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Earnings Conference Call
October 23, 2015
THIRD QUARTER 2015
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Agenda
• Highlights and Strategic Overview Gregg SherrillChairman & CEO
• Segment Results Brian KesselerChief Operating Officer
• Financial Overview Ken TrammellChief Financial Officer
• Outlook Gregg Sherrill
• Questions and Answers
Safe Harbor Statement / Non-GAAP Results:Please see the safe harbor statement and 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.
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Third Quarter Overview
3Q‘15 3Q‘14 B/(W) % Change
Total Revenue 2,025 2,081 (56) (3)%
Value-add Revenue 1,550 1,602 (52) (3)%
Adjusted SGA&E † (% of Sales) 7.1% 7.1% 0% 0%
Adjusted EBIT † 151 152 (1) (1)%
Adjusted EBIT † (% of VA Revenue) 9.7% 9.5% 0.2% 2%
Adjusted EBITDA *† 200 204 (4) (2)%
Adjusted Net Income † 73 78 (5) (6)%
Adjusted EPS ($) † 1.22 1.25 (0.03) (2)%
Cash Flow From Operations 106 115 (9) (8)%
Net Debt / Adjusted LTM EBITDA*† 1.4x 1.3x (0.1)x (8)%
* Including noncontrolling interests. † Adjusted for restructuring activities, bad debt charge and tax adjustments..
$ Millions, except as noted
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• Great performance in the quarter
– Revenue up 5%, excluding currency
– Outpacing light vehicle and commercial truck and off-highway industry production globally
– Stronger than market aftermarket sales growth in major regions
– Tenth consecutive quarter of margin improvement
• Balance serves us well in supplying cyclical markets and customers worldwide
• Making progress on our strategic imperatives for each product line
Quarter Highlights
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• Capitalizing on structural growth drivers delivering profitable growth for Tenneco
– Increasing global light vehicle industry production
– Emissions regulations which require new content to meet more stringent requirements
– Increased demand for MONROE® Intelligent Suspension technologies that differentiate vehicles
– Growing global car parc, which we serve with industry-leading aftermarket brands
Structural Growth Drivers
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Commercial Truck and Off-Highway Diesel Aftertreatment Customers
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• Total revenue $2,025M, down 3%
• Excluding an 8% currency headwind, third quarter total revenue up 5% to $2.2B– OE light vehicle up 6%, outpacing flat LV production,
lead by North America, Europe and India – OE commercial truck & off-highway outpaced industry
production with global unit demand down ~30% YOY. Total revenue down 7%; value-add revenue down 4%, demonstrating strong incremental content growth
– Aftermarket up 9%, driven by strength in North and South America
• Excluding substrates and currency, revenue up 5%– Clean Air and Ride Performance are both up 5%
Revenue
3Q 2015 Total Revenue
OE Light Vehicle72%
Aftermarket16%
OE CommercialTruck & Off-Hwy
12%
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• Adjusted EBIT of $151M, roughly in-line with last year
• Excluding $24M YOY negative currency impact, adjusted EBIT up 15%
• VA adjusted EBIT margin increased 20 bps to 9.7%, tenth consecutive quarter of improved margins
– Light vehicle and aftermarket revenue growth
– Commercial truck and off-highway content growth
– Benefits from restructuring savings and our product cost leadership initiatives
EBIT
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Clean Air Division
$ Millions 3Q 2015
North America
EuropeSA & India
AsiaPacific Total
Total Revenue $ 720 $ 453 $ 235 $ 1,408
Less: Substrate sales 251 166 58 475
Value-add revenue $ 469 $ 287 $ 177 $ 933
Adjusted EBIT $ 58 $ 16 $ 33 $ 107
Adjusted EBIT as a % of revenue 8.1% 3.5% 14.0% 7.6%
Adjusted EBIT as a % of value-add revenue 12.4% 5.6% 18.6% 11.5%
3Q 2014
North America
EuropeSA & India
AsiaPacific Total
Total Revenue $ 700 $ 484 $ 247 $ 1,431
Less: Substrate sales 261 164 54 479
Value-add revenue $ 439 $ 320 $ 193 $ 952
Adjusted EBIT $ 56 $ 18 $ 28 $ 102
Adjusted EBIT as a % of revenue 8.0% 3.7% 11.3% 7.1%
Adjusted EBIT as a % of value-add revenue 12.8% 5.6% 14.5% 10.7%
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• Clean Air VA revenue of $933M, down 2%; ex-fx up 5%
– NA VA revenue $469M, up 7%; excluding currency up 7%:• LV revenue growth of 6% on stronger volumes including ramp-up on the F-150 platform
and new platforms for GM and FCA
• Very strong growth in aftermarket revenue
• Commercial truck & off-highway revenue up 4% on additional content with CAT and Deere programs, despite a 35% decline in unit demand.
– ESI VA revenue $287M, down 10%; excluding currency up 7%:• LV revenue growth of 13% on strong production volumes including launches with Jaguar
and Nissan and continued ramp-up on other new platforms
• Commercial truck & off-highway revenue down 15% with additional content partially offsetting a 25% unit demand decline in the segment driven by Europe and S. America
• AM revenues in Europe were essentially flat
– Asia Pacific VA revenue $177M, down 8%; excluding currency down 4%:• LV revenue down 9% primarily due to lower industry production volumes in China
• Commercial truck & off-highway revenue increased 69% driven by continued ramp-up of Kubota off-hwy programs in Japan and installation rates for systems on commercial trucks in China that were higher YOY, offsetting a 28% decline in China production
Clean Air Division – Revenue
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Commercial Truck, Off-Highway and Other Revenue Details
2015 2014
Q1 Q2 Q3 Q1 Q2 Q3
RevenuesValue-add Revenues
RevenuesValue-add Revenues
RevenuesValue-add Revenues
RevenuesValue-add Revenues
RevenuesValue-Add Revenues
RevenuesValue-add Revenues
Clean Air Division
North America $ 86 $ 55 $ 87 $ 56 $ 81 $ 54 $ 87 $ 52 $ 98 $ 57 $ 89 $ 52
Europe, South America & India
73 44 75 44 65 39 88 53 96 58 88 54
Asia Pacific 31 19 26 16 31 20 34 23 38 25 23 13
Total Clean Air Division
$ 190 $ 118 $ 188 $ 116 $ 177 $ 113 $ 209 $ 128 $ 232 $ 140 $ 200 $ 119
$ Millions, Unaudited
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• Total Clean Air adjusted EBIT of $107M, compared to $102M last year, including $7M in negative currency comparison
– NA adjusted EBIT of $58M, up 4%,
– ESI adjusted EBIT of $16M, down 11%,
– Asia Pac adjusted EBIT of $33M, up 18%,
• Clean Air VA adjusted EBIT margin of 11.5%, up 80 bps driven by:
– Higher light vehicle volumes in North America and Europe
– Higher aftermarket revenue in North America
– Operational cost improvements
– Benefit of recovery timing from one customer in China of $5M or 3-cents per diluted share
Clean Air Division – EBIT
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Ride Performance Division
$ Millions 3Q 2015
North America
EuropeSA & India
AsiaPacific Total
Total Revenue $ 330 $ 236 $ 51 $ 617
Less: Substrate sales - - - -
Value-add revenue $ 330 $ 236 $ 51 $ 617
Adjusted EBIT $ 40 $ 8 $ 10 $ 58
Adjusted EBIT as a % of value-add revenue 12.1% 3.4% 19.6% 9.4%
3Q 2014
North America
EuropeSA & India
AsiaPacific Total
Total Revenue $ 342 $ 252 $ 56 $ 650
Less: Substrate sales - - - -
Value-add revenue $ 342 $ 252 $ 56 $ 650
Adjusted EBIT $ 41 $ 13 $ 10 $ 64
Adjusted EBIT as a % of value-add revenue 12.0% 5.2% 17.9% 9.8%
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• Ride Performance revenue of $617M, down 5%; ex-fx up 5%
– NA revenue $330M, down 4%; excluding currency down 1%:
• Strong aftermarket revenue growth
• LV revenue about flat
• Commercial truck revenue lower
– ESI revenue $236M, down 6%; excluding currency up 13%:
• LV revenue growth outpacing industry production in Europe on new platforms with Jaguar and Land Rover and continued ramp-up on programs with MONROE® Intelligent Suspension technologies
• Higher aftermarket revenue in South America and Europe
– Asia Pacific revenue $51M, down 9%; ex-fx flat against lower LV industry production
Ride Performance Division – Revenue
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• Total Ride Performance adjusted EBIT of $58M, down 9%, includes $17M in negative currency comparison
– NA adjusted EBIT of $40M, down 2%, $11M negative currency
– ESI adjusted EBIT of $8M, down 38%, $4M negative currency
– Asia Pac adjusted EBIT of $10M, flat, $2M negative currency
• Ride Performance adjusted EBIT margin of 9.4%, down 40bps, when excluding currency adjusted EBIT margin improved to 11.0%
– Higher aftermarket sales in all three segments
– Higher light vehicle volumes, mainly in the ESI segment
– Benefits from global product cost leadership initiatives and restructuring activities
Ride Performance Division – EBIT
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• Restructuring and related expense of $35M pre-tax, or 55-cents per diluted share; $31M Ride Performance, $4M Clean Air
– $25M related to exiting the Marzocchi operations, expect $7M improvement in results beginning 2016
– $10M ongoing cost improvement initiatives, including $5M related to the European cost reduction initiative
– European cost reduction initiative update
• 3Q’15 savings run rate of $10M
• Expect to reach our targeted savings run rate during 2016. At today’s exchange rates, that target converts to $55M.
• Net tax benefit of $12M, or 21-cents per diluted share, for tax adjustments to prior year estimates
Third Quarter Adjustments
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• Tax expense of $34M– Includes tax expense of $2M on restructuring charges and a tax benefit
of $12M for adjustments to prior year estimates
– Before those 3Q items, adjusted tax expense is $48M for an effective tax rate of 36% in the quarter
– For the full year we expect an effective tax rate before adjustments of about 35%, before the impact of the expected R&D credit extension
• 3Q net tax payments were $44M– In 2015, we now expect cash taxes of about $125M
• Interest expense of $16M, a $4M improvement from last year, mainly due to our December 2014 refinancing
– Expect annual interest expense of around $67M this year
Tax and Interest Expense
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• Net debt / Adjusted LTM EBITDA* ratio was 1.4x at the end of 3Q, about the same as last year
• Continue to target a leverage ratio of 1.0x
* Including noncontrolling interests(1) In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Tenneco adopted this standard for the first quarter of 2015 and applied retrospectively. The balance for unamortized debt issuance costs was $12 million and $11 million at September 30,2015 and September 30, 2014, respectively.
Debt and Cash Position
$ Millions September 30,
2015 2014
Total Debt(1) $ 1,341 $ 1,287
Cash Balances 222 280
Net Debt $ 1,119 $ 1,007
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• Repurchased 2.4 million shares in 3Q for $114M, through 3Q we repurchased a total of 3.1 million shares for $158M as part of the previously announced $350M share repurchase program, which we expect to complete by the end of 2016
• Additionally, we announced an expansion of our share repurchase program, authorizing the repurchase of an additional $200M of common stock which we anticipate completing by the end of 2017
• Expect to record a non-cash charge of about $4M in 4Q for another voluntary program offering to buyout former employees vested in our pension plans
Cash Flow
3Q’15 3Q’14 B(W)
DSO excl. factoring
65 62 (3)
DOH 38 39 1
DPO 72 73 (1)
Working Capital Metrics (L3M):• Cash flow from operations of $106M in the quarter, compared to $115M last year
– Strong working capital management, including inventory improvements, higher tax payments
– YTD cash generated from operations was $188M, compared to $89M last year
• Capital expenditures of $67M, vs. $95M last year
– Now expect 2015 capex towards the lower end of the previous range of $300M to $320M
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Revenue at Normalized CTOH Volumes
Actual booked business results in $1.7 billion of 2014 Commercial Truck and Off-Highway revenue at normalized volumes
$0.6
$1.1$0.9
$0.8$0.7
$0.4
Commercial Truck, Off-Highway and Other (CTOH) revenue
All Other revenue
Estimated CTOH revenue @ normalized volumes
$ Billions
CTOH:- Actual CAGR 29%
- At normalized volume 44%
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1. Fund organic growth
2. Restructuring activities to improve cost competitiveness
3. Balance sheet strength consistent with target leverage ratio of 1X
4. Strategic opportunities– Core sciences foundation, technology, customer,
geographic and aftermarket growth opportunities
5. Capital returns to shareholders– Share repurchases out of free cash flow after all
other investing & strategic needs are satisfied
– Total repurchases authorized of $550 million; $158 million completed through September 30, 2015
– Repurchased 5.1 million shares or 8% of shares outstanding since 2011
Capital Allocation Priorities to Drive Shareholder Value
Working Capital(Receivables + Inventory - Payables) as a % of Revenue
Capital Expendituresas a % of Revenue
TEN averaged 5.3% over the past 7 years
TEN averaged 3.3% over the past 7 years
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• In the fourth quarter, based on current global industry production forecasts and current China production schedules, we expect total revenue to grow 6%, excluding currency headwind of ~5%, based on current exchange rates– Significantly outpacing forecasted global industry light vehicle
production of -1%* in both product lines
• With the fourth quarter growth, still expect full year total revenue to increase 5%, excluding the impact of currency
Outlook
*Source: IHS Automotive production forecast (Oct 2015)
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Light Vehicle Production – YoY% Change
Major Regions3Q’15 4Q’15 FY’15
North America 5% 2% 3%
Europe 5% 1% 3%
South America -21% -28% -20%
India 6% 6% 6%
China -5% 0% 1%
Total of All Tenneco Regions* 0% -1% 1%
Source: IHS Automotive production forecast
* Change in light vehicle production in all regions in which Tenneco operates.
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Appendix:
Pension and OPEB
Pension 2012 2013 2014* 3Q’15 2015E
Defined Benefit Expense $21 $26 $15 $3 $15
Defined Benefit Contributions
$48 $57 $46 $5 $26
OPEB 2012 2013 2014 3Q’15 2015E
Expense $6 $3 $3 $1 $7
Cash Payments $10 $8 $8 $2 $9
$ Millions
* Does not include settlement or curtailment amounts
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• Leverage ratio
– Result: 1.51
– Test: maintain below 3.50
• Interest coverage ratio
– Result: 13.07
– Test: maintain above 2.75
• EBITDA cushion of $446M against tightest covenant ratio
• Current performance would meet our tightest covenant ratios through the expiration of the senior credit facility in 2019
Appendix:
Debt Compliance as of September 30, 2015
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Adjusted SGA&E as a Percentage of Sales –Reconciliation of Non-GAAP Results
Q3 15 Q3 14
SGA&E $ 148 $ 150
Adjustments (reflect non-GAAP(1) measures)
Restructuring and related expenses (4) (2)
Adjusted SGA&E (non-GAAP financial measures)(2) $ 144 $ 148
Adjusted SGA&E (% of Sales) 7.1% 7.1%
(1) Generally Accepted Accounting Principles
(2) Tenneco presents the above reconciliation of GAAP to non-GAAP financial measures primarily to reflect the results in a manner that allows a better understanding of the results of operational activities separate from the financial impact of decisions made for the long-term benefit of the company and other items impacting comparability between the periods. Adjustments similar to the ones reflected above have been recorded in earlier periods, and similar types of adjustments can reasonably be expected to be recorded in future periods.Using only the non-GAAP financial measures to analyze earnings would have material limitations because its calculation is based on the subjective determinations of management regarding the nature and classification of events and circumstances that investors may find material. Management compensates for these limitations by utilizing both GAAP and non-GAAP financial measures reflected above to understand and analyze the results of the business. The company believes investors find the non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on the company’s financial results in any particular period.
$ Millions, Unaudited
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Working Capital as a Percentage of Sales –Reconciliation of Non-GAAP Results
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Tenneco’s Revenue Projections
Tenneco’s revenue projections are as of October 2015, and except as provided herein the company does not otherwise
intend to update these projections until January 2016. Revenue assumptions are based on projected customer production
schedules, IHS Automotive October 2015 forecasts and Power Systems Research October 2015 forecasts.
In addition to the information set forth on this slide, Tenneco’s revenue 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, 2014. Please see that disclosure for
further information. Key additional assumptions and limitations described in that disclosure include:
• Revenue 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.
• Revenue projections are based on the anticipated pricing of each program over its life.
• Revenue projections assume a fixed foreign currency value. This value is used to translate foreign business to the
U.S. dollar.
• Revenue 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, pricing and foreign currency.
