Third Quarter Earnings Conference Call

Transcription

1 Third Quarter Earnings Conference Call October 26, 2018 NYSE: TEN 1

2 Safe Harbor Forward-Looking Statements This communication contains forward-looking statements. These forward-looking statements include, but are not limited to, (i) all statements, other than statements of historical fact, included in this communication that address activities, events or developments that we expect or anticipate will or may occur in the future or that depend on future events and (ii) statements about our future business plans and strategy and other statements that describe Tenneco s outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. These forward-looking statements are included in various sections of this communication and the words may, will, believe, should, could, plan, expect, anticipate, estimate, and similar expressions (and variations thereof) are intended to identify forward-looking statements. Forward-looking statements included in this communication concern, among other things, benefits of the Federal-Mogul acquisition; the combined company s plans, objectives and expectations; future financial and operating results; and other statements that are not historical facts. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those described in the forward-looking statements, including the outcome of any legal proceeding that may be instituted against Tenneco and others following the announcement of the transaction; the possibility that the combined company may not complete the spin-off of the Aftermarket & Ride Performance business from the Powertrain Technology business (or achieve some or all of the anticipated benefits of such a spin-off); the possibility that the transaction may have an adverse impact on existing arrangements with Tenneco, including those related to transition, manufacturing and supply services and tax matters; the ability to retain and hire key personnel and maintain relationships with customers, suppliers or other business partners; the risk that the benefits of the transaction, including synergies, may not be fully realized or may take longer to realize than expected; the risk that the transaction may not advance the combined company s business strategy; the risk that the combined company may experience difficulty integrating or separating all employees or operations; the potential diversion of Tenneco management s attention resulting from the transaction; as well as the risk factors and cautionary statements included in Tenneco s periodic and current reports (Forms 10-K, 10-Q and 8-K) filed from time to time with the SEC. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Unless otherwise indicated, the forward-looking statements in this release are made as of the date of this communication, and, except as required by law, Tenneco does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements. In addition, please see Tenneco s financial results press release for factors that could cause Tenneco s future performance to vary from the expectations expressed or implied by the forward-looking statements herein. 2

3 Agenda Third Quarter Highlights Segment Results & Financial Overview Outlook Q&A Brian Kesseler Co-Chief Executive Officer Jason Hollar Chief Financial Officer Brian Kesseler Roger Wood Co-Chief Executive Officer Brian Kesseler Roger Wood Jason Hollar Non-GAAP Results: Please see the tables that reconcile GAAP results with non-gaap results at the end of this presentation and in Tenneco s financial results press release, which is incorporated herein by reference. 3

4 Third Quarter Highlights Delivered a solid Q3 with strong organic * revenue growth across all product applications Record revenue of $2.4B, up 4% YoY, in constant currency up 7% -- outpacing industry production ** by 9 percentage points Commercial truck and off-highway revenue up 27% Light vehicle industry production down 2% globally Value-Add Revenue up 1%, constant currency up 5% Q3 VA adjusted EBIT margin of 8.4% -- consistent with outlook Record adjusted EPS of $1.70 * Organic revenue growth is measured at constant currency rates and excludes acquisitions and divestitures. Strong organic growth outpaced industry production by 9 percentage points **IHS light vehicle production forecast and Tenneco estimates 4

5 Industry Q3 Revenue Drivers Macro Drivers TEN Q3 Position China light vehicle slowdown; certain domestic Chinese OEMs underperforming LV production Europe light vehicle WLTP production disruptions and diesel declines NA light vehicle production: passenger cars weak with YoY declines light trucks strong YoY growth China exposure weighted towards global OEM JVs and select domestic OEMs Impact from WLTP and diesel declines on our platform mix is relatively neutral Europe Clean Air ~85% VA revenue unaffected by passenger car diesel mix NA light vehicle revenue levered to strong mix trend with > 80% pickups and SUVs Commercial truck and off-highway volume strength CT volumes up in Europe, India and NA OH volumes up in NA, Europe and Japan Strength of our diversified portfolio helps mitigate industry challenges 5

6 Q3 Value-add Revenue VA REVENUE by product application RECORD VALUE-ADD REVENUE $1,776M, up 5% * - Q3 light vehicle production down 2%** YoY Clean Air 6% * OH 7% CT 6% AM 18% Q RP LV 22% CA LV 47% Ride Performance 5% * Aftermarket 1% * VA REVENUE YOY comparison Light Vehicle 2%* Commercial Truck 23%* Off-Highway 25%* Aftermarket 1%* Organic growth in all product applications; strong growth in commercial truck and off-highway **IHS light vehicle production forecast and Tenneco estimates * In constant currency 6

7 Q3 Earnings Q3 ADJUSTED EBIT $149M Revenue growth outpacing industry production, with growth in all product applications (constant currency) VA adjusted EBIT margin of 8.4% -- consistent with outlook Adjusted EBIT / margin impacts Steel economics and tariff costs increased, 30bps impact on YoY margins Currency a negative 20bps impact on YoY margins, primarily Argentina transactional Fx RECORD ADJUSTED DILUTED EPS $1.70, up 3-cents Q3 diluted share count of 51.4M Q3 adjusted EBIT margin consistent with outlook; record EPS of $1.70 7

8 Q3 Clean Air VA REVENUE $1,006M, up 6% * VA REVENUE by product application Light Vehicle + 2%* VA Revenue $831M Americas + 7%* North America +7%, outpace production of +2% South America down slightly CT 5% OH 12% EMEA + 3%* APAC - 8%* Outpacing LV production of -5% New content on recent launches with Daimler, BMW and Ford. China -4%, in-line with production India double-digit growth, outpacing production +7% Australia end of OE production impact -500bps Q Light Vehicle 83% Americas + 35%* EMEA + 33%* APAC CTOH + 25%* VA Revenue $175M flat* New CT business with Daimler Truck in North America Off-highway up over 30% on higher volumes with CAT and John Deere MAN and Deutz business launched late Q3 last year Higher volumes with CAT and Daimler Truck India ramp-up on BS IV reg.; China CT volumes -18% Kubota volumes up over 10% Adj. EBIT $108M; VA Adj. EBIT Margin 10.7% Q3 Commercial Highlights 16 platform wins in China (majority incremental), with leading global and domestic OEMs 7 platform wins in India, including 4 BSVI commercial truck programs Won 2 hybrid programs in APAC in Q3 for a YTD 2018 total of 9 hybrid program awards * In constant currency 8

9 Q3 Ride Performance VA REVENUE $461M, up 5% * VA REVENUE by product application Light Vehicle + 3%* VA Revenue $394M Americas + 7%* Outpacing Americas LV production of +2% Higher volumes on new programs with VW & FCA NVH content growth on new BEV program EMEA - 4%* In-line with LV production of -5% LV Intelligent Suspension 7% CTOH 15% Q APAC + 5%* China +1%, outpacing production of -4% India +16%, outpacing production of +7% LV Conventional 78% Americas + 21%* EMEA + 16%* CTOH + 21%* VA Revenue $67M Higher volumes with Paccar, Daimler Truck and Hendrickson Higher volumes including with Volvo Truck, Paccar and Scania Adj. EBIT $17M; VA Adj. EBIT Margin 3.7% Announced intention to realign North America manufacturing footprint and close 2 plants -- expect savings of $20M to $25M by end of 2020 Increased steel economics and tariff costs, 90bps impact on YoY margins Q3 Commercial Highlights 2 program wins for intelligent suspension, 1 incremental In Q3, 2 intelligent suspension launches, 1 incremental New program launches in China and India continue to drive revenue growth above production growth * In constant currency 9

10 Q3 Aftermarket VA REVENUE $309M, up 1% * Americas + 2% * North America revenue about even YoY North America out the door retail sales continue to trend up through Q3 Double digit growth in South America EMEA - 4% * continues in established markets (Germany); Turkey economic issues Customer warehouse consolidation weigh down revenue VA REVENUE by region EMEA 21% AP 5% Q Americas 74% APAC + 9% * Double digit growth in both China and India Adj. EBIT $48M; VA Adj. EBIT Margin 15.5% Q3 Commercial Highlights China added 18 new customers, 430 new Monroe Installers, and expanded coverage with 120 new SKUs launched North America continues expanding coverage with 160 ride control SKUs launched Winning new business in all regions, including key distribution gains in South America and North America * In constant currency 10

11 Q3 Adjustments Restructuring and related expense of $12M pre-tax, or 17-cents per diluted share including Clean Air $1M Ride Performance $10M, primarily related to the accelerated move of our Beijing Ride Performance plant and North America cost reductions Aftermarket $1M Costs related to Federal-Mogul acquisition of $16M pre-tax, or 22-cents per diluted share $12M acquisition advisory costs $4M structural cost reductions in advance of closing, primarily for salaried headcount reduction Costs associated with litigation resolution of $10M pre-tax, or 15-cents per diluted share 11

12 Tax Expense Reported Q3 tax expense of $21M, includes Tax benefits for adjusted items: $6M for acquisition-related costs $2M for litigation settlement Other discrete tax items (net expense) of $1M Before those Q3 items, adjusted tax expense is $28M Adjusted effective tax rate of 22% in the quarter and 23% year to date China high-tech designation secured in Q3 and benefitted the ETR in the quarter Cash tax payments of $23M in Q3 Expectations for Q4 combined with Federal-Mogul Adjusted effective tax rate of 25% to 28% Cash taxes in the range of $45M to $55M Continuing focus on global tax planning 12

13 Cash Flow Cash used in operations of $41M Q3 results reflect investment in working capital to support revenue growth and cash payments for transaction costs Capital expenditures of $77M in the quarter Q3 spending $15M lower compared to last year Paid $14M in dividends, at $0.25/share in Q3 Board of Directors approved Q4 dividend of $0.25/share to be paid in December for $20M ($0.25 x 81M shares outstanding) Will evaluate future return of capital to shareholders via share repurchases vs. dividends based on share price Evaluating best allocation of capital to enhance shareholder value 13

14 Debt and Cash Position $ Millions September 30, Total Debt $1,544 $1,681 Cash Balances (1) Net Debt $1,341 $1,402 (1) Includes restricted cash Interest expense of $21M in the quarter Net debt / Adjusted LTM EBITDA* ratio of 1.5x * Including noncontrolling interests. 14

15 Q Outlook Revenue Walk Q4 Outlook Organic* revenue growth expected to outpace industry production by 2 percentage points Organic* revenue growth +3% Industry production +1%** ~$4.3B TEN and FM Combined Q4 Outlook VA adjusted EBITDA margin 11.0% % ~$1.9B Capital expenditures $260M - $280M Interest expense $72M - $76M $2.4B +3% Effective tax rate*** 25% - 28% -3% Cash tax payments $45M - $55M Noncontrolling interests $18M - $22M Q TEN Organic* Growth Currency Federal- Mogul Acquisition Q TEN * Organic revenue growth is measured at 2017 constant currency rates and excludes acquisitions and divestitures. At 9/30/2018 currency rates for Q4 ** IHS October 2018 global light vehicle production and Tenneco estimates. *** Excluding discrete tax items Including noncontrolling interests See slide 23 for Tenneco Projections Organic revenue growth expected to outpace industry production 15

16 Full Year 2018 Outlook Revenue Walk 2018 Outlook $9.3B +6% Currency ~ neutral ~$1.9B ~$11.8B Now expect organic* revenue growth to outpace industry production by 5% (previous +3%) Organic* revenue growth +6% Industry production +1%** Combined 2018 VA adjusted EBITDA margin of 11.3% % Legacy TEN VA adjusted EBIT margin at ~8.5%, which is within the previous guidance range 2017 TEN Organic* Growth Currency Federal- Mogul Acquisition 2018 TEN * Organic revenue growth is measured at 2017 constant currency rates and excludes acquisitions and divestitures. At 9/30/2018 currency rates for Q4 ** IHS October 2018 global light vehicle production and Tenneco estimates. Including noncontrolling interests See slide 23 for Tenneco Projections Raising 2018 organic revenue growth guidance to +6% 16

17 Financial Reporting Expectations For the remainder of 2018, we will measure our results of operations under the existing segmentation (adding the 2 FM businesses) As part of our transition towards the spin, as of Q we expect to revise our segments to reflect how the business will be managed going forward Q Reporting Q Reporting Clean Air Ride Performance Legacy TEN Clean Air Powertrain New Tenneco Aftermarket FM Powertrain FM Motorparts Legacy FM Aftermarket Original Equipment SpinCo Expect to give 2019 full year guidance as part of Q4 earnings in February Establishing expectations for reporting new companies during the transition period 17

18 Key Spin Milestones Working towards spin to create two focused, industry-leading, publicly traded companies Integration update on track to achieve forecasted earnings and working capital synergies Preliminary Form 10 Financing for SpinCo SpinCo Aftermarket & Ride Performance company Brian Kesseler, Chairman & CEO Senior leadership team established and named SpinCo should be named by early 2019 New Tenneco Powertrain Technologies company Roger Wood, Chairman & CEO Both division leaders and HR leader named Remaining leadership to be named by early 2019 Separation into two publicly traded companies expected to be complete late

19 Appendix: Industry Production YoY% Change Major Regions Q3 18 Q4 18 FY 18 North America 2% 3% 0% South America 2% 7% 7% Europe -5% 0% 0% China -4% -3% 0% India 7% 3% 8% Global LV Industry Production -2% 1% 1% Global 2018 light vehicle production now forecast up 1% YoY; largest 3 regions flat Source: IHS Automotive October 2018 global light vehicle production forecast and Tenneco estimates. 19

20 Appendix: Summary of Notes & New Credit Facility As of October 1, 2018 $mm 2,400 2,000 1,600 1, $1,598 $1,250 $1,022 $685 $500 $102 $102 $ TLA TLB Notes due 2022 (FM) Floating Notes due 2024 (FM) Notes due 2024 (FM) Notes due 2024 (TEN) Notes due 2026 (TEN) (Amounts in $millions) Coupon/Spread Maturity Date $1,500 Revolving Credit Facility* (New) LIB bps 10/01/2023 $1,700 Term Loan A (New) LIB bps 10/01/2023 $1,700 Term Loan B (New) LIB bps 10/01/ Notes due 2022 (FM) 4.875% 04/15/ Floating Notes due 2024 (FM) 4.875% 04/15/ Notes due 2024 (FM) 5% 07/15/2024 $225 Notes due % 12/15/2024 $500 Notes due % 07/15/2026 *Available revolver $1.5 billion undrawn revolver as of October 1, 2018 (Federal-Mogul acquisition close) Ample liquidity available to the combined company under new credit facility 20

21 Appendix: Pension and OPEB $ Millions Pension Q Tenneco only Q Combined Defined Benefit Expense* $4 $7 Defined Benefit Contributions $3 $16 OPEB Q Tenneco only Q Combined Expense $4 $6 Cash Payments $2 $9 * Does not include settlement or curtailment amounts.. 21

22 Appendix: Financial Overview Q3 $ Millions, except as noted Q3 18 Q Change Total Revenue 2,372 2,274 4% Value-add Revenue Δ 1,776 1,752 1% Adjusted EBIT % Adjusted EBIT (% of VA Revenue) 8.4% 8.8% -40 bps Adjusted EBITDA * % Adjusted Net Income flat Adjusted EPS ($) $1.70 $1.67 2% Cash Flow From Operations NM Net Debt / Adjusted LTM EBITDA* 1.5x 1.7x -0.2x Δ Value-add Revenue is total revenue less substrate sales. * Including noncontrolling interests. See the tables that reconcile GAAP results with non-gaap results in Tenneco s financial results press release. 22

23 Appendix: Tenneco Projections Tenneco s revenue outlook for Q is as of October Revenue assumptions are based on projected customer production schedules, IHS Automotive October 2018 forecasts, Power Systems Research October 2018 forecasts and Tenneco estimates. In addition to the information set forth on slides 15 and 16, Tenneco s projections are based on the type of information set forth under Outlook in Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations as set forth in Tenneco s Annual Report on Form 10-K for the year ended December 31, Please see that disclosure for further information. Key additional assumptions and limitations described in that disclosure include: Projections are based on original equipment manufacturers programs that have been formally awarded to the company; programs where the company is highly confident that it will be awarded business based on informal customer indications consistent with past practices; and Tenneco s status as supplier for the existing program and its relationship with the customer. Projections are based on the anticipated pricing of each program over its life. Except as otherwise indicated, projections assume a fixed foreign currency value. This value is used to translate foreign business to the U.S. dollar. Projections are subject to increase or decrease due to changes in customer requirements, customer and consumer preferences, the number of vehicles actually produced by our customers, and pricing. Certain elements of the restructuring and related expenses, legal settlements and other unusual charges we incur from time to time cannot be forecasted accurately. In this respect, we are not able to forecast EBIT or EBITDA (and the related margins) on a forwardlooking basis without unreasonable efforts on account of these factors and the difficulty in predicting GAAP revenues (for purposes of a margin calculation) due to variability in production rates and volatility of precious metal pricing in the substrates that we pass through to our customers. 23