to be able to really accelerate that approach.
But each of those businesses have separate and natural competitors in of themselves, there are different customer needs, certainly different growth potentials and economic drivers, and that's just resulted in what we will call an evolution to our strategic direction of growth that we pursued for the last 10 or 12 years. So in addition to providing 5-year revenue estimates, today, we want to talk to you a little bit about the evolution of that strategy and we are certainly going to come to that 5 year revenue estimate and talk more about it and give you a chance at the end to certainly have a good Q&A on all of this.
Environmental regulations, pure and simple, define the opportunities for our mission business. I mean, I'm not telling you anything new. We have been out there with that for a long time but when you really look at the macro trends, regulations are expanding beyond the traditional on-road markets, the off-road, we are seeing. We launched those starting a couple of years ago. We will be launching more later this year, the locomotive, the marine -- the marine has both ships that are in waterways, as well as oceangoing vessels, and stationary applications. Literally wherever. There is an internal combustion engine. It's beginning to come under Clean Air-type regulations. And when I say clean air, I'm talking about the category pollutants of particulate matter or carbon monoxide, or NOx, the things that are absolutely proven to be detrimental to the health.
Large regions of the world are experiencing increased standards of living. And as those economies develop, there becomes a higher and higher demand, the societal demand for clean air. The papers have been full of, in recent weeks, the level of pollution that they have now attained in Beijing, which is setting world records, not in a good way. They are off the charts, their air quality index, which I think stops, what, Tim, at like 500. And they have been up at 750 or 800 in the range on certain days in Beijing. The population is getting pretty fed up with it. You know, It's not a unpredictable problem in a very high growth developing area of the world where you begin to industrialize, which is driving the growth. Maybe you are not paying as much attention to the environmental concerns that's generating until they get to a point where people are obviously very concerned about them. China is there in their cities. They are also there in the countryside in many ways.
And so we see that right before our eyes. And we will see it in other areas as well. So it really follows and growth in per capita GDP. So anywhere you see in the world where you are getting these high growth rates, you can almost bet, you can bet, the clean air regulations are going to follow and we are seeing that in China, we will see it in other places of the world as they grow. And that's a norm that is historically pretty well-correlated.
So the results are that there is going to be even further regulatory effort going on in the U.S. and Europe and Japan, which is really the 3 big main regions of the world that are as most advanced today. We are seeing that even beyond 2017. The developing regions are adopting even more stringent standards. They have got them laid out. We will talk a little bit more about enforcement, of course. It's been the big bugaboo, particularly in China. But I would submit to you that they have got to be getting closer and closer as they can see less and less in their cities.
And that the lower-regulated regions are likely now going to accelerate their regulatory change. So really, the regulatory driver is not stopping in 5 years. It goes past 2017 for sure and there are significant opportunities out there in both the existing markets that we play in, which are mainly light and commercial vehicles, and in new markets such as the marine, the locomotive, large platform, stationary, that type of thing.
Obviously, we have had a lot of success so far in the regulated markets. We have got a full suite of diesel technologies, we have been through those with you before. Tim has hosted conferences, we were just at Sur not too long ago, we went through them there again. And that suite of diesel emissions technologies, I give Tim and his team, tremendous credit for because and number of years ago, we brought Tim back from his assignment in China, gave him this job as Chief Technical Officer and said, we have got to get away ahead of this regulatory wave that's coming to get on the bookshelf, technologies that can meet, for our customers, those regulations in time. And the ones that were coming up that we were in time for were primarily those off-road regulations. And you can see what we accomplished with that systematic approach, and it's shown on this chart. We have got an incredible list of customers around the world that we have been launching and will be launching in the future.
We had to build a total systems integration capability, and we are still doing that but we are a long way down that road. We have developed global regulatory expertise, not just U.S. but global. We have had to do that so that we could put the right suite of technologies on that bookshelf. And we have grown our technical centers and manufacturing footprint to support these customers around the world. And that systematic approach has really allowed us to be as successful as we have had -- as we have been and continuing to be as we continue to announce winning new business quite frequently.
So if we turn our attention to ride control, that's the emission control. It is a regulatory driven business and we will show you a little bit later, we think the markets are getting fairly significant out there. Really different fundamentals here. I mean, the growth is going to be determined by vehicle production growth, any market position gains that we can drive, and we think new technologies. Here we kind of show you the light vehicle production trend as we see it going out through 2017. Some modest growth rate but it's there. We are currently a market leader in ride control, we are #1 in original equipment in North America, we are #1 in Europe, we are #2 in South America, globally, we are #1. Josep will talk here in a few minutes. We manufacture over 80 million shocks and struts a year around the world. It's a tremendous manufacturing base that we have out there. Remember, there's 4 per vehicle, right? We manufacture 80 million of those things a year.
We have got a tremendous base to come off of to really drive what we see is a very positive, profitable business and put us in line to begin to look at sort of a separate, strategic focus on this business. I mean, the business is one that's a highly engineered product. We don't talk about it as much as we should, but it's a very highly engineered product and that's in a market with excess capacity, there's no doubt about it, as is a lot of things in the automotive space. And the most successful people have to have, A, a strong cost position in this type of environment. We have to maintain along with that superior cost position, superior functionality and quality or they are not going to buy our product, we feel like we do that. And we have to optimize our manufacturing footprint, which we have started and will continue to do around the world.
Driving cost out of this business and a big part of that cost-reduction effort that we started in Europe is in this side of the business over there. When you start thinking about that 80 million shocks a year, if we can do product design-related things and begin to take cost out, and you can get an average, even a few pennies for shock out, at 80 million a year, there's tremendous leverage there to flow that through right to the bottom line. And we are going to get super focused on that.
Advanced Technology. We have made what I would call a beachhead, a toehold, whatever you want to call it, in Europe with computerized electronic shocks. We continue to grow that business. It's not big, not big today. It's very niche. It's almost, I would say, I have said it before, mainly a German driver business at the moment in many respects. But that's expanding a little bit beyond that, that's a little unfair to say. But we truly believe and we have continued development efforts there. And the picture we show, that thing that looks like a bug is the suspension system that we have won all kinds of awards on for the McLaren Supercar. Not that we can put that on every car in the world, it's quite expensive. But it proves the technology capabilities we have because, believe me, that car is the closest thing probably to a Formula 1 car that's legal on the road today. And it's gotten rave reviews. McLaren is super happy with this. We are already working on the next generation program with this and we know, we have got technologies.
But what we need is a clear strategic focus on how are we going to market these technologies. Certainly downscale from that into a broader mass of vehicles where we can really drive higher revenues. We think there's a growth opportunity that's untapped, and we have had this thought, the product or the beginnings of the product technology. We have got the beginnings of a market out there but heretofore, I'm not sure we have had the right focus to really try to get out there and get after it. And that's what we are going to be doing as we kind of split ourselves into these 2 divisions, with 1 division being waking up everyday of the week, thinking about these types of things. This strategic focus.
Within this group is also our Elastomer business. It's small. Again, we don't talk that much about it but we drive tremendous amount of customer satisfaction with this business. This is the business that you would all know about if it wasn't there, because you would hate your cars. Because it's what keeps them for rattling and squeaking and keeps them firm and all kinds of things that go into the feel that you just can't describe very well. It's not a high revenue business. And much of it is, in fact, a very -- not our business, but much of the market is a very low profitable rubber grommet-type business out there. We don't go for that. We only want to compete there. What we go for us engineered solution, hydroelectric solutions. True solutions that are driving problems that our OE customers have out of their vehicles so the customers are satisfied before they even know they have got a problem. And it really -- I mean, it's a very profitable business. Again, not a high-revenue, very profitable, very successful, a lot of customer satisfaction. Actually helps our other businesses for that very reason.
And also, particularly like ride control, we all know our aftermarket is just a powerhouse of the business. Here, in the United States and North America, it's just tremendous, the Monroe brand is absolutely second to none. We have a wonderful market share. We have got great customer relationships out there. Consumers want our product and we drive a real good profitability, a real good cash flow out of that business. We do so in South America as well, we have done so in Europe. Europe's aftermarket -- and you can talk to any aftermarket company that you can find still in business in Europe, which we happen to be one of them because we are strong enough to be there. That market is decimated right now but it will come back and we are determined and that is also a part of our cost-reduction efforts in Europe that, when it comes back at whatever level it does, it will be as good a business as anywhere else, but it's very much and market-driven issue that we got to get our arms around over there. But clearly, the opportunity is there because you guys can see what it does for us in our North American market, it's similar in South America.
There are other markets out there that we can take that capability to as their carparks grow with the right focus. Think China, still a lot of cars. Still a small carpark that's very young. The thing about the aftermarket wants is a large carpark that's very old. But China's is getting better and it's aging. And we want to see ourselves positioned there and help shape that market as it does grow. And that's what we talked about levering that expertise in the new geographies in this business. In this business, the other key point, as mentioned right at about, is definitely countercyclical. I mean, we saw that in late 2008 and 2009 big time, and the OE businesses around the world were collapsing. And in our aftermarket stayed strong. There's no question, there was a great balance to help in those pretty dark years and it's always going to be countercyclical. And so we think it's very important and we want to keep that focus going there.
So what all that kind of adds up to is instead of sort of a "one size fits all", we have evolved this strategy into what we call the strategic imperatives. You are going to have trouble reading them, because I'm having trouble reading them from here. But I will give them to you. On the Clean Air side, and we are kind of renaming it Clean Air division. And the reason we are doing that is because it best describes what we do. We clean air. We help the world have healthier lives, quite frankly, on that side of the business. And we don't just do it anymore in vehicles. We are now doing it in off-road machines. We are going to move in to locomotives, there's the Marine market, there's the stationary market. And we think Clean Air better describes what that business is all about, light vehicle and commercial vehicles albeit the largest part of it.
Tremendous opportunity still there, but we want to capture because our product technology is the same regardless. It's just adapting and doing the right applications engineering to get it into those markets. So this strategy starts with global regulatory expertise. We have to have that. And we feel like we do. It has to have a foundation or what we call the core sciences of catalysis. I won't get into that. If you want to ask questions about that, I have got Tim with me, alright? But clearly, there are chemical reactions that have to go on in the system with high volumes of air very quickly to actually be an emission control system. And that core science, we are going to have the expertise in. We have got a great deal of it today. We are going to get even better.
Total systems integration again, especially in some of the markets we are moving into. They are not like the light vehicle world where they have got a lot of system integration expertise. They don't always even let you do it. But you get in the marine and some of these markets, they have none. They are going to have to turn that over totally to the supplier. And we want to have everything we need to make sure we capture that market. We are a long way there but we are going to be absolutely focused like a laser on it.
Cost-effective global market solutions. These systems are expensive, and we know that. And for our customers' sake, we have to continue to evolve them in as cost-effective a way as possible to keep them competitive, to keep us competitive. And those solutions are across a wide range of markets, light vehicle, commercial vehicle, and what we kind of call large engine applications. There you can think the locomotive, the marine, or the stationary or the industrial, that sort of thing. That's what we mean by large engine or large platform.
Also, in the Clean Air side of the business you will see China-specific solutions, and Patrick's going to talk a little bit more about that. China's the largest producer of vehicles in the world today. Certainly the largest producer in commercial vehicles today. They are a unique situation whereby they are very much driving a set of unique requirements that are a little bit different than the rest of the world. And if you are going to be a leader in any business like Clean Air, if you are not a leader in China, you are not going to be a global leader because it's that big, it's that big of an impact, and will be even more so in the future. And we have to have technical capabilities that are aimed for solutions for that China market that may be a little different than what the U.S. needs, North America needs, Europe, Japan, et cetera. Because their fuel's a little bit different, you will see that. There are requirements of durability, et cetera, a little bit different, and you got to be competitive within their market which, as I said, is somewhat unique. So we put them in as on their own, some China-specific solutions key to our strategy there.
And in large platform life cycle services, you will hear a little bit more about that a little bit later. But some of these large-engine applications have a very long lives, 35 years up to 50 years. And they are rehab-ed, rebuilt all through that period. In emission control systems, we will have to be as well. And we see the opportunity for almost a new business model within some of these. Be challenging to get there, but if we don't get it in our sights now, systematic approach, we could slip right by it. So we have got that in our strategy.
On the ride performance side, I already mentioned product, cost, leadership. We are going to tackle that one with a laser focus, as I said. It has to come alongside superior functionality, we have that today, we can't give it up as we drive for cost leadership. Advanced Technology, that's these computerized semi-active to more directly active suspension systems that the got a niche in today, how do we drive those into a broader market?
Vehicle dynamics and integrated system expertise. Many of you probably don't know the degree to which we do vehicle development work today. We don't just design shock absorbers. We do a lot of system vehicle work, there's a lot of added engineering into those product lines out there, but without which we really can't be sourced with the business. So we do a lot of tuning, shock absorber valving, balancing it to the vehicles and helping our customers get the right ride that they want to experience with any given vehicle platform. Being this NVH solutions provider -- that acronym is noise vibration and harshness, that's what I talked about a minute ago. Elastomers is critical in that. And of course, the leading aftermarket brands and a leading aftermarket business, not only here in North America, not only in South America but globally.
And we believe our Ride Performance products -- and Ride Performance is the new name of that division because we think it encompasses kind of this thing a little bit better. Obviously leads to smoother, quieter, safer transportation for people.
All that built on a common foundation that you will find is the same as we have always talked about for the most part. Operational excellence, we have to deliver. I mean, we are a manufacturing company. We got to deliver a product, the right cost, right quality, on time, everyday, thousands of places around the world. We cannot give that up and that has to be a part of the common DNA. We may have separated the strategies between Clean Air and Ride Performance, but operational excellence in the systems, in the way we ran our manufacturing plants, in the way we drive quality, in the way we ensure on-time delivery, the way we drive safety performance on and on and on, has got to be common. Because the DNA that doesn't matter whether you walk in as well as the financial strength, that any plant of Tenneco, be it in South America, be it in North America, be it in China, Japan, ride control, emission control and aftermarket, and you know you are in a Tenneco plant even if it's a different product. Because they will talk the same language around operational excellence and financial strength, and we will not give that up.
So as I said, if you believe our organization follows strategy, and I clearly laid out for you that all we have done is evolve this thing, Clean Air is pretty much the thing that it has always been, Ride Performance is the same as it has always been. The strategy still starts with our product technology and Tim Jackson's groups that stay ahead of that curve and design and get us those technologies way upfront. But execution of that strategy, cleanly down through the organization, uninterrupted by a management structure, is what we are now after with the Clean Air division and the Ride Performance division.
So Clean Air, as we announced earlier, led by Neal and Ride by Josep, and they fundamentally have slightly different tasks with those common foundations. And with the Clean Air, environmental regulations are expected impact new and growing market segments. We said all that, and we are going to see increased regulation, not decreased. That is absolutely in my mind pretty much a given.
It requires us to really take our systematic approach into all those markets and be highly focused, and we can continue to winning and even accelerate those wins. And as I said, we think we have been extremely successful here to date. Ride Performance, get really focused on that business. Clean Air has had such a overwhelming growth trajectory that because we kind of had common management within geographic regions of both, I'm not sure Ride Performance has gotten the focus that it needed. It will now. And I'm excited about that division as I am to Clean Air division, because it got a lot of opportunity there. And it requires a systematic approach as well, so we can capitalize on where we stand, capitalize on that 80 million shocks and struts we make every year, and drive a demand for the new technologies.
So that's my introduction. And with that, I'm going to sit down for a few minutes, turn this over to my team. We are going to follow this agenda. Neal will take us a little bit more through Clean Air, Patrick will follow with China, specific, Josep with Ride Performance, Hari will come up and talk about operational excellence and some of the things that still ties our business together completely, Ken is going to talk about financial strength and the new segments that we sort of announced, I think, this morning. And then I will come back and talk about in final the revenue guidance that we released last night. And from that point, it will be turned over to you guys to ask us any questions you may have.
But with that, I'm going to let Neal come up here and begin the Clean Air. Neal?
Neal A. Yanos
Okay. Well, good afternoon. Thanks, Gregg. I'm excited to be up here to talk about Clean Air. I think I have got the best assignment this afternoon. So Clean Air, we are very excited about the opportunities that are ahead of us. We think that we have a very solid track record of identifying growth opportunities and capitalizing on those over the last decade or so. What we look forward, I couldn't be more excited about what the future holds. Gregg showed this chart a little bit earlier. In the total chart, this is the Clean Air portion of that chart. And hopefully, it's a little bit more easy to read. Gregg hit on many of these points, I'm just going to touch on a couple of them.
We have had a great success being the expert on regulations, working with our customers, identifying what the timing is, identifying the trouble spots in those regulations. And then ultimately, helping design the systems so that they can meet those regulations. It's been a great model, a very successful model, and it's going to be a critical part of our strategy going forward.
Foundation in core sciences, again Gregg talked a little bit about this. And while we are very good, we think that we can be even better. And the takeaway from this point is, by having even more knowledge and more basic science, we are going to be able to create more value add with every system that we sell to that end customer. So we think that's an opportunity to sell even more and have even more revenue going forward.
Total system integration is absolutely critical. It's been part of our success and it will be going forward. Patrick is going to talk a little bit about China solutions and then Gregg touched on it but I'm going to have a chart on life cycle services. This is a brand-new opportunity. And again, we think it's an outstanding opportunity for growth.
So if think many of you know the Tenneco story. A decade ago, we were primarily a light vehicle company on the emission control side. We were then able to take that know-how and leverage it into diesel platforms, the diesel pickup trucks, right? So we took our know-how, went into a new market. Since that time, we have taken that same know-how and we have leveraged it into commercial vehicles. Again, taking that technology, bringing it into a brand-new market where we had little or no share. Now we are doing business with companies like Caterpillar, Deere, Scania, Kubota, some of the best companies out there. And so while the growth has been terrific, there's a lot of customers we don't even do business with. So we think we have outstanding global growth opportunities in the commercial vehicle space.
In a similar way, we are now taking another large platforms, locomotive, marine, stationary. regulations are just now coming into plays over the next several years. So once again, we are going to take our technology, our know-how and leverage it into a brand-new market. So again, a great opportunity for growth, that's why we couldn't be more excited about the growth opportunities in Clean Air.
So as I said, we are very excited about the growth opportunities and this chart kind of summarizes why we are so excited. So Gregg mentioned that we took a look at our strategic direction and we worked with an outside consultant and we said, in 2025, what does the market for our products look like? Let's try to scale it. Let's scope how big that opportunity can be. And this chart is really to takeaway of that opportunity. So we are assuming that economies will continue to grow between now and 2025, seems like a pretty safe bet. We are assuming that along with that, that will drive vehicle production growth. And then we are assuming that the march of regulation continues.
So you put all those factors together and the reason we are so excited is that in 2025, we believe the opportunity is 100 billion a year for our markets, for our types of products. Okay? So if you read along the bottom, you can kind of see how that's made up. Right? Light vehicle continues to grow. It accounts for around 50% of that total opportunity. On and off-road, another 30%. So in total, 80% markets where we already participate. In addition, there's another 20% with locomotive, marine and stationary. As I mentioned, these are markets that we are starting to move into. And we believe we have a roadmap of how we are going to be a substantial player in those markets. So this is a snapshot. It's why we are so excited about the future of Tenneco and the future of Clean Air. $100 billion a year of opportunities that's out there in markets that we understand.
And then finally, Gregg talked about this a little bit. This is a brand-new concept that we are putting strategies around and that's the Large Platform Lifecycle business. So in those large engines, locomotive, marine, stationary, those engines, when they are put into service will be in place for 30 to 50 years. So the concept is, we sell one after-treatment system, but then we continue to service them for the next 30, 40 and 50 years. So sell 1 system, but continue to perform service on those multiple times. So another great opportunity as regulations come into place and as we provide our first after-treatment system. And so we think this is an outstanding opportunity that isn't even rolled into that previous chart that I talked about. But again, great opportunity, another reason that we are so excited about the growth of this business.
With that, I will hand it over to Patrick.
Patrick Guo
Okay. Thanks, Neal. I'm very happy to be here to talk about China. You may wonder why I'm here, I'm not one of those big shots in Tenneco. And I why show you why. You have seen this slide. Feel this red color, China's big, big market potential. I'm not sure why it's red, if you would like to associate China with red color but let's don't talk about that.
So I'm here to talk about China regulation. I think many of you want to know that -- if China is really going to enforce the new regulation. It's been delayed twice. It's said it's going to be effective July this year but too many of you have questions. But the short answer is, we don't know because there's no official announcements. But I can share with you there are some information or some trends going on.
Gregg earlier mentioned about all the problems in pollution in Beijing, all the bad press publicity about Beijing. I can tell you because I live there, my family still live there and I have the experience knowing how bad they are. In fact, my kids, they are going to an American school in Beijing. They have just built 2 pollution domes. You may have read this. This was in the Financial Times. Their school -- because the kids couldn't go to the playgrounds to do their PE class. They actually counted, last year, there were 40-some days the air quality was not good enough, so they had to limit the kids' stay in the classroom and cannot do physical exercise.
So they have decided to build 2 big pollution domes. One over their tracking field and one over their 6 tennis courts and they just have this new thing already to be used, as they obviously caused some jealousy from the website. [indiscernible] oh you guys have rich kids, only you guys can afford it. So all this publicity is putting huge pressure on the Chinese government. So they are trying as hard as they can to do something about the pollution control. So that's good news. The bad news is, no matter how hard they try, the infrastructure is not ready. So the low-sulfur fume was not widely available. It's available in Beijing area, Shanghai area and Guangzhou area, but not in the other regions.
Finally, the big oil companies in China under the heavy pressure, committed to make investments, to make the low-sulfur fuel available starting next year in all country. So we see good signs that hopefully, this will be implemented going forward. But we do see that even if the implementation will be effective in July this year, the actual enforcement rate maybe that very long. So we have baked in our plan assumption of 5% to 10% implementation rate this year going higher the next 5 years up to 50% in 5 years. That's what we are assuming.
I'm going to talk about China-specific solutions. You have seen Gregg and Neal both talk about how important China is. And China is huge and it's growing fast. And the market is unique in many ways. I don't want to have to get in to all the details. You have already heard the Chinese customers have different ability [ph] requirements. The simple reason is, in China, the truck owners never sit in the trucks, and the people who drive trucks, who use the trucks are literally blue-collar workers who are just have happy to have a job. So therefore, the quality requirement, the ability [ph] requirement in China is different. And we, our China team, is working to develop our solutions to fit into those markets.
We have had emission control engineering center established 6 years ago in China. It has become one of the best engineering centers in that industry in China. And now we are opening a new large-engine, after-treatment technical center in China. We have already created China-specific solutions that is working for that China market and we are actually getting a lot of inquiries from other emerging markets. We have at least 1 or 2 major international customers who are trying to discuss with us to see if we can use our China solutions, our technology solution to be applied in India and South America. So we see that China-specific solutions will not only help us be much more successful in China but also going to help us in other regions of the world.
So with that, I will turn over to Josep.
Josep Fornos
Thank you, Patrick. Neal, you mentioned how excited you are with your new assignment and I understand that your numbers are very, very nice. But I have to tell you, I'm so excited too with my assignment because I believe in the technology, I like the technology and I trust that there is a growth opportunity there. So I'm going to elaborate on that.
So as Gregg mentioned before, we are the market leader -- sorry, okay. So we are market leader on conventional shocks and struts, and the industry recognize Tenneco for our technology, our right handling capabilities and as well for our ability to engineer noise, vibration, and higher matching [ph] in our Elastomer business. I would like to add to that as well, our leadership in the aftermarket, especially for Ride Control.
Those in the slide, I'm showing the 6 key strategic priorities that we have defined to develop the strategy that we are trying to put in place, to increase our growth, our business and our profitability as well in this segment of the business, in drive performance.
As has been said before, product cost leadership is one of the key strategic initiatives that we are putting. Right now, the customers are claiming that they are reducing the number of platforms, they are economizing platforms, that's true in a away. But at the same time, they are increasing the number of variants within each platform. So at the end of the day, the complexity, those are the views, may be is even increasing. So we have to work with that environment. They do not keep pointing the market this excess capacity. And this excess capacity is driving a very challenging pricing environment.
So the key thing in order to improve our performance is work hard on cost. That's the key thing and that's what we are going to do. Tenneco, as Gregg mentioned before -- we are producing around a little bit more than 80 million conventional shocks and struts, that's combining OE and aftermarket. We are the #1 in terms of the number of shocks and struts. Both in OE and in aftermarket. And with these volumes and with our strategic focus on cost, I have a strong belief that the opportunity in the Ride Control business, in the Ride Performance business will be higher than what we expected.
I'd like very much this one. Another of our key strategic initiatives is advanced technologies. I'm going to show here 4 of our key technologies. On the left side, on the upper left side, we have the CES, the continuous control electronic suspension. This has been in production now for a few years, we have been and we are serving close to 37 models in Europe and we are developing 9 more that will be in production in the next coming year or 2 years. This is an excellent product. The customers have been selling or offering that product as an option today. So our strategy here will be to increase the take rate by convincing the customers that, in some segments, in some type of cars, this should be a standard and it's well combining these new feature for other cars or other cars offering as a package with all options.
So in any case, our strategy here is clearly here to increase the take rate, push for increasing the take rate. This product has still opportunities to growth because we are improving the functionalities and at the same time, we are reducing cost, which is something that the customers appreciate very much.
On the lower side, still on the left side on the lower part, we have our unique digital valve, what we call DRiV. This product is offering a substantial amount of the features that the CES is offering both for handling and driving but at a lower cost. So we see this product as an excellent opportunity to grow and to push forward the electronic suspension into a lower-segment part of the market. On the right side of the slide, we have the most advanced Ride Performance technologies. On the upper side, it's the Kinetic plus CES, what we call H2 CES. This is today in production and using the McLaren MP4. With this technology, we have been awarded by the Vehicle Dynamics magazine as Supplier of the Year. And the experts in the market, they rated us as the best suspension that is in production, excluding what is in racing [ph] but in production. We are very proud of this technology and we expect we are having several customers interested in the technology and we are in a development phase with those.
We, on the lower part, we have as well our, I would say, most sophisticated technology right now that is close to production, is what we have called the actively controlled car or we call internally, ACOCAR. This is an active suspension, complete active suspension. Today, this technology will be scheduled or it is scheduled to be ready for production or ready for -- yes, ready for production by 2016. We have several customers who are interested and we are working on development for those customers. And with use of technologies, Kinetic plus CES and ACOCAR, our reputation in the market as a technology leader has increased significantly and each recognized by the customers and by the industry. So we have a lot of faith that these technologies will help us to grow further.
The last point of my presentation would be the aftermarket. Monroe brand is a well-known brand everywhere in the world. It's a very strong brand and together, we have our expertise in the sales, marketing, distribution. We will try to use that expertise in areas where -- in markets where the high-growth is and I'm talking about China, I'm talking about India and I'm talking about all those BRIC countries where we have a clear opportunity to increase in aftermarket. With all that, I believe that we can have -- bring good performance and we can increase the shareholder's value in the next coming years.
And with that, I'm going to turn out to Hari Nair, that he will cover the operations.
Hari N. Nair
Thanks, Josep, and good afternoon. As excited as we all are about our newly defined product line segments, I think it's important to point out that our foundation of operational excellence remains intact. In fact, there's no change to any of the focus we have maintained the last several years. Most important in this foundation area for us is safety and quality. Safety for us has remained #1 internally as an area of focus and we have done very well, we are very proud of our performance the last several years. We are approaching world-class status and close to benchmark-able levels even from our 2012 performance. Quality, of course, from our customer standpoint, the most important metric for them and there as well, we have done very well and continue to maintain world-class levels. So the focus on operational excellence has remained solid, intact and will continue to remain as we add more focus along product lines and link ourselves even more so globally.
The one area that will evolve as our technology continues to become more sophisticated and our customer requirements more complex will be the area of our strategic supplier partnerships. Our supply base is continuing to evolve as we continue to grow from the current light vehicle focus, more and more towards the more complex commercial vehicle segments, as well as the larger engines going forward, and that will be an area where we continue to invest, remain globally focused and develop stronger and stronger partnerships going forward.
Clearly, Tenneco manufacturing system, which many of you heard about in the past continues to remain a core element. It encompasses really a system that brings all our operations together under a common umbrella that really defines how we operate. We define our standards, we standardize where it make sense. Our plans, as Gregg referenced earlier, are very, very consistent, similar, not only in their look but in how they operate. Philosophically, operational metrics-wise and all the priorities that I mentioned with safety and quality, exactly the same in terms of their key performance indicators. You walk into a plant in Beijing, near São Paulo, South Africa, Australia, Michigan, China, Europe, you will see very similar appearances, very consistent approaches to how we operate.
The other side of technical manufacturing system for us is very much asset focused in terms of leveraging, standardizing and making sure we can deploy our capacities as best as we can, as need shift around the globe. Consistency is very important for us. So how we bend our pipes, how we weld, how we collect our parts together, how we deliver, all very, very consistent across the globe. Still some work to be done, but we continue to remain focused on staying connected through the system.
Not only manufacturing, but business processes are key as well for standardization, and how we connect ourselves globally. So from the standpoint of porting, how we manage our customer relationships, we have single points of contact around the world across our product lines. So emission control. We have single points of reference for each of our customers that act globally, and all the way from customer relationships down to how we launch our products, we remain totally consistent and connected globally. So very important for us, particularly as we continue to deploy our systems like SAP around the world, these processes are what keep us together and keep us connected. So another very important area from an operational excellence standpoint.
And last but perhaps most importantly, from my standpoint, the global footprint, we like to say, is unmatched. Most of our -- some of our competitors come close, but our customers tell us repeatedly that they are very excited to see us being able to supply parts virtually everywhere vehicles are produced, whether they be light vehicle or commercial vehicles. And as the large engine opportunities, marine, and other applications grow, particularly in the Asia region, we are extremely well established. It's also very important to point out these facilities focused on the local supply needs of our customers close to them, but they are also very collected globally. For example -- and we supply parts all around the world when it makes sense to leverage our assets that way.
For example, we supply shocks and struts to Mazda, Japan from Eastern Europe. We supply deep drawn press parts from Eastern Europe and Germany all the way to Mexico and around the world, and we supply most of our converters from South Africa to all around world. So a very well-connected network and a very important asset in how we manage those facilities, as well as our engineering centers. So the Edenkoben center, Grass Lake center for Clean Air, linked to Japan and China, for example, a key strength for our global customers. So very, very important to maintain that strength, and we continue to expand very carefully but certainly, strategically, to make sure we remain close to our customers.
And with that, I'd like to hand it off to Ken Trammell.
Kenneth R. Trammell
Thank you, Hari. So that chart that Gregg showed, that showed our new strategies, the strategic imperatives and the common foundation, including what Hari just talked about, includes our common foundation in terms of our focus on financial strength, and that hasn't changed. Earnings growth and cash flow that translate into EVA are key for us. We think that's the best link that we have been able to prove to growth in shareholder value, and I'm going to spend a few minutes here talking about our balance sheet and what our strategies are there as well.
You have seen this chart before. This chart is a very important chart because it shows the progress that we have made in terms of deleveraging Tenneco over the course of the timeframe since 2000. The nice thing is it's been as a result of both earnings growth and reducing debt through cash flow, as well as the equity deal we did back in 2009. So we really worked both ends to the middle to the point where we achieved in 1.5x a record low net debt to EBITDA leverage ratio at the end of 2012.
Now over that timeframe, when we made that progress, a number of our supplier peers have also been making progress. So actually, our relative position in the supply chain and the supplier peer group hasn't changed all that much even though we have made some very significant progress. Clearly, our goal is to make sure though that we manage the business, we manage the balance sheet in such a manner that we can deal with the cyclical business that we do business in today.
The light vehicle business, certainly as we saw in 2008 and 2009, has some fairly severe cycles, so hopefully not one like that for a while. The commercial vehicle business, as we are seeing even right now as we are watching into that, experienced a significant cycles as well. And some of the businesses that we havetalked with you about today, locomotives, marine and stationery, see very rapid cycles, although the markets are obviously a good bit smaller than the light vehicle market. So our goal is to make sure that we manage the balance sheet such that the next time there is a down cycle like we saw in 2008, 2009, to be sure that we don't have to go back to the banks to seek an amendment, that we are not asking for permission to keep operating.
So given that, and then taking a look at how we want to manage the business, we have determined that operating between a leverage ratio of 1x, so that's an operating target today, and that 3.5x covenant, that gives us the room to deal with the cyclicality that we see in the business from all those things that I just walked you through. That then takes us to the next slide, which is how we are going to spend our cash flow.
First of all, organic growth obviously is #1 for us. You have heard us talk about a lot of opportunities today. We have talked about opportunities for quite a while. We have got a lot of opportunities into our book of business. All the commercial vehicle business that Gregg showed you the slide on earlier, is now on our book of business. We are waiting for the market to come back. But that's a great opportunity for us. The opportunities that we see in locomotive, marine, stationary, as well as the geographic growth opportunities on the Clean Air side of our business, and then the right performance side, when we talk about opportunities for greater adoption of those technologies that Josep walked you through are all important growth drivers. We think that is our #1 opportunity to continue to drive shareholder value. So we will continue to fund that. Obviously, that's the first thing we are going to do. That should remain in the same zone that we have seen in the past in terms of the investments required from a CapEx and a working capital standpoint.
Our second priority, this is new to the slide, that as of today, and we did talked to you in the fourth quarter call about our European cost reduction plans. We told you that we expected to incur expenses in the neighborhood of $120 million over the next couple of years in order to drive the savings that we talked about, the $60 million annualized in 2016. We also said, in an answer to a question, we thought that at least 75% of those expenses would be cash expenses. So obviously, we think there is a great opportunity to drive value from that piece of the business, and we are going to make that a priority in terms of using our cash flow.
Third priority is really continuing to look at the balance sheet. I have talked about work we need to do on the balance sheet. I think that 1x leverage target that I talked about 1 minute ago better defines what we think the target is on the balance sheet rather than the 2x mid-cycle we have talked about in the past. And so we will continue to focus on the balance sheet to manage the business toward that 1x that we have talked about. The important thing to note here is back in the first quarter of last year, 2012, we did a very good refinancing that gave us a lot of financial flexibility to continue to pay down debt without reducing our liquidity. It will continue to use that as our primary opportunity to work on the balance sheet.
Number 4 on our list is strategic opportunities. We have talked a lot today about things like core sciences foundation, growing our knowledge base there. There may be an opportunity for us to add to that through some sort of an acquisition at some point in the future. You have seen us in the past add to our technology. That really is right in the middle of one of our strategies in terms of providing full systems to our customers, on liquid Urea SCR, the dosing and injection technology we bought a number of years ago. And we will also continue to look at customer and geographic growth opportunities. I do want to emphasize, I'm talking about the things that are right in the middle of the fairway for the strategies that we have talked about today. You can see we have got a lot of growth opportunity. We don't think we need to add something else to do business in order to make it grow.
And that takes us to the capital returns to shareholders. We have started something more than we have done in the past. Over the last couple of years, we bought back $34 million in shares, it's about 1 million shares, in order to offset the growth in dilution from employee ownership plans. We will continue to do that. In fact, we announced another 550,000 share authorization earlier this year in order to continue to offset that growth. As we get to that 1x target leverage, that gives us then the opportunity to consider further returns to shareholders. We are talking about dividends or share buybacks, can't commit to what it may be, but maybe some combination of the 2. But once we get to that point, I think that opens up a lot more options for us as well in terms of how we use our free cash flow.
Okay. So that's a lot about the balance sheet. I just want to spend 1 slide on the information that we put out this morning. As a result of what we have just walked you through, the change in the strategy, the change in the organizational alignment, the way we used to measure and manage the business, which was a geographic basis, has changed. Its primary focus now is on the product side, like Gregg's talked about, the Clean Air, and the Ride Performance side. So we are going to change our operating segment reporting. You will see Clean Air. You will see the North American results, the European, South American and Indian results, and the Asia Pacific results. And then you will see those same 3 geographies for Ride Performance.
We included as an attachment to the press release that we put out this morning a number of pages of lots of data, which hopefully, will help you walk through and understand what that is. That's 2010 full year, 2011 full year and 2012 by quarter, is to what that segment reporting would look like.
Also, I do want to point out that we have changed the way we are going to evaluate its segment 2 as it relates certain corporate costs, and we are going to evaluate that before the corporate costs. So you will see that listed in an Other column in the attachment that we put out this morning. Those corporate costs include some overhead but also stock index compensation. So that stays out of the results that you see from an operating segment standpoint.
Linae's ready to answer all the questions. I'm sure her phone will be burning up over the next couple of weeks. With that, I want to turn it back to Gregg.
Gregg M. Sherrill
Okay. Thank you, Ken and everyone. Last night, we put out a release on our revenue guidance. And I'm just going to kind of reiterate it here very quickly because you have all had time to look at it and we want to get into any questions that you might have here today.
But we gave -- you have seen the chart before, very similar-looking chart to what we have provided in the past, 5-year guidance. 2013 and 2014, while we would normally have given you sort of a specific target, and I think we said it pretty clearly in the release last night, there is a level of uncertainty, macroeconomic uncertainty out there, particularly driving big equipment expenditures, are people going to invest more in infrastructure, are they not, where is the world going in that. Europe is still very much a concern on everyone's mind, and for us, Patrick talked about as clearly as we know how, the uncertainty over just exactly how China may or may not ramp up some this year, perhaps next year. But clearly, the pressures are really coming to bear on them to begin ramping up. So we have ranged our revenue simply because of those factors that are beyond our control in '13 and '14.
And what I just want to kind of tell you, and I'm not going to say a lot that I didn't say in the release, when I look at 2013, all throughout the year, we are going to see some light vehicle growth in North America. It should in South America. It should in China. Europe is going to be down. It will be down, we know that, unless there's some miracle turnaround that goes on over there, and I wouldn't expect that. So we got some headwinds. We also got some positive tailwinds coming somewhat later in the year because not all those regions are, in fact, up in the first quarter, as we said. But North America, China, South America should provide some tailwind for us in light vehicles. Europe will be something of a headwind.
On the commercial vehicle side, we are not really not anticipating a great deal of improvement through the year. Most of our commercial vehicle revenues do come in those off-road equipment things, and we just got to wait and see, is that going to turn around or not. We know it's down now. And you have seen a lot of our customers talk about uncertainty out there, so it's difficult for us to be more certain than a customer who's got to buy this stuff from us. So we provided a range that we feel comfortable with based on what we know today.
I will say 2013, and I think I alluded to this in the earnings call as well, for me, is a relatively quiet year for us in commercial vehicle launches just because of the timing of the regulations. We have kind of gotten all of that Tier 4 interim and stage, whatever it is, 3B, interim, I will call it, Tim, will correct me here in a few minutes, but you know what I'm talking about in Europe, kind of in place and it is running at the volumes it is running at, which is pretty depressed right now, because as Ken said, we have launched into pretty much a recession there again. But we don't see that turning around a great deal unless there is some factor out there that begins to give it some momentum later in the year. And maybe there will be some momentum. But again, it's too hard for us to say.
So basically, what we are saying, 2013, we don't really have launch activity, coming on stream until the very end of the year. So it won't have a great deal of impact on our revenues because it will come fairly late in the year as we start ramping up the Tier 4 finals, et cetera. So it's going to be pretty dependent on the macroeconomic factors, simply what volume is going to be out there. We are going to need a range of estimates as we see it, 0.9 to 1.1 on the commercial, 5.5 to 5.7 on the light, adding up to a total OE range of 6.4 to 6.8 in 2013. And it's pretty macro driven now. It will be volume driven.
2014 is a different story because we really start coming back into significant launches with Tier 4 final in the Stage 3B -- I really get those all confused -- in Europe, final, if you will. Beginning the launching at the end of this year but coming on again into whatever volume scenario we find ourselves in 2014, but there is a nice content pickup for Tenneco in 2014, which should drive again another good year of revenue growth. And if the economies continue to improve, that could be quite nice for us because we are launched, we are there, the content is what we told you it would be, it's coming online again, the next round, when you told -- when we told you it would be. And again, it's purely a micro concern now, is to what volume levels at.
But 2014, we see the commercial picking up somewhere between 1.3 and 1.6; the light, 5.9 to 6.1, adding up to the 7.2, 7.7. And then we are looking at the ongoing sort of regulatory coming in, going out through, I won't talk in detail about those today, '15, '16 and '17, and a little more modest, probably, growth than what we have had in the past. I'd be the first to admit, we have not been the best macroeconomic forecasters in the world, which probably puts us in the middle of the pack lately because I'm not sure who has been. But we have got a little more conservative there just because we see maybe a little bit longer, as the world still climbs out of, what was a very severe financial-driven recession. Historically, those do take a while to dig out of. There is a lot of leverage that has to be worked out of the total system before true growth picks back up, and we are certainly likely not going to see that for several more years in Europe in particular. But nevertheless, we are very -- we are still feel very, very good.
We are probably standing here today regardless of the macro situation, and I'd be honest with you, feels a little bit -- Hari and I talked about it, we are down to feeling now, right, that Europe may be bottoming somewhat, particularly in the aftermarket. That will be a good thing, we said that, or maybe a little bit downside but we don't see it continuing those dives that it has taken severely as it has. There is probably a little bit more downside, as we said, this year on OE because we are now seeing the entirety of the eurozone slowing down, the northern country slowing somewhat as well, and they could never really escape that. That should be no surprise to anyone that understands those economies over there.
So nevertheless, in this 5-year timeframe, certainly a recovery period coming on, just maybe a little bit slower than what we had originally thought but still a very good growth rate. We are still looking at a double-digit CAGR of 10% to 12% with sort of a production forecast growth of around 5% through those years. And I think I just will mention one other thing. Everything else is on the appendix. But the exchange rate -- the most critical exchange rate for us, of course, is the euro, was 1.27, which is the same that we used last year in the chart as well. So there's no real effect there.
We have mapped out for you the more significant regulations, and when they come in, are phased in down below the chart, in line with the years, and that pretty much is it. We feel pretty good about it. We are going to have a tough first half, as I think everybody is, but we are on line to kind of deliver as we said we would in the last earnings release. And we should see a little pickup in the back half of the year, that's the anticipation now, and meet this revenue forecast in 2013. But as I said, it will depend somewhat macro on how things do recover. Recovery got a little bit faster. We don't know. China could come one faster than everybody's thinking. We don't know. But -- so there's this upside as well depending on how those things work themselves out.
Just some quick summary. I want to say about everything you have heard here today. We have been extremely successful. That chart is reflective of that. I have said before, that growth is a force that's coming. It is volume dependent. We are launched in a great many of those. We are launching right on plan, others later this year, that generate the content. And what we are simply looking for now is the volume that gets us there. Economy cycle, they have been down. They will cycle back up. And when they do, we are in a great position to ride that growth. What we then did and what we rolled out for you today is really, we want to know, can we sustain this sort of thing beyond these charts that we show you guys every year. And we are not ready to pull a forecast from what we showed you today, but we wanted to know that our eye is out there so that we are continuing to build strategies to position us because we can't just wait on things to happen, to be prepared to attack those markets and have the opportunity to achieve that growth, that market of $100 billion that Neal showed you.
Today, I think that same market is about $30 billion to $35 billion, all right? There's not anything that's on the commercial side that would be there by 2025. That was a 2025 estimate, if you will. And let's say it's off by -- think it will be off by 15%. It's a huge market, right? But that market today is around $30 billion to $35 billion, and there's nothing to the right of commercial vehicles in the way of market today because they are not regulated yet. But we know when they are becoming regulated, talking locomotive markets, talking marine markets, talking stationary markets, everything we kind of showed you out on the right-hand side there. And we want to be prepared.
So we really feel good about the steps we are taking to continue the performance of Tenneco, clearly kind of dividing ourselves, not that we have always -- the strategy in and of itself does not change that much. There's a way now of focusing and deploying that strategy down each distinct product line and really providing focus. I'm big on that. If you want to talk about focus, I can spend hours with you on it. It's so critical. Each of the businesses we have has a unique and critical mission. It definitely takes this distinct strategy so we can, down the road, optimize the performance of the company in our mind. And we are going to focus on that. We have aligned organizationally along that. In that way, we are going to be able to really prioritize our investments in areas that are going to support successful execution on these strategies.
So we feel really good here today. It's all the reason we brought you together, the reason we brought everybody out here in New York. We are excited, and we are very happy now to entertain your questions. So let's hand to our first -- and by the way, we are being webcast. So we are going to bring a microphone to you, ask you to use that so those on the -- online can hear.
Question-and-Answer Session
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
It's Peter Nesvold from Jeffries. So Gregg, I think historically, you have always talked about the 2 divisions being separate businesses or different businesses. Now it sounds like you are describing them as separate and distinct. In addition to the enhanced financial disclosure and sort of aligned management, is there some kind of change in your view about whether these 2 sides should be together long term?
Gregg M. Sherrill
Not really. Not right now. I mean, they are part of the DNA of Tenneco. And both bring today very powerful pieces to Tenneco. On the one side, it's all the growth, on the Clean Air side, profitable growth. On the other side, and probably the most profitable thing coming today, not only as the large amount of customer service we do at 80 million sharp, but an aftermarket that's countercyclical. And we see them both fitting into our strategy as we stand here today. What we simply see is we need a -- there's this cleaner line of focus right down through the organization on the distinct strategies, and that's really what we have done. By the way, I can tell you this, underneath these top executives that we've announced to align that strategy, the business units that actually execute day in and day out haven't changed. Their leadership hasn't changed. Teams haven't changed. Functional groups haven't changed. I mean, what we are doing is making sure that the operational capability each one of those business units brings us today still does it 5 years from now and 10 years from now because we have got a clear line of where we are going down through there. So it's more of a strategic focus operationally. What we got to do to deliver this quarter or next quarter or this year, we don't mess with those teams, nor did we even mess with the leadership. We actually messed with 1 leader, and that was because we had an open position and we filled it. But other than that, all stayed the same. So we feel good that it's not -- it's a clear step to provide the focus we want, so we can keep this going like you see on the screen. It's not something that unband to the company and causes a lot of angst down in the ramps and that sort of thing or like what is my job tomorrow because your job is the same as it is today, absolutely no different. So we feel good about taking the step that we are taking but not going any further with it. It's just clear to us that we wanted to align ourselves strategically along those product lines. Quite frankly, we will bring up the focus on the right performance like what we did on this, by doing this. Focus is on the Clean Air side because of that revenue trajectory that we were on and the huge number of launches we have. And like I said, I will be happy to talk about focus all day long. It's so critical. All the way to the back, and then I will just start working my way around.
Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division
Brett Hoselton, KeyBanc. I wanted to ask you about Slide 16, the post-OE revenue. And the first question, I was hoping you could kind of give us a sense on this. What is that? I mean, are we basically taking a diesel particulate filter and swapping it out with a fresh one after the...
Gregg M. Sherrill
I'm not going to try to back up. You guys have your books. It will take me forever to back up. Slide 16 is the life cycle services business slide, right?
Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division
Yes, exactly.
Gregg M. Sherrill
What we look at there is not just parts. It's service as well. In other words, some of these things were actually refurbished. And all we are seeing there is, in this business, we should take a look at it upfront, not from an aftermarket sense like we do today where out there somewhere after a 1-year part sales and we sell you one. But we know these are going to have scheduled service intervals. Should we be involved in that? Probably the minimum we would sell parts into it. But should we be into it more formally, in a service contract along those service intervals? Or should we not? I mean, it's something we want to take a serious look at. Because some of these businesses, they are going to be very cyclical, they are very low volume compared to what we're used to, and these type of business could provide a little bit more constant stream of revenue out there in those markets we would see. That, by the way, you have to understand, I want to be very clear about it, that's given you a real visionary look, if you will, because let's say the marine industry begins to be regulated -- what, Tim, in 2016 or '17, something like that?
Timothy E. Jackson
Gregg M. Sherrill
So you install the first system there. And I don't know how many years later in the service it needs to be serviced, but you have just got 1 or 2 boats out there. It takes a long time to develop. That is a business to grow into the chart. We wanted to show you, that's the kind of visionary thing we wanted so because if we are interested in that, we got to start upfront, to have flow of revenues even 10 and 15 years later from a business like that, all right? But it's not going to -- you won't see that in any forecast in a 5-year plan for a while, okay?
John Murphy - BofA Merrill Lynch, Research Division
John Murphy from Bank of America Merril Lynch. First question for you, Hari. You have mentioned something about your supply base evolving as you are getting into larger format projects or products. Does that mean you need to work with your current supply base and pull them along from the light vehicle side or the commercial vehicle side? Or do you have to go to a new supply base? Or do you start allocating capital and further integrating more over time? I'm just trying to understand what you really meant there.
Hari N. Nair
Yes. It's really all of the above. Obviously, our current supply base, we have got to continue those links, develop them, optimize them, develop more low-cost turnkey solutions, et cetera, et cetera. That's well underway. What we are really talking about is an evolution towards suppliers that are, in most cases, new to us. We are talking about components that are much more complex, much higher precision, much tighter tolerances in product segments that are also somewhat new to us as we add the aftertreatment systems solutions to our portfolio. So there's a lot more to the supply base than what we are traditionally used to. So filters [ph], orifice plates, controllers, ECUs, et cetera, et cetera. As we move more and more towards mechatronics, our supply base starts to expand in a very different way than what we used to. And that requires much deeper engineering involvement upfront. It involves a lot of volume commitments, et cetera, which is natural. But the entire integration approach is quite different than, say, buying quails of steel because their engineers, our engineers need to work together along with, in some cases, customers' engineers to make sure we have got the right package.
John Murphy - BofA Merrill Lynch, Research Division
And with that complexity, do you think you can get adequate returns or returns that are...
Timothy E. Jackson
Absolutely, well, that comes upfront. I mean, we are not into those projects unless we determine they bring more than adequate returns. In fact, superior returns is our goal. So we begin with that, we quote on that basis. We secure the business. And as we are securing it and developing it, we develop the supply base.
John Murphy - BofA Merrill Lynch, Research Division
Okay. Just one second question, Josep, you have mentioned something about on the ride control side, even though you were getting -- there's more and more accommodation of platforms going on at the automaker level. You are still seeing a high level of complexity on the ride control side, that really kind of flies in the face of what we are hearing from a lot other suppliers and particularly from the automakers as if they are saying they are coming back [ph] in their platforms and saving costs by doing that. I'm just curious, what is going on there? Is there something on the ride control side that's unique where there's a lot of SKUs or products that are -- technologies that are coming in? Because it's very different from what we are hearing from a lot of other folks in the industry.
Josep Fornos
No. It's not that -- excuse me if I [indiscernible]. I think you are seeing -- generally a lot of components in the car industry is complexity. And in the ride control, if we talk about conventionals, the difference between 2 SKUs to part numbers is a combination of components that you put inside. Most of the components are common. So if you talk about the valves, I mean, the number of spring bridges that you might have is different because you have to tune bridges' specific obligation. And bridge, when in each model [indiscernible] of the car. But it's basically the same components with different combinations. But the other case is more SKUs, yes.
Gregg M. Sherrill
And one thing with ride control. You may have a common platform in the variance that affect us, or things like a performance spinoff for that, sport, you see it, the auction, right? And they change the ride. And you may look at the shock. As Josep said, it's the exact same one, but we have to adjust the valving inside of it, the tuning of the thing. And that now is a different part number for us. It's also added engineering work.
Hari N. Nair
But if I could just add to that, John, I think the distinction that Josep was making and it's really important to our strategy is that we are really focusing in different ways on those 2 segments of what we call are conventional and what we call are advanced technology. So your point is absolutely valid for the conventional, which is where we have got to focus on cost, simplicity, standardization, et cetera, et cetera, and make sure we are absolutely cost competitive. But there is another side of the business where we are doing quite well, but we see a much broader application potentially. And that's not mass market yet, but our objective is to make sure the market broadens. So it's really very different segments we are looking at.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Chris Ceraso with Crédit Suisse. A few things. First, the ride control business, could you give us some examples of where you think you are going to find these pennies per shock, cost savings, maybe why you haven't done it before? And then I'm not exactly clear on whether or not this is something when you find these savings, if it's going to make its with the bottom line, or is it in response to price pressure that you are seeing in the industry? You mentioned overcapacity and pricing pressure. So is this just a reactive action for you in ride control? Or is it proactive, and we are going to see improved profitability in ride control?
Gregg M. Sherrill
Well, I'm going to say right upfront, it's proactive. You guys can talk a little bit about the pennies for shock because this gets in the -- Hari was just talking about on harmonizing components so that we can cascade it across 80 million shocks. We have always worked on cost. But Hari, you just might, or Josep, elaborate.
Hari N. Nair
It's proactive. Definitely, it's proactive. Because if you want to win business, you need to be competitive in the market, no doubt. It's not new. We have been doing cost improvements since many, many years ago. The focus now will be more on leaning out the designs. I mean, we have been doing a lot of efforts on manufacturing footprint optimization, supplier cost optimization. This will continue, no doubt, but we are going to increase the effort on leaning out the designs.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Okay. Second question is about Navistar, a big customer for you, is going to be using Cummins for some engine applications, does that create any risk for your position because Cummins is also a competitor for you?
Gregg M. Sherrill
Yes, it does. I will be perfectly honest with you. We don't know exactly where Navistar is going. They have not made any formal decisions on the medium-duty vehicles. But obviously, they had to switch their strategy overnight. I mean, that's quite public, I think, from the high EGR to an SCR. They needed engines they went to Cummins, right? Cummins does provide aftertreatment systems. So we will see where that goes. I will say this, regardless of where it goes, the guidance I gave you today is still good, all right? Navistar represents, and Ken, correct me if I'm wrong, on emission control side, on total revenue, roughly, $100 million. But it is very unique because they took a unique strategy, and it represents only about $30 million to $35 million of value-add revenue. The rest is all pass-through because they had a really low -- the flat number to go with that high EGR strategy. So it is our highest pass-through, I would say, in the world by a long shot. So the total line doesn't tell you anything about our Navistar business, all right? It's $30 million to $35 million on a value-add basis. And we will see where -- they have been a good customer of ours. We are more than happy to continue to supply that. We are more than happy to work with Cummins. But yes, it's a risk as Cummins does tend to use our own in-house, right? Clearly.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
That's really helpful. Just one last thing for Ken. The range on what leverage level are you comfortable at 1 turn to 3.5 turns? Just to make sure that I understood you correctly, it sounds like the objective is to get to 1, and then from there, contemplate further returns to shareholders. It's not that you are planning to add leverage to free up capital to buy back stock, is that right?
Kenneth R. Trammell
You have got that exactly right, Chris. Yes, adding leverage would be something that doesn't fit with the culture of the company, so absolutely. The goal is that once we are at 1x, that gives us kind of open ups -- opens up the opportunity, if you will, for further returns. But not anything today.
Gregg M. Sherrill
Let's go over here, and then we'll come back, I think, a couple on the back of the room back here.
Unknown Analyst
I guess following up on the Navistar question, maybe you can tell us a little bit about the risk to -- on highway in general. For instance, you have some revenue in Brazil that's a subsidiary of Navistar. Is that something that down the road, I mean, obviously, it's fine for the current cycle, but is in danger of being resourced? And second to that, more on the opportunities side, clearly, you go back to plug and play as you are gaining a lot of share in off-highway. And I don't know if this is more of a question for Neal or for Tim, but can you tell us a little bit about who you are gaining share from, who are these incumbents that don't have the scale and the technology that you are displacing?
Neal A. Yanos
Well, let me just start the on-road question out. I see Navistar is bringing a unique thing altogether, and not in any way, connected to any other on-road concern. I mean, we are launching business in Europe on-road later this year, correct? We have just launched in South America. China is almost exclusively on-road commercial stuff. And we are pursuing others right now and heavy into working with them. And I think you are just talking about a clear -- very unique situation there. And I don't know what more to say about. But you have -- there was further parts to the question.
Gregg M. Sherrill
Yes. And Pat, specifically as it relates to MWM, which I think you are question was on that as well. It's different engine, different regulations were designed in that we are in production that we don't see any threat to that at all.
Neal A. Yanos
And then second question was who the market share in the off-road commercial vehicle is coming from. I want to point out that the off-road commercial vehicle just wasn't regulated. So there was no aftertreatment. It's not that we are taking away form somebody. It's that we are winning because they are turning to our technology is the best way to meet the regulation.
Unknown Analyst
Kenneth R. Trammell
In fact, some of our customers did their own exhaust systems because there was a pipe and a muffler.
Douglas Karson - BofA Merrill Lynch, Research Division
Doug Karson, Bank of America Merrill Lynch. There was a slide earlier about China, and I was wondering if you can expand on some of the capabilities in China production facilities, what type of growth, what type of markets you may be expanding in China given that's one of the fastest-growing markets in the world?
Kenneth R. Trammell
Yes. I mean, we are putting in as much production capability in China as we have anywhere in the world. Patrick may want to elaborate on that. And technical capability, by the way. He showed you a picture of what's going to be a wholly-owned and very expanded target of primarily a commercial vehicle segment, engineering center, that will be in place relatively soon, already operating just not in that facility, if you will. But you may want to talk a little bit more about the various capabilities we have in production and manufacturing in China.
Patrick Guo
Yes. In China, recently, we have been growing with the markets, mainly with light vehicle. In the commercial vehicle, the traditional commercial vehicle, the muffler business, was a very, very low TAC [ph], and we are not in that. With the new regulation coming on, we are getting ready for that. So we have been building up capacity. We are probably adding plants every year because our light vehicle, our customers going everywhere in China, they are expanding. So we have been adding capacity with that. And we are using our existing capacity for the coming commercial vehicle. We are being very careful not to add too many facilities, and so we are utilizing our current facility. And because at this point, it is pretty much covering all China, and we anticipate most of the future commercial vehicle business we can cover with our existing plants, with one exception. We are building the new large engine tech center, and nearby, we are prepared to build the plant for that.
Hari N. Nair
I will include the fact that, that large engine center has our biggest dynamometer in the world. It actually takes a slap to engines of about 8,000 horsepower, and along with that, we have got complete emissions measurement equipment so that we can actually run the certification cycles required by the International Maritime Organization.
Gregg M. Sherrill
That brings us to an interesting point. I don't think it has come out. Most of the big marine construction going on in the world today is in Asia. I mean, so we will be heavily focused there on that.
Joseph Spak - RBC Capital Markets, LLC, Research Division
Joe Spak, RBC Capital Markets. You mentioned the market today is about $30 billion to $35 billion, and clearly, you probably have about $800 million of that now. So it suggests that obviously, a lot of the legacy emission that you don't play with. Can you talk a bit more about the competitive position on the newer technology or the value-add technology, how you see share playing out there? And also assess the risks since this is becoming quite a large market, that some of the engine manufacturers attempt to do this again more in-house.
Gregg M. Sherrill
Yes. Tim, you have probably been as close to that as anyone.
Timothy E. Jackson
Yes. Well, clearly, you have heard about the system integration, and when we use that word at Tenneco, it means not only being able to supply the type of components that you traditionally think about when you think Tenneco and Clean Air such as particulate filters and SCR catalysts and all the [indiscernible] and connecting pipes. We have moved clearly into injection systems, including the fact that we can go all the way from a urea tank through the pumps lines, connectors, filters, electronic control, where we not only supply ECUs that are manufactured to a Tenneco specification, but in fact, we write the software, not only for the control of the systems, but also the onboard diagnostics requirements. And so when we look to the engine manufacturers and to directly address your question, particularly in Asia, what we are hearing is that they will go to a company where they can get that one-stop shopping. They don't want to go to an electronics expert and a fluids expert and a traditional aftertreatment supplier and then have to try to figure out how to make those 3 pieces shake hands and then work together. They want a company like Tenneco that can clearly do that. And in fact, what we are hearing from our customers in Western markets is that they would like companies like Tenneco to take the next step and actually move up to the point where, just like we described here in marine market, we have got actual certification equipment and we can actually partner with them and help them through that emission certification process, which is becoming increasingly complex and increasingly expensive for them to do and if we can leverage that type of investment across the broad group of customers, like you saw on our commercial vehicle chart, we arguably can do that more cost effectively than they can do it on their own. So while the trends we are hearing are clearly in support of becoming more of a full system integration company, and that's why this foundation of the core sciences becomes increasingly important going forward.
Gregg M. Sherrill
And I think the second part of this question, if it's not, I'm going to throw it out there anyways, was, are there other -- if we didn't go there, who would be the competitors or who is the competitor in that space?
Timothy E. Jackson
Yes. I mean, clearly, we talked about the Cummins emissions solution. Of course, Cummins is an engine company. They do participate not only in the [indiscernible] spaces, but they are big in stationary power and marine power. So that certainly is a company that we work on and benchmark ourselves against. Interestingly, companies like Bosch are working at this entire space and so, hey, maybe, they need to have more of a full systems integration capability rather than just approaching that from the fuel and electronics end. And frankly, what's surprising to me is that a lot of our legacy competitors or traditional competitors have not made a decision to move into this direction. So clearly, the [indiscernible] of the industry is more limited in terms of companies that truly have this full integration capability.
Joseph Spak - RBC Capital Markets, LLC, Research Division
And one more question on -- in the past, you talked about some structural differences in term of profitability by region. Now that we have gotten pages and pages of more data, and specifically in Clean Air, as the incremental opportunity is, it seems, more off-road and more commercial vehicle, and you look in 2012, the value-added margins are 5% in Europe versus 13%-plus in North America, can that gap close and can it actually get up to that North American level over time?
Gregg M. Sherrill
I have addressed that a number of times, so I'm going to jump in real quick. You have got to look at various businesses. Let's take light vehicles. Still the bulk of our business around the world, right? My goal is to have -- and we pretty well achieve it, I think. Similar profitability on light platforms. So a C class vehicle in Europe ought to be similar in profitability as C class in North America. It's fundamentally mixed. We have a lot of large pickup business here. We have got electric cars here. Much retro mix, if you will. That will always be used -- they don't have that in Europe. Our pickup truck sales, you don't have as many of the large luxury sales. It's just a whole shifted segment mix, if you will. So on the aggregate, you would see a little bit -- or you will see lower margins in Europe. But like platform for like platform, you have got similar profitability. So like platform for like platform in commercial should be similar. Europe right now is definitely getting hit by this underutilization, if you are looking at our actual numbers of capacity. I would say that's one of the biggest factors in our European numbers right now, not only in commercial vehicles. But obviously, we are underutilized in light vehicles there as well because of the low levels of production but -- and the difficulty in Europe and actually, shedding. And it's more fixed cost there than there is in other regions. But I don't know if that completely gets to your question, but there are some differences, and the biggest thing is that segment mix that makes the 2 different. Where are we at?
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Rich Kwas, Wells Fargo Securities. This is maybe a question for Gregg or Tim. If you look at the substrate sales here longer term, it looks like they kind of stabilize at 28%. That's down from what you had last year on the longer-term outlook. Does that reflect a change in mix of the vehicles produced? Or is that some of the technology that I think you went through a couple of years ago at Grass Lake where that was more value-add oriented?
Gregg M. Sherrill
Ken, do you want to start? Maybe Tim?
Kenneth R. Trammell
Yes. Actually, Rich, the biggest driver right now is that precious metals prices are not as high as they were in the past. There are some other stuff in there as well. There's a little bit of mix and a little bit of technology differences. But that's the biggest change year-over-year.
Richard M. Kwas - Wells Fargo Securities, LLC, Research Division
Okay. And then what's been the progress of some of those technologies that you showed, I think, back in 2010 with -- that are more value add that should add to the value?
Timothy E. Jackson
Yes. Probably one of the best examples is HC LNC, we showed you that as an alternative to normal urea-based SCR. That has eluded [ph] itself. In South America, we currently have 2 different customers under development that have taken it to the point where they have actually got trucks on the road and they had a revenue service doing fleet testing. And again, the results of that look very encouraging or very hopeful that, that can lead to a production contract in the near future. Some of the other technologies we talked about were from the management technologies. And certainly, we have seen a very significant expansion of our fabricated manifold business. And again, the concept of fabricated manifolds and air gap pipe to get more heat to the catalyst more quickly. In some cases, that allows you to free up the amount of precious metal. And again, well, I think we have seen a nice move forward on those types of technologies.
Gregg M. Sherrill
Okay. I have gone 10 minutes over my allotted time. I can get one more question then back here, I think, and Linae will obviously be available for additional questions.
Dan Levy - Barclays Capital, Research Division
Dan Levy, Barclays. I believe your prior guidance for CV in '14 was 25 to 29, so down about $1.2 billion to the midpoint. Can you just walk us through -- if you could just break that up between was that driven by FX, if there's anything from market share, lower macro, break that up.
Gregg M. Sherrill
It's all volume, Dan. Exchange rate even affects it at all.
Josep Fornos
Yes. The currency exchange rates are the same. So there's no currency. We certainly haven't lost any share. It's just all the volume differences. Right now, we are in -- obviously, there's downcycle for commercial vehicle production, and it's going to take a while for it to come back.
Gregg M. Sherrill
And I say volume is the macro-driven piece of it. We have seen no shift in content programs for customers. All the same. All right. I mean, we are just now -- like I said upfront, I was not a good macroeconomic forecaster, I'm not sure -- it probably puts me in the middle of the pack of all you guys as well, but that's it. We are trying to be a little more conservative there. We do think -- I mean, there is still -- we are living in a post deep financial recession world, and there's a lot of digging out that's still going on, particularly in Europe, right, that is just slowing growth down and the recoveries down. So we are not seeing the steeper recoveries we have seen from other recessions. That's all we are seeing there. So we are slowing the rate of growth down. If it comes back, it comes back, that's great because our content is there. Okay?
All right. I want to thank everybody for coming this afternoon. We really appreciate you coming out and taking the time to spend a few minutes with us. And we will be seeing all of you, I'm sure, in the not-too-distant future. And of course, Linae will be available for further questions whenever you want. So thanks a lot. Appreciate you coming.
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