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10:30 AM ET Q4 2008 Tenneco Inc. Earnings Conference


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10:30 AM ET Q4 2008 Tenneco Inc. Earnings Conference

  1. 1. Tenneco Inc. Fourth Quarter and Full-Year 2008 Conference Call February 5, 2009
  2. 2. Safe Harbor Statement Please see the safe harbor statement in Tenneco’s fourth quarter and full-year 2008 financial results press release, which is incorporated herein by reference.
  3. 3. Agenda Gregg Sherrill, Gregg Chairman & CEO Sherrill – Strategic overview Ken Trammell, Executive VP & CFO – Fourth quarter 2008 results Ken Gregg Sherrill Trammell – Outlook Q&A Please see the company’s February 5, 2009, press release for reconciliation and explanation of all non-GAAP measures contained in this slide presentation 3
  4. 4. LV 4Q 2008 Production Change v. 4Q 2007 North America -24.1% Europe -26.6% - E. Europe -23.6% - W. Europe -27.8% China -10.8% Australia - 8.3% South America -29.7% Source: Global Insights, January 30, 2009 4
  5. 5. Actions to address global crisis Number 1 priority: Generating and Preserving Cash • Global restructuring - $58mm savings when fully implemented by end of 2009 – Eliminate 1,100 jobs; in addition to 1,150 already eliminated – Close three NA plants; Australia engineering facility – Suspend matching contributions to 401(k) programs – Cut IT, sales & marketing spending • Flexing operations – Temporary hourly layoffs; salaried furloughs in NA – Eliminated all temporary positions in Europe; working with works councils to achieve other salary cost reductions • Compensation – Freeze 2009 salaries at 2008 levels; other salary control actions – Cut compensation on average 60% for top 50 executives • Reducing capital expenditures and engineering investments • Generating cash flow through working capital improvements • Eliminating all discretionary spending 5
  6. 6. New Business in 4Q’08 • Joint development agreement with General Electric – Will expand TEN’s NOx reduction technology portfolio; further strengthens position to grow in adjacent markets – Will work will GE Transportation to further develop hydrocarbon SCR aftertreatment technology into complete diesel aftertreatment systems for locomotive and off-highway vehicle markets – Complements TEN’s ELIM-NOx urea-based SCR aftertreatment solutions – Includes a development contract for locomotive projects; positioned to become long-term strategic supplier of diesel aftertreatment solutions to GE Transportation • In 4Q 2008, won new or replacement contracts for 18 different model vehicles with nine customers • Launching product on 31 OE platforms globally in 1Q 2009 6
  7. 7. 4Q 2008 Financial Results • Revenue was $1.208 billion, down from $1.565 billion – Impacted by OE production and aftermarket volume declines and $123mm in unfavorable currency • EBIT was a loss of $145mm, vs. earnings of $43mm in 4Q’07 – Negatively impacted by goodwill impairment charge, lower OE volumes globally, unfavorable vehicle mix, manufacturing fixed cost absorption, lower aftermarket sales, higher restructuring costs and $21mm in currency transaction and translation losses • Adjusted EBIT was a loss of $7mm vs. earnings of $61mm in 4Q’07 • EBITDA including minority interest was a loss of $91mm vs. earnings of $98mm in 4Q’07 • Adjusted EBITDA including minority interest was $47mm vs. $116mm in 4Q’07 7
  8. 8. 4Q 2008 Adjustments 4Q 2007 • Restructuring expenses of $18 million pre-tax, or 26-cents per diluted share; • A charge of $21million pre-tax, or 31-cents per diluted share for refinancing a portion of the company’s debt; • Net tax expenses of $64 million, or $1.34 per diluted share, including $66 million in non-cash expenses to realign the European ownership structure and a net benefit of $2 million, primarily related to adjustments for prior year income tax returns. 4Q 2008 • Restructuring expenses of $24 million pre-tax, or 34-cents per diluted share; • Non-cash asset impairment charges of $114 million, or $2.44 per diluted share, related to goodwill for 1996 Clevite Industries acquisition; • Non-cash tax charges of $144 million, or $3.11 per diluted share, related to a further increase in a valuation allowance against the company’s deferred tax assets, the impact of not benefiting U.S. tax losses, changes in foreign tax rates and other adjustments. 8
  9. 9. 4Q 2008 Tax Adjustments (additional detail) Tax adjustments of $144mm • $101mm impairment in carrying value of U.S. deferred tax asset –due to production decline and accounting rules that do not consider economic recovery or give weight to future business growth • $11mm in adjustments in deferred tax liabilities for changes in tax rates • $20mm for impact of not recording a tax benefit for the U.S. net tax operating loss and other jurisdictions where TEN cannot record such a tax benefit • Various tax adjustments for prior year income tax returns 9
  10. 10. 4Q 2008 North America Revenues • OE Revenue down 16% at $498mm, down 4% excl. substrate sales and currency – Includes $32mm in revenue from Kettering, Ohio ride control operations; passenger car business acquired in June 2008; – Reflects 4Q industry production volume declines in NA where light vehicle production fell 24% year-over-year; impacted ride control and emission control businesses – Volume declines on platforms like the Toyota Tundra, GM Duramax pick-up trucks, GMT900 platform, Chevrolet Trailblazer/Envoy • Tenneco unfavorable mix: SUVs and pick-ups = 49% of sales vs. 69% in 4Q ’07 – Full year 2008 SUVs and pick-ups = 54% vs. 72% in 2007 • Aftermarket revenue was $113mm, down 8% from $122mm in 4Q’07; down 6% adjusted for currency – Softer sales volumes in both ride and exhaust products, partially offset by price increases for steel recovery 10
  11. 11. 4Q 2008 North America EBIT • EBIT was a loss of $131mm, compared with earnings of $16mm in Q4:07 • Adjusted EBIT was a loss of $8mm vs. earnings of $18mm in Q4:07 – Adjusted for Q4:08 goodwill impairment charge of $114mm and $9mm in restructuring expense; 4Q:07 included $2mm in restructuring • $29mm of EBIT decline due to: – Lower OE production volumes – Manufacturing fixed cost absorption – Vehicle mix – Lower aftermarket sales • Negative currency impact of $14mm related to Mexican Peso and Canadian dollar • EBIT benefited from: – Lower SGA&E spending – New OE business launches 11
  12. 12. 4Q 2008 Europe OE Revenues • European OE revenues down 31% to $352mm from $511mm in 4Q’07 – Industry light vehicle production fell 27% year-over- year – Excluding substrate sales and currency, revenue down 12% to $329mm from $373mm – Recently acquired suspension business of Gruppo Marzocchi added $18mm in revenue • Revenue decrease driven by decline in OE emission control sales, down 19% excluding substrate sales and currency 12
  13. 13. 4Q 2008 Europe Aftermarket Revenues • Europe aftermarket revenue was $76mm, versus $96mm in 4Q’07 • Excluding currency, revenue was $89mm • Decline driven by lower ride control and exhaust sales volumes in most regions • Partially offset by price increases for higher material costs 13
  14. 14. 4Q 2008 South America and India Revenues • Revenue declined to $72mm vs. $96mm in 4Q:07 – Worsening industry conditions – Primarily driven by OE production volume declines in Brazil and Argentina – Excluding substrate sales and currency, revenue was down 4% to $80mm from $84mm 14
  15. 15. 4Q 2008 EBIT for Europe, South America and India • Reported EBIT was a loss of $12mm vs. earnings of $19mm in 4Q’07 • Adjusted for restructuring ($15mm in 4Q’08 and $16mm in 4Q07), EBIT was $3mm vs. $35mm in 4Q’07 • Negative EBIT drivers: – OE production volume declines – Unfavorable mix – Lower aftermarket sales volumes – Related manufacturing fixed cost absorption • $7mm negative currency, primarily related to transaction losses on Brazilian real and translation losses on the euro • Partially offset by: – Reduced overhead costs and cuts in discretionary spending – Benefits from new OE business launches 15
  16. 16. 4Q 2008 Asia Pacific Results • Revenue from Australia operations was $27mm, down 46% from $50mm in 4Q’07 • Asia revenue fell to $70mm vs. $98mm in 4Q’07 – Excluding substrate sales and currency, revenue was $46mm vs. $62mm in 4Q’07 – Driven by China industry production down by 11% vs. double digit growth in first half of ’08 – Volume declines on Tenneco supplied GM and VW platforms • Asia Pacific EBIT was a loss of $2mm vs. earnings of $8mm in Q4’07 – Lower OE production volumes in China and Australia and related manufacturing fixed cost absorption drove the decline 16
  17. 17. 4Q 2008 Gross Margin/SGA&E Gross Margin • Reported 4Q gross margin decreased to 12.6% from 14.3% in Q4’07 • Includes restructuring costs of $8mm in 4Q’08 and $16mm in 4Q’07 • Impacted by: – Decrease in OE volumes – Vehicle mix – Manufacturing fixed cost absorption – Negative currency impact SGA&E • Before impact of higher year-over-year restructuring expense, SGA&E expense down due to cuts in overhead costs and discretionary spending • 4Q:08 SGA&E expense was $126mm or 10.4% of sales vs. $127mm or 8.1% in Q4’07 • Full-year 2008 SGA&E was 8.8% vs. 8.3% in 2007 – Increase due to lower revenue and higher restructuring in 2008 17
  18. 18. Depreciation and Amortization • D&A was $54mm in 4Q’08, relatively even with $55mm in 4Q’07 • Full-year 2008 D&A was $222mm, vs. $205mm in 2007 • For full-year 2009, anticipate depreciation and amortization at about same level as 2008 18
  19. 19. Interest Expense • Q4’08 interest expense was $25mm – Included $6mm benefit from fixed to floating interest rate swaps – Terminated swaps in fourth quarter – Collected $6mm in cash from swap counter parties • Full-year 2008 interest expense was $113mm 19
  20. 20. Taxes • Recorded $126mm tax expense in Q4’08 • Cash taxes for Q4’08 were $12mm vs. $15mm in 4Q’07 • Full-year 2008 cash taxes were $62mm vs. $60mm in 2007 • For full-year 2009, expect cash taxes between $40mm-$45mm 20
  21. 21. Cash and Debt Position at December 31, 2008 • Consolidated debt at $1.451 billion ($1.374 billion at 12/31/07) • Cash balances of $126 million ($188 million at 12/31/07) • Debt net of cash balances at $1.325 billion ($1.186 billion at 12/31/07) 21
  22. 22. Cash Generated by Operating Activities • Cash flow from operations was $126mm in 4Q’08 v. $199mm in 4Q’07 • Year-over-year decline driven by lower production environment • 4Q’08 cash flow of $126mm includes $115mm in cash from working capital, primarily accounts receivable collections and inventory reductions 22
  23. 23. Working Capital • Rapid decline in global production impacted working capital metrics in the quarter • Days sales outstanding, excluding the impact of factoring, was 56 days at 12/31/08 vs. 53 days at 12/31/07; improved from 64 days at 9/30/08 • Inventory days on hand were 44 days vs. 36 days last year; driven by rapid production decline • Days payable outstanding was 67 days at 12/31/08, virtually unchanged from 66 days at year-end ‘07 23
  24. 24. Debt Compliance See Tenneco’s Form 10-K, Note 5 for year ended December 31, 2007, for a discussion of the significance of the company’s senior credit facility and compliance with these covenants (page 91). • Leverage ratio (tightest covenant) – Result: 3.66x – Test: no more than 4.25x • Interest coverage ratio – Result: 3.64x – Test: maintain above 2.10x • Launched the process to amend senior secured credit facility in light of difficult economic and industry conditions – Meeting with banking group later today • Expect to complete amendment by the end of February 2009 24
  25. 25. Factored Receivables • Extended $120mm U.S. receivable securitization facility through March 2, 2009 – Revised terms: • Annual cost increased by about $4 million • Reduced percentage of Tenneco’s U.S. accounts receivable that the sponsors will purchase – TEN estimates between $10 million and $30 million less – Tenneco expects to renew for another 364 days, concurrent with completion of the senior secured credit facility amendment • Worldwide factored receivables: – Maximum factoring allowed $250mm – $179mm as of 12/31/08 – $157mm at 12/31/07 25
  26. 26. Capital Expenditures • Capital spending was $45mm in 4Q:08 vs. $77mm in 4Q’07 • Full-year 2008 capital spending was $221mm, up from $198mm in 2007 – Preparing for new business launches and projects in expanding markets like China, India, Russia • Expect FY2009 capital spending to be about $160mm 26
  27. 27. Q&A 27
  28. 28. APPENDIX 28
  29. 29. Pension/OPEB Pension 2005 2006 2007 Q4:08 2008 2009E Expense $34 $37** $24* $6* $22* $23* Defined Benefit Contributions $50 $42 $36 $9 $27 $24 Enhanced Benefit Contributions - - $10 $2 $10 $10 OPEB 2005 2006 2007 Q4:08 2008 2009E Expense $11 $11 $12 $2 $10 $9 Cash Payments $11 $9 $9 $5 $9 $10 *Defined benefit and enhanced defined contribution expenses. ** Does not include approximately $7mm curtailment gain due to pension freeze. 29
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  33. 33. Market Driven Growth Opportunities 33