tenneco annual reports 2004

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tenneco annual reports 2004

  1. 1. EXECUTION & DISCIPLINE DRIVE RESULTS Tenneco Automotive Inc. 2004 Annual Report 29% FIVE YEARS OF PROGRESS Increased Revenues by $953 Million 68% Increased Revenue Per Employee from $136,000 to $229,000 22% Reduced Debt Net of Cash by $344 Million 145% Increased Market Capitalization by $439 Million
  2. 2. Tenneco Automotive ORIGINAL EQUIPMENT Operations 2004 Sales Markets Served Products Brands Emission $2,287 million Passenger cars Complete exhaust systems ■ ■ Control Light trucks Fabricated manifolds ■ ■ Commercial vehicles Manifold-converter modules ■ ■ Industrial applications Catalytic converters ■ ■ Motorbikes Mufflers and resonators ■ ■ Diesel particulate filter systems ■ NOx abatement systems ■ Exhaust heat exchangers ■ Exhaust isolators & hanging systems ■ Ride Control $931 million Passenger cars Shocks & struts ■ ■ Light trucks Suspension bushings ■ ■ Commercial vehicles Coil, air & leaf springs ■ ■ Golf carts Torque rods ■ ■ Off-road recreational Engine/body mounts ■ ■ Rail cars Suspension modules/systems ■ ■ Control arms/bars/links ■ Cabin dampers ■ Computerized electronic suspension ■ Anti-roll system ■ AFTERMARKET Operations 2004 Sales Markets Served Products Brands Emission $365 million Passenger cars Manifolds ■ ■ Control Light trucks Mufflers ■ ■ Commercial vehicles Pipes ■ ■ Performance vehicles Tubing ■ ■ Mounting components ■ Catalytic converters ■ Performance mufflers ■ Ride Control $630 million Passenger cars Shocks ■ ■ Light trucks ■ Struts ■ Commercial vehicles ■ Cartridges ■ Performance vehicles ■ Mounting kits ■ Trailers ■ Performance shocks, struts, ■ filters and brakes Torque rods ■ Suspension bushings ■ Engine mounts ■ Coil springs ■ Car-appearance products ■ 2004 2003 2004 Sales 2004 EBIT* North America North America $4,213 $3,766 Revenues (millions) 47% 76% Emission Control/ Europe and Europe and 63/37 63/37 Ride Control Balance† South America South America 13% 44% Original Equipment/ 76/24 75/25 Aftermarket Balance† Asia Pacific Asia Pacific 9% 11% †percentage of sales *EBIT is earnings before interest expense, taxes, and minority interest.
  3. 3. Competitors Key Advantages Top Five Customers Top Five Platforms 2004 Market Opportunities Emission & Ride Control GM Bravada, Envoy, Trailblazer ArvinMeritor General Motors Additional content due ■ ■ ■ ■ to emission regulations ■ Advanced technologies Faurecia GM Escalade, Silverado, Ford ■ ■ ■ Suburban, Avalanche, Tahoe, Diesel aftertreatment ■ Eberspächer ■ Experienced team ■ Volkswagen ■ Sierra, Yukon Customized sound attenuation ■ Bosal ■ ■ Product/process quality PSA Peugeot/Citroen ■ Dodge Ram Pickup ■ Demand for diesel/ ■ Delphi ■ ■ Global program DaimlerChrysler ■ PSA Citroen C5, Peugeot 407, hybrid/fuel cell ■ management Peugeot 608 Emerging markets ■ ■ Japanese alliances GM Opel Vectra, Saab 9-3, ■ Commercial vehicle segment ■ ■ Joint ventures in China, Chevy Malibu, Pontiac G6 India, Thailand, and U.K. ■ Customer relationships ZF Sachs Ford GM Escalade, Silverado, Vehicle stability/ ■ ■ ■ ■ ■ Broad product range Suburban, Avalanche, Tahoe, safety requirements Delphi Volkswagen ■ ■ ■ Full service supplier Sierra, Yukon Modular assembly ■ ArvinMeritor ■ General Motors ■ ■ Just-In-Time (JIT) Ford Focus, Mazda 323, ■ New technologies ■ Kayaba ■ DaimlerChrysler ■ assembly Volvo S40 Adjacent markets ■ Magneti Marelli ■ Nissan ■ VW Golf, New Caddy, Seat Altea ■ Electronic technologies ■ DaimlerChrysler Town & Country, ■ Voyager, Caravan VW Transporter ■ Competitors Key Advantages Top Five Customers Leading Products Market Opportunities Quiet-Flow3® Mufflers/ Emission & Ride Control ArvinMeritor NAPA Growing number of vehicles ■ ■ ■ ■ Assemblies on the road ■ Brand dominance OE Service TEMOT Autoteile ■ ■ Dynomax® Ultra-Flo Stainless/ OE Service ■ ■ Bosal ■ Relationships with ■ Automotive Distribution ■ Welded Mufflers/Systems all major wholesale International (ADI) New technologies ■ Goerlich’s Exhaust ■ distributors/retailers DNX™ performance ■ Systems Advance Auto Parts Emission regulations ■ ■ exhaust systems ■ Global presence Midas/IPC ■ Independent Motor Trade Performance-product demand ■ ■ SoundFX™ mufflers ■ ■ Leading market shares Factors Association (IFA) Clean Air™ catalytic converters ■ ■ Product innovation ■ Product quality Reflex® shocks & struts ArvinMeritor NAPA Growing number of vehicles ■ ■ ■ ■ ■ Extensive product and on the road Kayaba Sensa-Trac® shocks & struts Advance Auto Parts ■ ■ vehicle coverage ■ OE Service ■ OE Service ■ Rancho® shocks, struts and O’Reilly Auto Parts ■ ■ Targeted marketing ■ New technologies suspension lift kits ■ programs ZF Sachs ■ TEMOT Autoteile ■ Unperformed maintenance Quick Strut™ ■ ■ Introduction of ■ Pep Boys ■ service parts Gas-Magnum® shocks Premium mix expansion ■ ■ Broader product coverage DNX™ performance shocks ■ ■ and struts Heavy-duty truck penetration ■ Monro-Matic Plus® shocks ■ Safety/installer education ■ DuPont™ car-care line ■ Testing/diagnostic equipment ■ Diverse Customer Base Profile Top Customers as a % of Total 2004 Revenues Approx. 18,400 People: Largest OE Customers Largest AM Customers Manufacturing & 17.9% 2.0% General Motors NAPA 71 12.0% 1.3% Just-In-Time Facilities: Ford Motor Co. TEMOT Autoteile GmbH 10.5% 1.1% Volkswagen Advance Auto Parts 13 Engineering Centers: 8.0% 1.1% DaimlerChrysler ADI (Automotive Distribution Int’l) 7.4% 0.6% PSA Peugeot Citroen O’Reilly Automotive 138 Countries Served: 3.9% 0.5% Toyota Motor Co. Pep Boys 2.2% 0.4% Nissan Motor Co. KFE (Kwik-Fit Europe) As of 12.31.04 2.0% 0.4% Honda Motor Co. Uni-Select
  4. 4. >> VISION PIONEERING GLOBAL IDEAS FOR CLEANER, QUIETER AND SAFER TRANSPORTATION. CORPORATE PROFILE Tenneco Automotive is one of the world’s largest designers, manufacturers and marketers of emission control and ride control products and systems for the automotive original equipment market and aftermarket. The company became an independent corporation in 1999, allowing singular focus on strategies to maximize global results. Tenneco Automotive markets its products principally under the Monroe®, Walker®, Gillet®, and Clevite® Elastomer brand names. Leading manufacturers worldwide use our products in their vehicles, attracted principally by our groundbreaking advanced technologies. We are one of the top suppliers to the automotive aftermarket, offering exceptionally strong brand recognition among consumers and trade personnel. VALUES Teamwork Passion and a Sense of Urgency Continuous Improvement Seamless collaboration A consuming desire to win now Relentless focus on achieving more with less Integrity Balance Being honest, fair and never Promoting a balanced perspective ED compromising our ethics in everything we do Execution and Discipline Trust Accountability Relying on and having faith Accepting responsibility for in one another our actions EXECUTION AND DISCIPLINE Execution and Discipline drive results through detailed planning, follow-through and accountability. TABLE OF CONTENTS Gatefold 1 2-4 5 6-8 9-11 Tenneco Financial Chairman’s Operations North Europe & at a Glance Highlights Letter Review America South America 12-13 14 15 16 17+ Inside Back Cover Commercial Technology Board of Directors 10K Investor Asia Pacific Vehicle & Officers Information
  5. 5. Tenneco Automotive 2004 Annual Report FINANCIAL HIGHLIGHTS Execution and Discipline has driven notable progress in Tenneco Automotive’s business since we emerged as a separately traded public company five years ago. The table below summarizes our reported results, which include the costs of achieving this improvement— namely restructuring, refinancing and similar charges. Adjusting for these items, our operational improvements were even greater. You can read more information about the charges in Management’s Discussion and Analysis found in our Form 10-K included in this Annual Report. 2004 2003 2002 2001 2000 1999 (dollars in millions except share and per share data) Sales $4,213 $3,766 $3,459 $3,364 $3,528 $3,260 Earnings before interest and taxes $÷«171 $÷«176 $÷«169 $÷÷«92 $÷«120 $÷«148 Depreciation and amortization $÷«177 $÷«163 $÷«144 $÷«153 $÷«151 $÷«144 EBITDA* $÷«348 $÷«339 $÷«313 $÷«245 $÷«271 $÷«292 Net income (loss) before discontinued operations and changes in accounting principles $÷«÷13 $÷÷«27 $÷÷«31 $÷(130) $÷÷(42) $÷÷(81) Earnings (loss) per share before discontinued operations and changes in accounting principles $÷0.31 $÷0.65 $÷0.74 $«(3.43) $«(1.20) $«(2.42) Capital expenditures $÷«130 $÷«130 $÷«138 $÷«127 $÷«146 $÷«154 Average diluted shares outstanding 44,180,460 41,767,959 41,667,815 38,001,248 34,906,825 33,656,063 Total debt $1,420 $1,430 $1,445 $1,515 $1,527 $1,634 Cash and cash equivalents $÷«214 $÷«145 $÷÷«54 $÷÷«53 $÷÷«35 $÷÷«84 Debt net of cash balances $1,206 $1,285 $1,391 $1,462 $1,492 $1,550 *EBITDA represents income from continuing operations before cumulative effect of changes in accounting principles, interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the historical statements of income data. In addition, EBITDA should not be considered as an alternative to net income or operating income as an indicator of our performance, or as an alternative to operating cash flows as a measure of liquidity. We have reported EBITDA because we believe EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company’s performance. We believe EBITDA assists investors in comparing a company’s performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon many factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. Working Capital† Revenue Per Employee Debt Net of Cash Balances $ in thousands $ in millions Percentage of Sales $229 15.6% $1,550 $1,492 $1,462 $197 $1,391 $1,285 $176 $1,206 $156 $153 $136 10.1% 6.0% 3.6% 2.1% 0.9% 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 † See 2004 Form 10-K Item 6 for reconciliation to GAAP reporting measure. 1
  6. 6. >> TO OUR SHAREHOLDERS Over the last five years, we’ve made • Revenues increased 12% in 2004 tremendous headway in improving our to $4.2 billion— our highest ever. financial position and enhancing operating • Operating income adjusted for results, and 2004 was no exception. certain items increased 21% over Our team of more than 18,000 employees 2003, representing three years has steadily transformed this company of consecutive improvements since from a struggling, highly leveraged becoming a stand-alone company. and newly independent operation to • Adjusted earnings were our best ever a profitable, high-tech auto supplier with at $1.18 per share, which is 115% higher leading market share positions in every than the previous year. region of the world and in each of our product lines. • Capital spending was unchanged from 2003 at $130 million despite the Enhanced Shareholder Value impact of the higher Euro and the fact Since becoming a stand-alone company, that in 2004 we more than doubled we’ve pursued the same goals of debt the number of product or platform reduction and market expansion, launches implemented. relying on stringent cost management, capitalizing on natural growth drivers • And debt less cash balances ended the and leveraging alliances and joint year at a historically low $1.206 billion, ventures to get us there. Staying the down 6% from 2003. course has continued to yield improving I’ve cited adjusted numbers so that results. Even in 2004, against a difficult you can see how our base operations industry backdrop, we remained are performing. Of course, an explanation disciplined in the execution of these of these adjustments, including strategies and ultimately delivered restructuring and other items, can be outstanding results. Let me put some found in the Management’s Discussion numbers to my enthusiasm. and Analysis of the attached Form 10-K. Additionally, a reconciliation of the results is detailed on the inside back cover of this report. 2
  7. 7. Tenneco Automotive 2004 Annual Report Mark P. Frissora Chairman, Chief Executive Officer and President April 2005 In 2004, our liquidity benefited from Positive change. Above all else, we’ve become an extremely process-oriented the successful refinancing of our company. This is a priority for us and most-expensive 11 5/8% bonds for new I’m passionate about it. We’ve invested 8 5/8% bonds due 2014. As a result, in training for every manager in the we will generate pre-tax interest expense organization and are now moving that savings of about $15 million annually. training down to the shop floor, so that The market’s view of our strong everyone is on the same page and equally operating performance and this accountable. Process tools like Lean favorable refinancing transaction was Manufacturing, Six Sigma, Business reflected in a 171% increase in the Operating Systems, 8D analysis— market capitalization of our stock last these are what give Tenneco its low- year. This led to two Automotive News cost advantage. They allow us to reduce Shareholder Value Awards, which our fixed costs, providing greater recognized Tenneco for delivering flexibility when we need it, while the highest shareholder return among continuing to be competitive for the automotive suppliers for 2004 and over benefit of our customers. the latest three-year period. Restructurings have been necessary and Shareholders also benefited from our effective. We’ve closed excess capacity, long-standing commitment to corporate right-sized our workforce and reorganized governance best practices including our plants for optimal workflow. This independence, transparency and has been an extensive undertaking, accountability. We will continue to incor- but the results have made it worthwhile. porate the same high standards and We’re benefiting from higher capacity integrity in every aspect of our business. utilization, improved manufacturing The Foundation of Our Success efficiencies and lower overhead costs. As I think about the exciting opportunities Today we’re a leaner, more streamlined ahead for Tenneco, I realize that we and more efficient business. There’s still wouldn’t be in a position to take advan- work to do of course, but we’re much tage of many of them were it not for the better positioned to capitalize on the significant amount of change that’s many growth opportunities that are now taken place over several tough years. ours for the taking. 3
  8. 8. Strategic Framework rates in each of the last eight quarters. But for all the progress that we’ve made, Continuing to diversify our business will we’re really just getting started. We have On this front, our strategic plan has two better insulate us during challenging a distinctive mix of leading brands, primary objectives. First, we’re targeting automotive cycles. growing channels and strong positions growth markets where we can take around the world. We will continue to advantage of external trends. Our priority is to grow organically. focus on areas of high potential, relying We’ve come a long way in improving our Examples include: on our global workforce of talented, financial position and have no intention • emerging automotive regions like experienced and motivated people to of stepping backwards. Where value China and Eastern Europe; lead us through Execution and Discipline. can be added through acquisitions, we’ll • legislation-driven regulations be opportunistic. However, our criteria for emissions and consumer safety are stringent. Any acquisition must be concerns— each offer greater accretive and credit neutral. That was prospects for technology-driven the case with our early-2005 $10 million companies; acquisition that brought us all of the exhaust business for Harley-Davidson • frequently replaced service parts, Mark P. Frissora motorcycles. This profitable business like brakes and filters, in the generated 2004 revenues of $38 million Chairman, Chief Executive Officer aftermarket; and and supports our diversification strategy and President • new and existing customers with while leveraging our technology April 2005 positive growth trajectories, like the strength. Any future acquisitions must Japanese and Korean automakers. offer a low-risk way to grow revenues by enhancing our technical capability in Second, we’re focused on further areas like electronics and software for diversifying our revenue stream ride control, and air-flow management through entry into counter-cyclical or fuel management for emission control. adjacent markets like commercial and specialty vehicles. For 2005, our goal is to continue to pursue opportunities that will make Diversity of platforms, geography, Tenneco a stronger company going customers, markets and product lines forward, building on the considerable has been the key to our revenues out- progress achieved over the last five performing global market production years. Our improved performance is a sign that we’re on the right track. 4
  9. 9. Tenneco Automotive 2004 Annual Report >> EXECUTION & DISCIPLINE Tenneco Automotive has created a culture based on Execution and Discipline, encouraging behaviors and practices that drive value creation. This culture is rooted in its people, processes and strategies. In the following pages, several of Tenneco’s senior leaders talk about the energy, initiative and commitment that have enabled the company to make sustained progress through Execution and Discipline. Neal Yanos Brent Bauer Hari Nair Ulrich Mehlmann Josep Fornos Timothy Donovan Lois Boyd Timothy Jackson Senior Vice Senior Vice Executive Vice Vice President and Vice President and Executive Vice Vice President and Senior Vice President and President and President, General Manager, General Manager, President and General Manager, President, Global General Manager, General Manager, Managing Director, Europe Europe General Counsel & Commercial Vehicle Manufacturing and North America North America Europe and South Original Equipment Original Equipment Managing Director, Systems and Engineering Ride Control and Original Equipment America Emission Control Ride Control Asia Pacific Global Program 21 years in the Aftermarket Emission Control Management 20 years in the 21 years in the 22 years in the 6 years in the auto industry 20 years in the 21 years in the auto industry auto industry auto industry auto industry 24 years in the Joined Tenneco auto industry auto industry auto industry Joined Tenneco Joined Tenneco Joined Tenneco Joined Tenneco Automotive in 1999 Joined Tenneco Joined Tenneco Automotive in 1987 Automotive in 2003 Automotive in 2000 Automotive in 1999 Joined Tenneco Automotive in 1988 Automotive in 1996 Automotive in 1997 5
  10. 10. World Headquarters Emission Control Manufacturing Ride Control Manufacturing Emission Control Engineering Center Ride Control Engineering Center >> NORTH AMERICA In terms of culture, our people have How have North American operations changed in the last the attitude that it’s their company, five years? and they’re running it to win. We hold ourselves accountable for the targets Brent Bauer, Senior Vice President we set and expect to achieve them. and General Manager, North That’s different from having lots of good America Original Equipment ideas, but no accountability for the Emission Control: We have much execution of those ideas. better process disciplines. We have put in place things like Business Brent: That’s right. That discipline Operating Systems, where each area of and accountability is part of what’s the business regularly tracks the vital driven our strong performance over few metrics they need to drive progress. the last five years. Additionally, we Today, we employ Lean Manufacturing have outstanding technical resources and Six Sigma methods to identify and engineering expertise, which gives opportunities to take waste out of the us a competitive edge. And we’re system and to increase quality and seeing tremendous leverage today speed. Processes like these have really as revenues grow and we continue become ingrained in the business. to reduce fixed costs. Additionally, the savings we’re getting How are the new environmental by sourcing components from low-cost mandates impacting your business? countries and working with suppliers on cost reductions are making us more Brent: It’s hard to find a competitor competitive and more profitable. that stacks up better than Tenneco on technology. Our customers know Neal Yanos, Senior Vice President that we have the products and and General Manager, North America Ride Control and capabilities to help them meet the Aftermarket: Our focus has been stricter mandates. In North America, legislation like ULEV, SULEV and Tier II very strategic. We don’t expend a lot of resources where the likelihood is driving increased exhaust content on of profitability is low. gas-engine vehicles. And as diesel engines grow in importance over the next several years, there will be 6
  11. 11. Tenneco Automotive 2004 Annual Report “ Tenneco is efficient. We provide services and products with fewer people and resources than most other big suppliers. And still, our OE revenues continue to outperform market production rates.” Neal Yanos pollution-control regulations in place relationships to continue to expand. Execution & Discipline for that segment too. In 2004, we For example, our award-winning launch Pep Boys Case History leveraged the diesel technology of the Lexus RX330 played a big part developed for our European operations in our winning the Toyota Tundra truck Success is the product of many years to win three new light-duty diesel platform in 2004, which is scheduled of hard work. That was the case with platforms in North America for the to be a high-volume platform that’s the North American Aftermarket team, 2007 model year. They’re the largest launching in 2006. who pursued Pep Boys for two years, platforms we’ve ever won— and we won convincing them of the value of the Why is the aftermarket a good Monroe, Rancho and DNX lines of shocks, them because we had a better technical business to be in, and what are your struts and exhaust products. Ultimately, solution than our competitors. plans for growth? we signed a long-term contract to supply Business with the Japanese Pep Boys stores across the United States Neal: The aftermarket’s a great automakers in North America and Puerto Rico. Persistence, hard work business for us. We employ a premium is another targeted growth area and customer focus paid off. product strategy, which drives better for Tenneco. What are you doing margins; and, we have strong brand to improve your position with equity with Monroe and Walker. these original equipment North American Revenues Additionally, we’ve been improving manufacturers (OEMs)? Outperform Market Production profitability as we capitalize on favor- Brent: The Japanese automakers are able manufacturing synergies across % change rapidly gaining share in North America, 4% our product lines. We’re also benefiting and we certainly want to be a part of from a stronger top line as sales to 3% 3% their growth. As a result of a long-term existing customers expand, the exhaust 2% focus on building relationships with market stabilizes, and we add new 1% these customers, we’ve been success- customers like Pep Boys for ride control fully winning new business. In 2004, products, and Wal-Mart and Target for 0% Japanese OEM business represented our niche DuPont-branded car-care line. -1% 19% of our total North American original In addition to our leading market shares, -2% equipment (OE) revenues. That’s up our sales force, customer support areas, Q1 Q2 Q3 Q4 from 16% a year earlier. By delivering and engineering and marketing savvy the highest levels of quality, responsive- give us a clear competitive advantage 2004 Tenneco North American OE Revenues ness and execution, we expect these that we can leverage by bringing 2004 North American Light new, non-core products through our Vehicle Production distribution channel. 7
  12. 12. “ Emission regulations dictate the kind of product solutions that customers are looking for. Based on our expertise and capabilities, in 2004 we won all of the domestic OEMs’ light-duty diesel business— our largest platforms ever.” Brent Bauer the leverage we get from adding higher- How has the rising cost of steel Execution & Discipline margin revenues on top of our efforts affected your business? Cambridge Case History to continuously lower our fixed costs is Neal: In ride control, we use a lot of significant. Over the long-term, we think For Toyota, the first launch of a Lexus carbon steel for our shocks and struts there’s a lot of opportunity, especially as made in North America was vitally so the substantially higher costs could we expand the implementation of Lean important. Our Lexus team of emission- really impact our margins. But our global control engineers in Canada worked side Manufacturing throughout our plants. supply chain team has done a great job by side and used extensive bench- working with steel suppliers to secure North American auto production marking with Japanese counterparts capacity and negotiate the best prices is expected to be flat this year. to find ways to reduce costs, improve based on our global purchasing power. Will you continue to outperform performance and reach quality levels the market? And we’re working with all of our cus- that exceeded Toyota’s world-class tomers to get price recovery. We’re also standards. For that, Toyota bestowed Neal: It’s all about the diversity of our its prestigious Excellence Level Award continuing our focus on cost reduction. platforms and the markets we serve, and on our team in Cambridge. Brent: On the exhaust side, we’re going the strength of the new platforms that to feel some pressure this year. However, we’re launching. Today, we’re favorably we’re also negotiating for customer positioned on a large number of the top- price recovery, and our supply chain selling vehicles. It’s been an advantage. team has been very strategic, focusing Brent: The diversity of our customer on materials substitution, low-cost base is another advantage. Having country sourcing and optimizing the sale Toyota, Honda and Nissan among our of our global scrap volumes. top six customers in North America is really paying off. What is the North American operation doing to help improve margins over time? Brent: We have a pretty good track record of improving gross margin in North America. The formula is simple. Having differentiated technology allows us to capture a better return. Moreover, 8
  13. 13. Tenneco Automotive 2004 Annual Report Europe South Africa Emission Control Manufacturing Ride Control Manufacturing Elastomer Manufacturing Emission Control Eng. Center Ride Control Engineering Center Ride/Emission Control Eng. Center South America >> EUROPE & SOUTH AMERICA to the #1 position in the European How have you transformed European operations in recent years? market this year. Hari Nair, Executive Vice Hari: Besides operational improve- President, Managing Director, ments, we’ve completely transformed the Europe and South America: Over culture of the organization. The concept the past five years, we’ve adjusted to of Execution and Discipline is embedded changes in the marketplace by modifying in the way our people work. It’s about our profile in terms of manufacturing making people accountable. Employees capacity and location, customer mix must feel that they can contribute to the and market share. This was the result best of their abilities. Recognition and of careful planning and determined celebration of success are key to this. execution, and leaves us well positioned The improvement in the OE to benefit from market opportunities. operation has been significant. Ulrich Mehlmann, Vice President How much opportunity is left? and General Manager, Europe Ulrich: Quite a bit. On the top line, our Original Equipment Emission technological leadership in developing Control: Also, we’ve made our opera- diesel products that provide a cost- tions more process-oriented, improving effective means for meeting stricter efficiency and reducing our costs. Equally emission standards results in greater important, our innovative technologies customer satisfaction. That means more are driving new business growth in opportunity for Tenneco. In addition, we emission control as well as our expanded are looking at adjacent markets, like presence in the luxury segment. commercial trucks and specialty vehi- Josep Fornos, Vice President cles, to generate increased revenues. and General Manager, Europe Our focus is more pointed than simple Original Equipment Ride Control: revenue generation. We are driving for The European OE ride control business profitable growth. has benefited from a renewed focus. Based on the incremental new contracts we’ve won, we should move closer 9
  14. 14. “ Customers recognize us as a contributor to their success and not merely a commodity supplier. We can manage the entire development spectrum. Advanced engineering and technology is what sets us apart.” Hari Nair market growth and lower costs in manufactured by AvtoVAZ, and we’ll Execution & Discipline Eastern Europe. begin supplying exhaust parts for GM’s Valencia Case History Opel Astra in Poland this year. What percent of manufacturing Execution and Discipline was critical is in Eastern Europe? What was your most important to meeting the simultaneous challenges launch in 2004? Hari: Approximately 22% of our of serving new customers, handling Hari: We had 37 well-executed OE multiple launches and executing a plant European OE ride control manufacturing redesign at our emission-control facility capacity is in the east today versus product or platform launches in Europe in Valencia, Spain in 2004. Launching a low single-digit percentage just last year and all of them were important. four new platforms—each for a a few years ago. We are continuing These successes helped increase our different customer—while moving 80% to migrate our emission control capacity OE ride control market share in Europe of the equipment to improve workflow to Eastern Europe as well. from the #4 position as recently as was accomplished successfully without 2001 to challenging the leading Josep: We have been aggressive in the need for additional resources and competitor for the top position in 2005. without disrupting any production for developing opportunities in Eastern At the same time, we maintained our #1 existing customers. Europe. In 2004, we launched the high- position* in the European OE emission volume Ford Focus, a compelling example control business. Josep: I agree. Our advanced of our “Go East” strategy. We would Ulrich: We also made great strides never have won this ride control Computerized Electronic Suspension business without our capacity in Poland in increasing customer satisfaction last product provides vehicle handling and and the Czech Republic. year by implementing detailed plans for safety improvements that customers meeting and exceeding expectations. As are willing to pay for. At the same time, Ulrich: Moreover, we now have full a result, we had a number of successful we are reducing costs by increasing engineering and design capabilities launches including the BMW 1-Series, purchases from low-cost countries, out- for exhaust systems in Eastern Europe. which represents our move into the sourcing non-core processes, further We believe this differentiates us from higher-volume small-vehicle segment, reducing inventories and standardizing most automotive suppliers. And, while and Porsche’s Boxster and 911, which more of our products and processes. Western European automotive produc- demonstrate our continuing relationship Hari: The improving South American tion is expected to be flat this year, with this prestigious nameplate. we see positive projections in the east economy and our efficient operations and are well positioned to capitalize there also present opportunities for *Market share data in this annual report is based on 2004 estimated revenues and are compiled on that expansion. For example, we are growth. Additionally, we’ll continue to from our knowledge of our relative position in the market and industry sources. These data building relationships in Russia with look at ways to fine-tune our manufac- are prepared in accordance with what Tenneco our exhaust contract for the Lada Riva, turing footprint to take advantage of believes to be standard industry practice. 10
  15. 15. Tenneco Automotive 2004 Annual Report Ulrich Mehlmann Josep Fornos introduction of longer-lasting stainless What will drive future revenue growth? European Revenues Outperform steel by the OEMs. We’ve also streamlined Josep: New ride control technologies Market Production Rates manufacturing operations to reduce that address comfort and safety such as costs, including integrating aftermarket % change CES, our electronic shock, and Kinetic, and OE production to more efficiently 16% our anti-roll system offering improved 14% utilize capacity. 13% vehicle stability. Also, leveraging our 10% North American relationships with the Why are European operating margins Japanese automakers and developing lower than North America’s? 3% 2% new relationships with Korean OEMs Hari: Complexity. The total number as both have expanded their European -1% of countries we serve exceeds 90. -2% market shares. That means doing business with multiple Q1 Q2 Q3 Q4 Ulrich: Stricter environmental legal entities, currencies and languages, requirements will also drive growth. We 2004 Tenneco European OE Revenues and producing a greater number of 2004 W. Europe Lt. Vehicle Production anticipate increased value for emission- models and engine variants to meet control content in both the passenger consumer preferences, which vary by car and commercial vehicle markets. region. But more than anything else, superior quality. And these are not my Western European labor costs are signif- words. The most frequent feedback from What have you done to improve icantly higher, in part resulting from a our customers is that we flex where European aftermarket results? more stringent regulatory environment. others don’t— whether it be in opera- Hari: We have been making steady tions, design, engineering or logistics, Ulrich: But we are making progress improvements, including signing roughly and when a customer faces an issue, as revenues increase and ongoing $20 million in incremental business in our reaction speed is second to none. restructuring initiatives bear fruit. 2004 with customers like Van Heck & Co., New OE programs that we’ve launched Ulrich: We place the highest a major wholesale distributor in the in lower-cost Eastern Europe are helping importance on providing solutions that Netherlands. In addition, we adjusted continue this progress. are tailored to individual customers. our product mix by eliminating weak- Hari: By providing solutions and selling parts. And new products being How does Tenneco stack up rolled out in 2005, like high-perform- delivering on our promises, we are against the competition? What ance brakes and filters under our DNX building credibility, trust and a win-win differentiates you? brand, will help to offset the shrinking partnership with our customers. Josep: A combination of things that add exhaust segment that resulted from the up to best-in-class customer service and 11
  16. 16. Asia Australia Emission Control Manufacturing Ride Control Manufacturing Emission Control Engineering Center Ride Control Engineering Center >> ASIA PACIFIC for the production of export products China is expected to become the world’s second largest automotive and components. As quality improves, market in terms of sales in three the most likely candidates to handle the years. Are China’s steps to slow its export volume will be India and China. booming economy likely to persist Today, virtually all of our production in and what does that mean for China is for use in the Chinese market. Tenneco’s growth? Another area driving growth will be the Tim Donovan, Executive Vice stricter emission standards. Beijing is President and General Counsel restricting emissions now in anticipation & Managing Director, Asia Pacific: of the 2008 Olympic Games. Shanghai There is concern that the Chinese is planning to do the same. government might try to further limit Finally, we are positioning ourselves economic growth this year. As a result, for the expected consolidation of about we expect to deliver a modest increase 120 automakers in China today to less in volume in 2005 as that economy than 10 that are likely to survive over sorts itself out. Beyond that, I really the long haul as global players. Our do believe China’s growth is going leading market share in emission control to be a stair-step versus a straight-line gives us a competitive advantage as this trajectory. Regardless, we continue trend plays out. to believe that the opportunity is substantial, given its population size What are your plans for Thailand and relatively low level of vehicle and India? ownership. Over the long-term, China Tim: Thailand presents an opportunity could become Tenneco’s largest market. for us to manufacture cost-effective So what will it take to make that emission components for export happen? throughout the region. In India, we are upgrading our ride control facility to Tim: Two important catalysts will be make products for global export. greater efficiency in our OE joint- venture operations and the effective use of capacity in low-cost countries 12
  17. 17. Tenneco Automotive 2004 Annual Report “ We became the #1 exhaust supplier in China last year and continue to grow with that market, diversifying our customer base through new business.” Tim Donovan In Asia there are seven joint What differentiates you from the Execution & Discipline competition in Asia? ventures— five in China and one Australia Case History each in Thailand and India. Are there Tim: Primarily the quality of our plans to open more? Global customers need global supply management teams in the region— teams that work together across conti- hiring local people that have intimate Tim: In China we’re in pretty good shape nents, time zones and cultures with knowledge of the markets, as well as the right now with the 2004 addition of a seamless focus. General Motors was legal, commercial and regulatory new JV to service Ford and the recent looking for an exhaust supplier for one environment. We supplement this local partnership with Eberspächer for BMW of its new models. A Tenneco Australian orientation by drawing on our global exhaust business. We currently have team enlisted their counterparts in North manufacturing, supply chain and four exhaust JVs and one ride control America and the commercial representa- technological resources. Additionally, JV in China. Why only one shock plant? tive at our South Africa plant. Operating our leading-edge technology gives Shocks are relatively cost-effective to over three continents as a single global us a competitive advantage. ship, so having multiple facilities, each crew, the team won incremental new business worth millions of dollars. in proximity to the customer, is not as What are your top priorities for 2005? important as it is for exhaust facilities. Of course, we’re always open to new Tim: Expanding and upgrading our ride- opportunities to expand our business control operations, further diversifying Leveraging Joint Ventures to in the Asia Pacific region. our customer base through new business, Capitalize on Growth in China improving processes, and executing What is the outlook for growth in the Tenneco Revenue flawless launches. $ millions $125 aftermarket business? $120 What does Tenneco’s culture of Tim: It’s a very fragmented market Execution and Discipline mean to you? right now in China. There’s no clear $80 distribution system for aftermarket like Tim: It means differentiating ourselves there is in the United States. We’re from the competition by getting the $43 currently launching a very detailed plan basics right. Best-in-class suppliers like $30 to leverage our strong Monroe brand Tenneco know that being more process $14 in China with a goal of capturing a 30% driven allows more opportunities share of the aftermarket by 2009. for growth. We strive to be disciplined 1999 2000 2001 2002 2003 2004 in the execution of our programs and processes—and that should give us an advantage. 13

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