Tenneco, Inc. (NYSE: TEN) Q3 2020 earnings call dated Nov. 02, 2020
Corporate Participants:
Linae Golla — Vice President of Investor Relations
Brian Kesseler — Chief Executive Officer
Matti Masanovich — Executive Vice President and Chief Financial Officer
Kevin Baird — Executive Vice President and Chief Operating Officer
Analysts:
Rod Lache — Wolfe Research — Analyst
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Ryan Brinkman — J.P. Morgan — Analyst
Joseph Spak — RBC Capital — Analyst
Marc van Heems — Lombard Odier Investment Managers — Analyst
Edison Yu — Deutsche Bank — Analyst
Presentation:
Operator
Good morning and welcome to the Tenneco Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Linae Golla, Vice President of Investor Relations. Please go ahead.
Linae Golla — Vice President of Investor Relations
Thank you and good morning. Earlier today, we released our third quarter 2020 earnings results and related financial information. A presentation corresponding to our prepared remarks is available on the Investors section of our website.
Please be aware that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachments and other earnings materials. When we say EBITDA, it means adjusted EBITDA. Revenue year-over-year comparisons are measured at 2019 constant currency rates. Unless specifically described otherwise, margin refers to value-add adjusted EBITDA margin. The earnings release and other earnings materials are available on our website.
Additionally, some of our comments will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. Over the next several weeks, we will be participating in three virtual conferences, including the Gabelli Automotive Symposium, the 2020 Baird Global Industrial Conference and the Barclays Global Automotive Conference. We look forward to speaking with many of you there.
Our agenda for today starts with CEO, Brian Kesseler giving an update on our business operations and current liquidity position, as well as focusing on our efforts to build a stronger organization. Our CFO, Matti Masanovich will then provide a summary of overall third quarter financial performance, followed by a detailed review of our third quarter segment performance from our new COO, Kevin Baird. Matti will also provide an update on our balance sheet and overall business outlook. And Brian will make closing comments before opening the call up for questions.
Now, I will turn it over to Brian. Brian?
Brian Kesseler — Chief Executive Officer
Thank you, Linae. Good morning everyone and welcome. I hope everyone continues to remain safe and healthy. Before we begin, I’d like to take a moment to welcome the newest members of Tenneco’s executive team, Kevin Baird, our Chief Operating Officer, and Matti Masanovich, our Chief Financial Officer, to the call. The addition of both Kevin and Matti further strengthens the deep experience and knowledge of our leadership team, and we’re happy to welcome them to the Tenneco team.
I’d like to begin with an overview of our third quarter performance on Page 4. As we continued to ensure the health and safety of our team members, our global operations largely returned to normalized production during the quarter. Production schedules are close to pre-pandemic levels and low inventories in the U.S. gives us good line of sight for the fourth quarter.
When we last spoke in early August, we were confident that the third quarter was going to be better than the second quarter. However, we were pleasantly surprised with the pace and magnitude of the global automotive recovery. North America, Europe and China volumes continued to strengthen sequentially and our team was able to deliver solid profitability and cash flow and a higher than initially expected sales. On operating leverage and higher structural cost savings, we achieved adjusted EBITDA dollars of just above the prior year and around $250 million lower value-add revenue, and our year-over-year adjusted EBITDA margin expanded 90 basis points.
We remain on track to reach our savings targets from the Accelerate+ program, which made significant contributions to the company’s EBITDA and cash performance in the third quarter. Additionally, we were able to increase our cash conversion through a mix of capital spending discipline, effective working capital management, and some recovery in our factored receivables. As a result, we generated $475 million of adjusted free cash flow in the third quarter.
Our cash performance allowed us to meaningfully reduce our debt relative to the second quarter. We paid down $1.1 billion of our outstanding revolver balance and reduced our net debt by over $400 million from the end of the second quarter to the end of the third quarter. We built roughly $400 million in liquidity during the quarter, and had $1.8 billion of total liquidity at quarter end. Matti will address our balance sheet and liquidity position in more detail later in the presentation.
Turning to Page 5 for an update on strategic priorities. We continue to execute our Accelerate+ cost reduction program that targets delivering $265 million of annualized cost savings into our run rate by the end of 2021.
Second, we are focused on reducing our capital intensity in our OE-centric businesses that primarily represents greater discipline in capital spending, and in our motor parts business, better working capital management, specifically, inventory efficiency as our primary opportunity.
Third, we are optimizing our business portfolio to enhance our margin and cash flow performance over the long term. Using our value stream simplification methodology, we are strategically positioning our business lines to optimize portfolio growth, returns and cash flow. Ultimately, some businesses may not stay with the company long term, if they do not align with our long term product and market-strategic objectives.
Finally, we are investing in our targeted growth businesses which encompass all our key end markets, aftermarket, light vehicles, commercial and off-highway vehicles and industrial.
Turning to Page 6. We are making good progress on reducing our structural costs with Accelerate+ on track to achieve $165 million of annualized cost savings run rate by the end of this year. Since these are run rate targets, we expect carryover benefit into 2022. At the segment level, approximately 60% of the savings will benefit cost of goods sold and the remainder comes out of SG&A. In addition, a portion of Accelerate+ reduces our structural corporate expense which is all SG&A.
Our working capital improvement also continues to gain momentum, and we are on pace to achieve a one-time $250 million benefit by the end of 2021. This improvement comes primarily from inventory efficiency gains resulting in higher turns and lower days on hand required to support the operations going forward. We expect to realize half of that benefit this year.
The benefit of temporary cost actions, which included salary reductions, unpaid furloughs, and other non-recurring items was about $50 million in the third quarter. The temporary salary reductions have been restored to our team members as of the fourth quarter.
Now, I will turn it over to our CFO, Matti Masanovich for a detailed view of our financial and operating performance in the third quarter. Matti?
Matti Masanovich — Executive Vice President and Chief Financial Officer
Thank you, Brian, and good morning everyone. It is great to join you on my first earnings call as CFO of Tenneco. Turning to Page 8, I’d like to review our third quarter results at an enterprise level. Total revenues were $4.3 billion in the quarter and value-added revenues were $3.3 billion, 8% lower versus the prior year on a constant currency basis.
Adjusted EBITDA was $388 million, a slight increase from the prior year quarter despite an approximate $250 million year-over-year decline in value-added sales. Value-added adjusted EBITDA margin was 11.8%, favorable 90 basis points on a year-over-year basis, and primarily driven by the Motorparts and Powertrain segments.
Adjusted earnings per share was $0.33 and included a 73% effective tax rate. This quarter’s tax rate was impacted by the mix of our earnings in jurisdictions where we had large unbenefited losses and did not record a tax benefit. In the third quarter, we assessed the recoverability of our deferred tax assets using historical and forecasted 2020 pre-tax earnings, which were largely impacted by COVID and took a valuation allowance charge of $523 million, primarily related to our U.S. business. Those deferred tax assets, although impaired, are available for future use. That charge of $523 million has been adjusted from tax expense to arrive at the 73% effective tax rate noted above.
As previously mentioned, our adjusted free cash flow was $475 million and strong on a seasonal basis. We benefited from efficient working capital management and disciplined capital spending.
Turning to Page 9. We show more details on our revenue and earnings performance. Our light vehicle value-added revenues declined 6% year-over-year compared to a global light vehicle production decrease of 3%. On a consolidated basis, our commercial truck, off-highway and industrial value-added revenues declined 13% year-over-year. However, our China commercial and on-road value-add revenues more than doubled year-over-year on the back of market strength and content growth related to the new China VI emission regulations. Our Aftermarket and OES business was down about 8% year-over-year, more weighted towards the European markets and OES channel due to a slower European recovery from COVID.
On the lower right, profitability improved year-over-year. Adjusted EBITDA was $388 million and margin was 11.8%, up 90 basis points. Adjusted EBITDA was just above prior year levels on significantly lower value-added revenue. We continue to gain more traction with our Accelerate+ initiatives, which we expect to deliver more savings as we continue to execute those initiatives and as demand normalizes on a go-forward basis.
Now, I will turn it over to our Chief Operating Officer, Kevin Baird, for more details regarding our segment performance. Kevin?
Kevin Baird — Executive Vice President and Chief Operating Officer
Thanks, Matti. I’ve been with Tenneco for about 90 days now, and I am pleased with the progress the company has made to date in executing its key operating initiatives. There is more to do, but I am proud of how our team is working together to make the enterprise stronger and healthier.
Moving to our segment review, starting with Clean Air on Page 10. Clean Air value-added revenues were $958 million, a 5% year-over-year decrease on a constant currency basis. Our end markets, light vehicle, commercial truck, off highway, industrial and other, as well as OE service were down similarly year-over-year. Segment EBITDA was $149 million, a decline of about 5% from the prior year period. Adjusted EBITDA margin was 15.6% and was about even with the year-ago period. Cost savings were offset by the timing of commercial and engineering recoveries in the prior year.
On Page 11, we show Powertrain’s performance. At constant currency, revenues decreased 8% year-over-year. Commercial truck, off highway, industrial and other revenues declined 15% year-over-year, and OE service revenues fell 9%. Despite the lower revenue, segment EBITDA increased to $124 million and adjusted EBITDA margin was 12.3%, which represented a 220 basis point increase compared to third quarter of 2019. The business has started to see tangible savings from the fixed cost reduction actions executed earlier in the year.
The Motorparts segment is next on Page 12. Third quarter Aftermarket revenue decreased 7% year-over-year at constant currency, primarily due to COVID-19 constraints and the strategic decision to exit certain product lines in certain regions. Motorparts revenue continue to increase month by month through the quarter and into October. In the quarter, the team secured incremental annual revenue of around $35 million in our Garage Gurus program launched, an industry-first mobile customer training experience in North America. Year-over-year operating performance of $39 million improved significantly despite lower revenue, fueled by cost reductions and manufacturing distribution in SGA&E. Segment EBITDA was $131 million and adjusted EBITDA margin was 17.9%, that’s up 270 basis points year-over-year.
Please turn to Page 13 for details on Ride Performance. Third quarter revenue of $600 million was down 12% year-over-year in constant currency, primarily impacted by program rationalization in North America, that facilitated the footprint consolidation completed in the middle of the year. Segment EBITDA was $32 million and margin was 5.3% compared to 6.3% last year. The volume mix decline is related to program rationalizations. In the operations performance, you can see that we’re beginning to benefit from the North America Ride Control facility consolidation where we reduced capacity from four plants to two. We expect further benefits to be realized in 2021 as the consolidated operation stabilize. Our Ride Performance business contributed to positive cash flow in the quarter as well.
In our AST business, we launched six advanced technology suspension programs in the third quarter including CVSA2 adjustable damping for Mercedes-AMG black series super cars and Intelligent Suspension business with Volkswagen for their new ID.3 battery electric vehicle platform. In addition, we launched conventional business for a battery electric SUV for another customer.
I’ll now turn the call back to Matti to discuss our liquidity and debt position.
Matti Masanovich — Executive Vice President and Chief Financial Officer
Thanks, Kevin. As of September 30, we paid down $1.1 billion of our previously fully drawn revolver. As you may recall, out of an abundance of caution, we drew down the entire $1.5 billion revolving credit facility in the second quarter. Our plan was to pay down the revolver to a more reasonable amount once we could get comfortable with the underlying health of the industry and put that extra interest costs back in our pocket. With the sequential improvement in demand in the second quarter to the third quarter, and overall market confidence returning to more stabilized levels, we are very comfortable paying it down and having the availability on our revolver.
At quarter-end, liquidity increased to a very healthy $1.8 billion compared to $1.4 billion on June 30, 2020, and consisted of total cash balances of $721 million and undrawn revolving credit facilities of $1.1 billion.
Moving to our objectives to optimize cash performance. The past couple of quarters, we have been talking about our emphasis on reducing capital intensity. This quarter, we made capital investments of $96 million as we continue to invest in the business. On a full year basis for 2020, we expect capex to be around $380 million with some benefit in spending levels impacted by our team’s focus on reuse of existing equipment. That is a significant reduction to the over $700 million that we spent in 2019.
In the third quarter, we continue to execute on our structural cost savings projects and our Accelerate+ program to improve earnings. In addition, we did an excellent job flexing our trade working capital in the quarter. We continue to reduce our investment in net working capital as we drove efficiencies through our processes, which delivers significant cash flow. More specifically, while our receivables and payables increased as a result of increasing sales and volumes, our metrics around DSOs and DPOs were enhanced as we returned to more normalized levels of factoring, and we continue to improve on our payable terms with our suppliers.
Regarding inventory, this continues to be a major success for all segments of our business with our Motorparts business leading the way in improvement. More specifically, we have improved our inventory turns over 20% compared to the third quarter of 2019, increasing our delivery performance and lowering our finished goods intensity needed to service our customers.
A final note on trade working capital. We measure our net trade working capital as a percentage of revenue. In Q3, we have sustainably improved our net trade working capital efficiency by approximately 250 basis points compared to the prior year. Cash from operations also benefited from the net reduction of other assets and liabilities, including the reduction of customer tooling balances. As we look forward, based on our current demand forecast, we expect to have positive free cash flow for the fourth quarter.
We remain fully focused on our debt maturity windows. Our next significant debt maturity is in April 2022 and we are actively monitoring the credit market conditions for the right opportunity to replace that bond and extend its maturity. We have made significant progress in the third quarter towards our year-end target of net debt, even with or better than year-end 2019.
You can see our debt maturity schedule and leverage ratio on Slide 16. Total debt of $5.8 billion improved by $1.1 billion compared to the second quarter 2020. Net debt of $5.1 billion improved $429 million compared to the second quarter and was $123 million lower in the prior year. We remain fully compliant on all debt covenants with significant cushion to our covenant levels.
Turning to Page 17 for our fourth quarter outlook. We are using a more conservative production assumption, relative to the latest IHS forecast and expect fourth quarter value-added revenues to be similar to the third quarter. In addition, we estimate a slight decline in Aftermarket revenues relative to the third quarter, reflecting normal seasonality. As we look at our fourth quarter profitability, we expect strong year-over-year margin performance with EBITDA margin increasing nearly 200 basis points. The margin expansion is enhanced by a favorable comparison in the prior year. Of note, Accelerate+ savings continue to build and partially offset the elimination of the temporary cost savings realized in the third quarter.
Our key financial assumptions for 2020 are shown at the bottom. We continue to expect approximately $380 million of capital expenditures. Our D&A forecast is approximately $630 million. We expect cash taxes of approximately $140 million. We estimate our net debt will be at or slightly below the 2019 year-end level of $5 billion. Overall, we are expecting a strong second half margin and cash flow performance.
I’ll now turn the call back to Brian for concluding remarks.
Brian Kesseler — Chief Executive Officer
Thanks, Matti. Turning to Page 18 for a quick summary before we open the line for your questions. As we move through the fourth quarter and into 2021, margin expansion and cash flow generation remain our key priorities. Focusing our efforts on these two items will continue to build a stronger organization and optimize shareholder value.
As I mentioned, we have multiple avenues to drive further improvement. We are focused on reducing structural costs as part of our Accelerate+ program, and we continue to identify more opportunities through our BSS and continuous improvement process. We intend to lower our capital intensity from both our capital expenditure and working capital standpoint. We expect improving working capital turns as we deliver on the Accelerate+ working capital improvement target. We continue to optimize our business line portfolio, and are assessing each one of our business lines to determine where we can further enhance margin and cash performance.
We are increasing investments in our growth targets. These targets have a demonstrated higher return on capital, solid macro trends in the markets they serve, as well as the capability to grow faster than their underlying markets. From a debt reduction perspective, free cash flow generated from the activities, I just mentioned, will be used to pay down debt. We are confident in our ability to maintain significant cushion on our debt covenants and, as Matti mentioned, we will continue to monitor credit market conditions in the near term to address our next significant maturity in April 2022.
Focusing on these priorities will allow us to create enhanced shareholder value through significant debt reduction and targeted growth investments, ultimately, building a stronger Tenneco.
In closing, I would like to thank our global Tenneco team for their continued hard work and dedication to our organization. As we reflect on the challenging year and look ahead, I’m confident in Tenneco’s ability to deliver on our key focus areas, generate earnings and cash flow and continue to pay down debt. Thank you for joining our call this morning and for your continued interest in Tenneco.
With that, we’re ready to take your questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Rod Lache of Wolfe Research. Please go ahead.
Rod Lache — Wolfe Research — Analyst
Good morning, everybody. I was hoping, first you could talk a little bit about the below IHS forecast for Q4. I’m curious if you’re seeing any indication that the Europe light vehicle production is getting ticked lower. Obviously, there’s a lot of — there are a lot of developments there with U.K. and lockdown and so forth. So any just kind of high level color on what market conditions look like?
Brian Kesseler — Chief Executive Officer
Hey, good morning, Rod, this is Brian. Maybe I’ll grab that one. So we’re a bit cautious on Europe, especially with some of the more — some of the recent shutdown announcements we hear coming across there. Also our Aftermarket business, generally, sequentially moves down from a seasonality standpoint, Q3 to Q4. China continues to look strong for us and we’re still bit cautious in North America, not so much from production as we see being scheduled, but we see across the network, there is some stress on the supply chain that could interrupt production schedules occasionally.
We don’t see any issue on our side currently, but we do get some good indications in the marketplace that there is stress on the supply chain, probably — mostly due to demand characteristics that we’re seeing, which is — are all strong, but also some of the challenges operationally as different organizations, even ourselves, deal with kind of some of the COVID outbreaks in the hotspots.
Rod Lache — Wolfe Research — Analyst
Yeah, that makes sense. And secondly, I was just hoping you can just address a couple of questions that we had about the outlook. Just, maybe first talk about this level of EBITDA that you’re seeing in Q3 and Q4, looks like in the low-to-mid-300s, adjusted for the non-recurring items in the third quarter. Is there any reason to believe that that run rate of EBITDA wouldn’t be sustainable if this level of revenue would be sustained? Can you talk about what normalized capex would look like? Is that closer to D&A? And then any color on the businesses that may or may not stay with the company that you alluded to? Is there a formal process underway right now to make something happen there?
Brian Kesseler — Chief Executive Officer
Yeah, I’ll start with — I’ll try and get them in order, but if I miss one, just kick back in. From a sustained margin performance at these revenue levels, obviously, we’ll be at the $50 million of — and a temporary and one-time savings that will go away here in the Q4 period. So that will put pressure on margins, but our Accelerate+, as that continues to ramp and drive momentum, will partially offset in the Q4 and then we would expect to continue to build on that. So we kind of like that space as we go and look to continue to drive the margins.
From a overall capex perspective, for sure, we look at $380 million as kind of a necessary rate through the times that we’re in this year. $700 million is way too high from a generalized run rate, somewhere in that $550 million to $600 million on a normalized year is probably a reasonable target for you to assume for us. It will ebb and flow a little bit with different business conditions or different business wins. But as we look at our expected second half performance, it should cause the status of each of our year-end objectives run rate of $165 million, working capital $125 million and net debt at or below start of the year, all of those objectives should be able to go green on the status card for us.
Rod Lache — Wolfe Research — Analyst
Right. And the comment you made on businesses that might not stay with the company. Can you just provide any more color on what you’re considering at this point?
Brian Kesseler — Chief Executive Officer
Yeah. So we — as we break the business down and take a look at it, businesses that maybe aren’t at the return on invested capital targets that we would want, I would say they’re more smaller in general. So they would look to move to a work out. We’ve taken each of them and put them into three categories in each of our business lines of which we kind of break down regionally to about 40-plus. So our targeted growth ones we highlight, kind of the key big ones there in the presentation. We’ve got another group that we’ve put in to optimize, really optimizing the capacity that we’ve already invested in, a lot of that heavy investment in 2019, it’s time for those businesses to pay that back. And we’ve got a category called Work-Out and there’s a formal process on that, that over the course of two to three quarters, we’ve got to be able to see a roadmap to get them back to what we deem acceptable for the longer term. And if they can’t do that, then we would look to monetize them and then in some of the smaller ones, we could even make decisions, just discontinuing.
Rod Lache — Wolfe Research — Analyst
Okay. In aggregate — just lastly, but that last category of Work-Out, any sort of high-level revenue? If you aggregated them all, how big would they — would those amount to?
Brian Kesseler — Chief Executive Officer
Yeah, I think I’d hesitate to put a number to that, Rod, only because sometimes we put things in work out to — that we see good plans to get there. So, that will move around quite a bit, so I’m a little bit hesitant to put a number on it right now.
Rod Lache — Wolfe Research — Analyst
Okay, great. Thank you.
Operator
Our next question comes from James Picariello of KeyBanc Capital Markets. Please go ahead.
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Hey, good morning, guys.
Brian Kesseler — Chief Executive Officer
Good morning.
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Just within the fourth quarter guide, it sounds as though your temporary cost out measures will be fully unwound. So that’s my first point of clarification. And just to get to the 10.5% EBITDA profitability, can you talk about where we might see the most significant sequential step down? You’re guiding to 200 basis points in year-over-year margin improvement. I’m just trying to get a sense for what segments maybe benefited the most from the temporary measures as we bridge to this fourth quarter. Thanks.
Brian Kesseler — Chief Executive Officer
Matti, you want to grab that one?
Matti Masanovich — Executive Vice President and Chief Financial Officer
Yeah, I’ll take that. So the $50 million of temporary cost initiatives are in the third quarter. They are not going to recur. We’ve — we’re going to put — take away and re-install wages at 100%. So we had to reduce wages 10% to 20% across the Board and some of the salary and SG&A workforces. So it does go back in into the run rates. And I think it’s shared shared across each segment and corporate. So there’s really no — no one is going to be any more impacted than another as we kind of take a step back and look at the overall. And as you know, in the third quarter, we saw enhanced profitability on an EBITDA basis out of two of our segments, Powertrain and Motorparts. And we continue to expect that there is an enhanced level of profitability. But on a year-over-year basis, that — putting back in the cost, it goes in ratably across the segments and in corporate.
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Got it. Now, that’s helpful. And then as we think about next year, if we want to try to quantify what the year-over-year headwind might be from a temporary cost out measure standpoint, so you get the $50 million unwound in — from 3Q to 4Q, just thinking like on a full year basis ’21 versus ’20 — versus this year. And then is that math — if my math is close, on the structural savings side, you might be looking at $135 million in incremental benefit, right? So is the bias — my ultimate question, is the bias to your normalized incremental margin above that level or is there like equal — are they equal offsets?
Brian Kesseler — Chief Executive Officer
I would — so I think the $50 million we talked about in Q3 is — you’re right on there. I remember in Q2, we had about $100 million of temporary cost action there. We’ve made some bigger adjustments to pay salaries or more furloughs and other programs that we participated in. So we’ve got a comp against that in Q2. I think the zip code that you’re talking about from an improvement and earnings in Q1 from Accelerate — or in the year from Accelerate+ is in the right zip code. So most of our improvement, year-over-year, in the first half of the year, is going to be difficult to comp against with that kind of that $100 million in Q2. As we are — as we’re ramping, you would expect us to be able to offset some of that in Q3 from a temporary standpoint with the savings that we’re generating. That makes sense?
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Yeah, yeah. No, it does. Sure. And if I could just slip one more. Can you help us better understand the mechanics behind the deferred tax asset write-down? I mean, it sounds as though it’s primarily related to your U.S. business and that you can still utilize your NOLs in the future. So what exactly reflects the valuation allowance charge? Is it simply a function of the lower U.S. earnings outlook, over what timeframe? Just any clarity on this, I think, would be helpful.
Matti Masanovich — Executive Vice President and Chief Financial Officer
It’s based on a cumulative — the rule is a cumulative rule over three years. So 2020 being primarily impacted by COVID, we had to take the valuation allowance charge in the U.S., so obviously, future years, and our ability to generate income where structurally headquarter cost, etc., are in the US. So — but essentially, it’s a three-year cumulative rule and that’s what creates the variance in allowance against the deferred tax assets.
James Picariello — KeyBanc Capital Markets, Inc. — Analyst
Got it, thanks.
Operator
Our next question comes from Ryan Brinkman of J. P. Morgan. Please go ahead.
Ryan Brinkman — J.P. Morgan — Analyst
Hi, thanks for taking my question. While margin has obviously been negatively impacted this year due to the sales deleverage, just given the Accelerate+ and other cost reductions you’ve undertaken in the wake of COVID-19, what do you think will be the ultimate impact of 2020 on your normalized margin even if that margin is some years out? Do you think normalized margin has increased? And if so, how should investors think about the magnitude of improvement based upon some of these new savings you found this year?
Brian Kesseler — Chief Executive Officer
Yeah, I think — so we are measuring the Accelerate+ cost savings off of a baseline of 2019. So, if we take that $265 million that we are targeting to put into our run rate by the end of 2021, you would — I think, it would be safe to assume that we’re targeting a mean shift up in our margin performance from an EBITDA percentage of value-add revenue. So I think that’s the simplest way to think about it. And we’re getting about 100 — we’re talking about $165 million of that $265 million into the run rate by the end of this year, and then the remaining $100 million into the end of 2021.
Ryan Brinkman — J.P. Morgan — Analyst
Okay, thanks. And obviously there has been recently strong contribution to your EBITDA from improved execution of captured in the operating performance driver on the EBITDA in Slide 9. As you look though at the various segment EBITDA walks on the subsequent slides, it’s clear that comparatively less improvement was seen at least in the third quarter from the Clean Air division. It looks like you’re highlighting there the lumpiness of engineering recoveries a year ago as contributing to that optic. But I’m just curious if you could sort of walk through or rate the various businesses in terms of how you feel they are executing and in which of the divisions there may be the most or comparatively less opportunity to improve results going forward.
Brian Kesseler — Chief Executive Officer
Probably the good news, we see good opportunity in all four of the segments. Obviously, you see in this quarter, Powertrain and Motorparts contributed strongly. We continue to look for opportunities to make them better. Clean Air, as you mentioned, didn’t show, from the bridge standpoint, the operating performance, but we had a bit of a comp issue there where we had roughly $15 million of timing on commercial and engineering recoveries last year. That was difficult for it to comp against. But I think, overall, I’m pleased with the way the Clean Air team is executing and we would expect to show meaningful year-over-year improvement going forward as we execute on the plans there.
Ride Performance, a little bit more suppressed than maybe we’d like to see, but that’s a function of us finalizing the movement of the two plants that we took out of operation in the middle of the year as we now are putting everything into the two locations where it’s going to be permanently housed. We’ve got to make sure that we’re ramping through that and protecting the customers through that. So that benefit, which is encompassed in our Accelerate+ numbers, but about $20 million to $25 million of run rate improvement in our Ride Performance business as we stabilize those operations through next year.
So I think there’s great opportunity and the team continues to use our value stream simplification and continuous improvement tools to identify more opportunities. That work is never done.
Ryan Brinkman — J.P. Morgan — Analyst
Okay, thanks. And then just lastly, I know you’re not guiding to 2021, but is there any sort of high level puts and takes you can provide on free cash flow? So, for example, lingering one-time costs related to the separation or how much cash restructuring we should assume. I know you continue to make progress on working capital on underlying basis and payment terms, etc., but on the other hand, with presumably recovering industry production, how should we think about all those things?
Brian Kesseler — Chief Executive Officer
Well, the trade working capital improvement target that we have for as part of the Accelerate+ program is $250 million by the end of 2021. We are still targeting half of that this year and half of that next year, so it’s a $125 million, when you look at from a perspective of looking into 2021, what — you’re going to see us probably be more cautious on Q1 just because I’m not sure we’ve seen or anybody understands the true underlying demand here in the North American market. I mean, it’s great that we’re still trying to replenish inventories, but we’ve got to see what this thing looks like when we get into Q1. And, there was another part of that question Ryan, I think I might have missed.
Ryan Brinkman — J.P. Morgan — Analyst
[Speech Overlap] It was the restructuring.
Brian Kesseler — Chief Executive Officer
Yeah, restructuring cost, we’ve said, we talked about Accelerate+ being $250 million cost to achieve, $150 million of that is targeted this year, of which, year-to-date, we’ve spent about two-thirds of it. So you could think about that, and that remainder being made up here in the fourth quarter and then that $100 million is a good estimate at this point. So, a bit of a step down in restructuring. But I think any business that’s kind of in the manufacturing sector, there should always be some continuous improvement in restructuring that’s always planned. And so kind of that $100 million rate is I think a good proxy for what we should be driving for continuous improvement in our — in our restructuring projects going forward.
Ryan Brinkman — J.P. Morgan — Analyst
Very helpful, thank you.
Operator
[Operator Instructions]. And our next question will come from Joseph Spak of RBC Capital Markets. Please go ahead.
Joseph Spak — RBC Capital — Analyst
Thank you very much. Matti, I just want to confirm the $50 million of one time, this quarter, I guess $150 million year to date, did you say that was okay to sort of pro rata allocate across the segments? Because I guess, I am just trying to understand really how much better the underlying structural improvement in powertrain and motorsport — and motor parts was this quarter or — yeah, this quarter.
Matti Masanovich — Executive Vice President and Chief Financial Officer
Well, I specifically didn’t give you any answer to that question earlier. So it’s a little bit more weighted to the Powertrain segment, but we’re not going to give out the details across the segments and through Corporate. There’s a little bit — a little bit more weight in the Powertrain segment.
Joseph Spak — RBC Capital — Analyst
Okay. Again, just on capex, I know you got a lot of your question on this earlier, but I think it’s obviously — I think you mentioned it was, you were spending too much in years prior, but I think even versus what you initially were planning to spend at the beginning of this year, it’s down like 40%. So can you give us some sense of what is really been cut and how much of that is really just delayed and maybe needed to come back over the next couple of years?
Kevin Baird — Executive Vice President and Chief Operating Officer
Yeah. So we’ve deferred probably some maintain, repair, replace capex this year that will get caught up a little bit next year. What we haven’t sacrificed is capex on new program launches, making sure that we protect those, but that $550 million to $600 million range that commented on earlier next year, even with the makeup, we should, we’re comfortable probably being in that range for next year. We’ll give obviously more details on that as we go through Q4 earnings and outlook next quarter.
Joseph Spak — RBC Capital — Analyst
Okay. And then, just in terms of assets [Indecipherable] may — you may look to divest which I think is something you’ve talked about for a while. I think in the past you mentioned the market wasn’t really there because multiples either weren’t willing to sort of look past some of the lower operational figures given brought on by the pandemic or maybe buyers as far as they are yet ready to go to market. Any update there as what you see, does — is that loosening up a little bit as sort of numbers and [Technical Issues] begin to normalize a little bit, do you sense that there is greater potential maybe than three months ago to consummate from these transactions?
Brian Kesseler — Chief Executive Officer
Yeah. We see it picking up a bit. You know, earlier I think it was much more of the sponsor — sponsor interest and again not just on any assets we might have, but just general in the market as we talked with our advisors, sponsored money private equity, and that money was earlier in, more looking for deals, I think and we’re not anywhere near any fire sale. We’ll get fair value or what we think is fair value for assets if they, if it makes sense.
So I think it’s still hopefully heating up a little bit. I think the strategics are a bit more cautious coming in. But you know as we mentioned at the Q2 earnings call, we were kind of mid-flight with the potential transaction that as soon as we see recognition for pre-COVID margins and valuations, you would expect us to opportunistically play in that sooner than later.
Joseph Spak — RBC Capital — Analyst
All right. Maybe just one quick one, if you could really give us a sense as how you are thinking about the CTOH market heading into ’21, I think like China was [Technical Issues] my understanding [Technical Issues] were pretty strong this year because of regulatory change. But on the flip side as you think about some of the construction equipment, seems like inventories are pretty low there. And I know, I know you generally don’t know where your product goes because it goes to the engine and not necessary the product, but what are you hearing from your customers there in terms of [Technical Issues] on the construction side?
Brian Kesseler — Chief Executive Officer
Yeah. We obviously followed the big guys like Deere and Caterpillar and supply them their valuable customers to us. So, on that space how they go, we go on the off-highway side. Commercial truck side, we continue to see growth with the China 6 continuing to accelerate through balance of this year and then to early next year. Broad fix in India moving along, probably a little too early to tell on the commercial truck side in Europe, and as I know you’re aware, Joe, we don’t have a huge presence on commercial truck here in North America.
Joseph Spak — RBC Capital — Analyst
Okay. Thank you very much.
Operator
Our next question comes from Marc van Heems of Lombard Odier. Please go ahead.
Marc van Heems — Lombard Odier Investment Managers — Analyst
Yeah. Thank you very much for the presentation. What’s the relevant [Phonetic] timeframe do you have in mind for the refinancing of the April ’22 maturity?
Matti Masanovich — Executive Vice President and Chief Financial Officer
I’ll take that one, Brian. We’ll continue to monitor the market and I would say over the near term, we’d be looking to replace and extend the maturity. But we’re actively monitoring the market, obviously, and we’re looking for it as it opens and as it’s cooperative we’ll go into the market and replace and look for a longer maturity.
Marc van Heems — Lombard Odier Investment Managers — Analyst
Do you imagine calling bond in April, ’21 or are you — have you thought about this?
Matti Masanovich — Executive Vice President and Chief Financial Officer
Could you repeat that question, please?
Marc van Heems — Lombard Odier Investment Managers — Analyst
Yeah, do you think of possibly calling the bond in April ’21 as the bonds callable in ’21?
Matti Masanovich — Executive Vice President and Chief Financial Officer
I think you know, given the — given overall COVID uncertainty and just uncertainty in general, we’ll take a very cautious approach to liquidity of the Company. I think we would refinance and look for a longer-term, long-term maturity. I think that’s a prudent — kind to prudent thing to do.
Marc van Heems — Lombard Odier Investment Managers — Analyst
Okay. Thank you very much.
Matti Masanovich — Executive Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Emmanuel Rosner of Deutsche Bank. Please go ahead.
Edison Yu — Deutsche Bank — Analyst
Hey, it’s Edison on for Emmanuel. Two questions. First, can you maybe go over some of the underlying dynamics and aftermarket by products and how those are sort of shaping up going through year-end? And then secondly, I think you’ve mentioned some EV wins and Ride Performance, could you maybe go over that and the — maybe the size or the kind of TAM you think you might have access to going forward. Thanks.
Brian Kesseler — Chief Executive Officer
Yeah, if I do the EV one, I don’t want to get too far in front of our customers on some of the EV revenue or take rates that they’re assuming. So I think we’ve just recently announced and went on super cars, obviously, those are lower volume, but the Mercedes, battery-electric vehicle is strong. Our advanced suspension technology unit and our NBH Performance Materials unit are both benefiting from the EV platforms that are in development both from traditional and some of the new entrants from an OE perspective.
So not a lot of numbers I can put to it just because I don’t want to get it, as I said, I don’t want to get in front of our customers. The other question was — oh, aftermarket, yeah, so aftermarket we saw as that continually, sequentially improved through the quarter, I wouldn’t talk about it so much from individual product lines. I look at it more as channels. The retail channel is up a bit more year-over-year than say the traditional channel overall, and the other thing I think is good and sometimes we get questions on is on inventory positions and what we see as the inventory positions on our categories as are lower this year at our customers than they were last year. So I think that’s also favorable for us.
Operator
[Operator Closing Remarks].