Tenneco Inc. Earnings Call Nuggets: Aftermarket, Commercial Vehicles
On Monday, Tenneco Inc (NYSE:TEN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.
Brian Johnson – Barclays Capital: Want to delve into the aftermarket – three questions, two on aftermarket, one on CB. Let’s just start on CB, would you say the CB business in terms of growth in margins come in about where you were expecting it, and are you comfortable with the margin progression in that business?
Kenneth R. Trammell – EVP and CFO: Yeah, I think it’s right where we expected Brian.
Brian Johnson – Barclays Capital: So let’s then move to aftermarket. It looks like there is really two issues here. One is Europe, which I guess the question is, this is cyclical and what in particular in emissions is driving people from buying emissions control products at profitable margins and when does that fix itself? The second, maybe what are you seeing in the North American shock absorber market. Are you cannibalizing sale with this value product and if so — and can you get the margins up on with these pricing increases? Do you have someone out there who is being irrational in the marketplace, I do know that Gabriel Shocks changed ownership a year or so ago. So just maybe start with there and then move on to Europe if you could?
Gregg Sherrill – Chairman and CEO: Yeah, I’m going to start with North America first okay. The situation in North America, probably around a year ago, you can’t pin me on the timing, but roughly then, we introduced this value line of products directed at a certain segment. Later in the year last year, we (acknowledged) that, to cover the number of more SKUs. We’re not cannibalizing our business the best that we can see right now. All of our segments were up, including that one okay, and the more premium segments, but it certainly impacted our mix. This sort of expansion that we saw and I think we told you North American sales were up quite a bit in the first quarter. We may have been caught a bit little surprised by that second quarter, of course, we normally see the much higher sales, but what we sort of saw was the sales of that value line was up. It didn’t cannibalize on ours it certainly dropped our margins and therefore impacted us at the EBIT line. But overall then, one of our normal times of the year for catching up on inflation, except for pricing is the March timeframe. So all that pricing that we would go for over that went in March, maybe just a few months too late, but we weren’t going to go out there and rattle on bunch of customers on changing the timing of those negotiations and that will all be an effect now for the second quarter and it should go a long way in bringing our margins sort of back to where we would expect. It of course will depend ultimately on the mix which is very difficult for us to totally pin down.
Kenneth R. Trammell – EVP and CFO: But to be clear Brian, what Gregg’s describing is a move against low-priced products that we want to make sure we protect our strong market share, so it was to the right decision and at that point of view.
Gregg Sherrill – Chairman and CEO: That decision was made for the long-term health of the business and it was clearly the right one. Timing wise maybe these pricing increases could have got in a little bit earlier, but that’s only because of the timing of the situation with the value line. Like I said, we weren’t going to rattle the customer and pull that pricing negotiations ahead, so that’s that. Europe is definitely all, a part of the overall economic condition in Europe. Consumer confidence is down. Aftermarket sales were getting hit. I think I’ve seen others including something OE reporting parts sales were down in Europe and we expect that to sort of continue for some time and it has. We haven’t talked about the European aftermarket for several quarters now, so the only upside in the European aftermarket is in the east and that’s where the lower margin products are versus the west. The West continues to suffer and the only positive thing that we will see a helping that, but I don’t see it in the same light as North America is we also had pricing going in Europe probably about the same type timeframe as in North America. That will have some positive impact, but that market is going to continue be challenging. I don’t think there is any two-ways without that.
Brian Johnson – Barclays Capital: Some of this deferred maintenance or now there are annual air testing in Western Europe that would force someone to get a new muffler or converter if they need one?
Gregg Sherrill – Chairman and CEO: I think some of it is. Remember, you’ve got several things still playing out in Europe. All of this current economic confidence getting stuff if you will is playing out under the whole environment of the fact that we still have the lingering effect of all those scrappage programs from a few years ago, so a whole bunch of vehicles, we keep a pretty couple million of them. There would have been in the prime sort of repair time where their lives were scrapped. So that will hurt the after-market until that whole just kind of ages through the system, okay, over there. Then you put on top of that the consumer confidence hits that they are taking just due to the overall every other week or month fear of sovereign debt issues that hit the newspapers, et cetera that’s had an impact I’m sure on deferring as well sales.
Kenneth R. Trammell – EVP and CFO: Brian, just to put a fine point on it, the best we can tell, we are not losing any market share, it is truly the market that’s down not just us.
Brian Johnson – Barclays Capital: Back to North American, last question, just what’s been the competitor reaction or what are you anticipating as you go through pricing and bring the price point of the value end of the segment up on the channel reaction if that’s where you start?
Gregg Sherrill – Chairman and CEO: Well, too early to say. It’s really just too early to say, that pricing went in, in March, we’ll start seeing sales for the April timeframe very shortly, but all our indications are the second quarter is still going to be a good quarter for us and our market shares are going to be right in line. I really think we did the right thing there and by the way, a lot of that was aimed at foreign competition, not domestic.
Brian Johnson – Barclays Capital: So nothing to do with Gabriel having new owners? Have you seen – certainly the aftermarket has things going on from time to time with foreign competitors. Has the organization lived through this before, and is it something that’s kind of moved beyond?
Kenneth R. Trammell – EVP and CFO: I think one of the things that our guys do the best job all over in the aftermarket, is monitoring what’s going on and responding appropriately. I mean, as you know, we have got a pretty good position in the ride control business with Monroe, and it’s important for us to make sure that we respond when and if necessary, and like Gregg said, this was clearly the right decision to make sure we protect the really strong position we got in the market with that number one brand name.
Gregg Sherrill – Chairman and CEO: Let me clear, I am not worried about our North American aftermarket business.
John Murphy – Bank of America Merrill Lynch: Just kind of a follow-up on the aftermarket, because we are hearing some mixed messages from folks in that channel, particularly when we look at replacement tire demand, it’s fairly weak, but we have heard some points of strength. I just want to understand, generally, what’s going on in that market, and also just a little bit confused, because you are saying, you are cutting price to defend a market share position, but then also raising prices, so once again, I am sort of just trying to get a handle on what’s broadly going on in the segments you are operating in, in the aftermarket?
Gregg Sherrill – Chairman and CEO: We didn’t just cut prices, we introduced what we call the value line, into a specific market segment. To defend that segment, not the whole aftermarket, and we think we very successfully have done that. Yes, it created within that segment, a mix from something that previously had been pretty much all premium. But the premium line continued to grow as well. So we are kind of okay, with exactly what’s taking place, thus far, again mix is going to be something we’ll watch very carefully going forward. Now what we’re saying is we come along at the end of the same quarter with our normal time of the year. Negotiations on pricing to catch up on inflationary cause et cetera and those went in, in March and we are talking North America now, your question seem to be specific to North America and we’ll have the full impact of that across pretty much the whole of our lines in the second quarter, which should begin to bring our margins back. So I think in the end, I mean, we might not even would have been talking about this if we hadn’t seen the fairly successful growth in those lines in the first quarter as we kind of expanded the SKUs we put in there vis-a-vis the timing of this normal pricing that we got going in and hence I am just really not that concerned at this point. We will certainly watch the mix very closely as we go forward.
John Murphy – Bank of America Merrill Lynch: But on unit basis, you’re actually – you’re seeing some very strong growth in your aftermarket segments in ride control emissions?
Gregg Sherrill – Chairman and CEO: Yes.
Kenneth R. Trammell – EVP and CFO: You saw that come through in revenue numbers. Just take a look at the revenue numbers.
Gregg Sherrill – Chairman and CEO: As we said, the North American aftermarket was one of the revenue drivers in the quarter.
John Murphy – Bank of America Merrill Lynch: Then on the commercial vehicle side just to think about the margin mix, I mean obviously you guys aren’t disclosing commercial vehicle margins versus your light vehicle, but presumably they are a lot higher. How much of an impact do you think that they are pushing in North American commercial vehicle this quarter really helped out the margins? Was it a substantial impact or is it still on the come, is it too early to really claim some margin improvement from that business?
Kenneth R. Trammell – EVP and CFO: I mean, John it is clearly from a revenue standpoint that fastest growing piece of what we have in the business, but we also saw an uplift from the light vehicle side and as you know we’ve handled this stuff in the same plans as we do our lighter vehicle business, so any attempt to try and allocate it probably be an estimate of best. At the end of the day though, the growth in the volumes I think I like Gregg said a while ago is driving the margin improvement that we expected, the volume growth looks very strong. I think we said volumes in North America were up about 50% on a year-over-year basis, which is obviously some pretty good growth. We’re starting to see the ramp up in the other regions as well, slow in Europe and I think we’ve pointed out that South America, we should begin to see the ramp here as we kind of move into the second quarter, so all the things are happening just like we anticipated and its coming through like we wanted.
John Murphy – Bank of America Merrill Lynch: Then lastly just Ken on the leverage, 1.9 times net debt to EBITDA, are you comfortable operating in this one to two times range, that sort of where we should be thinking about that leverage ratio going forward?
Kenneth R. Trammell – EVP and CFO: John, we’ve said mid cycle two times is our goal which means like you said will be certainly well below it at some points in the cycle and be back above two times probably at some point in the future, if we another recession, but we are all hopeful that’s a the while.