Q3 2019 Earnings Call
All participants are only mode.
Did you need assistance, we see no corporate specialist by pressing star key.
Zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question as you May Press Star too.
Please also note that today's event is being recorded.
At this time I'd like to turn the conference call over too.
What I Gallo Vice President of Investor Relations. Please go ahead.
Thank you.
We released our third quarter, 2019, or anything else and related financial information.
Today's call to discuss the border are fine castlerock or what co Chief Executive Officer.
Our Chief Financial Officer.
He he VP finance.
As a decent corresponding to our prepared remarks is available on the investor section of our website.
After our comments this morning.
There will be a question answer session before we begin please be aware that I'd say like the information on non-GAAP financial measures.
Which are reconciled with GAAP measures in our press release attached.
Also note that all pro forma comparison measured at 2018 constant currency rate.
I don't know acquisition at prior period.
Scott year over year comparison on a pro forma.
I'm not specifically described otherwise archon refers to value add adjusted EBITDA margin.
Earnings release, and attachments are available on our website.
Additionally, some of our cotton <unk> forward looking statements. Please keep in mind that our actual results could differ materially from those projected than any of our fourth.
Now I'll turn it over to Roger.
Thank you today.
Good morning, everyone and welcome.
Please turn to page four.
Medical delivered solid third quarter results in the face of uneven industry demand and the labor strike a general motors.
As an enterprise, we generated revenue of $4.3 billion.
Absent currency and pro forma basis.
It was increased 3% year over year outperformed global light and commercial vehicle production.
New telco revenues grew 7% and drive revenues fell 3% compared to Q3 2018.
Third quarter, adjusted EBITDA was $387 million and adjusted EBITDA margin increased 100 basis points year over year.
Pro forma basis to 10.9%.
At the enterprise level, the G.M. strike reduced adjusted EBITDA by $13 million and adjusted EBITDA margin by approximately 20 basis points.
Excluding impact from the strike our revenue and adjusted EBITDA results were at the midpoint of our Q3 guidance.
Our key business highlights during the third quarter include that we began to realize value added revenue contribution from new China six light vehicle emission standards that took effect in the middle of this year.
We were named 2020 automotive news pace award finalist for Iraq's to bearing technology.
And we continue to win advance suspension technology in NVH business, particularly on electric vehicle platforms.
On page five we're provided at our updated enterprise outlook for the fourth quarter and full year.
Later on in today's call Ron Brian Jason.
Right more details around the outlook as it pertains to the new Tenneco and drive divisions specifically.
Looking at the fourth quarter light vehicle production is expected to be lower year over year by 6%.
And the commercial truck market is showing signs of softening.
In Q4, we expect enterprise revenue in the range of $3.95 billion to $4.05 billion, representing a 5% year over year decline in constant currency at the midpoint.
For the full year 2019, our enterprise total revenue guidance range is $17.25 billion to $17.35 billion.
Flat versus 2018 on a constant currency basis.
We estimate the G.M. strike will reduce our revenue growth by about 1% for 2019.
With regards to profitability, we forecast Q4, adjusted EBITDA to be in the range of $295 million to $315 million, which translates to a value added EBITDA margin of 9.4% at the midpoint.
On an enterprise basis, we estimate the G.M. strike will negatively affect our fourth quarter adjusted EBITDA margin by approximately 70 basis points.
Full year 2019, we project adjusted EBITDA to be in the range of $1.4 billion to $5 billion to 1.44 or $5 billion down from prior guidance of $1.515 billion to 1.565 billion.
Reflecting the GM strike impact as well as on favorable demand and mix in the fourth quarter.
We are improving our outlook for interest expense tax rate cash taxes and capital expenditures relative to our prior guidance.
Our expectation for net debt to EBITDA at year end 2019 has increased to 3.4 to 3.5 times range from our prior 3.3 times expectation.
Lower production volumes and less favorable business mix has reduced our adjusted EBITDA expectation and driven the increase in the ratio.
We are evaluating strategic options to facilitate the separation of new Tenneco and drive and Brian will touch on this later.
I want to thank the more than 80000 hardworking tenneco team members around the world.
They bring their passion and commitment to work every day to find new ways to satisfy our customers grow the business improved the quality and efficiency of our processes and ultimately create value for our shareholders.
Please turn to page six.
In Q3, new Calico generated $2.1 billion of value added revenue flat year over year on a constant currency basis and pro forma basis.
New Tenneco slightly outperformed global light vehicle production and experienced modest growth in the CTO age and industrial business.
FX was a 2% headwind to revenues on a year over year basis.
Pro forma adjusted EBITDA grew 2% year over year to $245 billion and adjusted EBITDA margin was 11.8% and up 50 basis points versus Q3 of 2018.
The GM work stoppage reduced new tenneco's, adjusted EBITDA by $11 million in the quarter and division margin by approximately 30 basis points.
In the near term, we're implementing additional actions to improve the company's cost structure, while also focusing on cash generation.
We're in good position to realize solid content gains in China, and India, and 2020 and 2021.
Now I'll turn it over to Ron for review of New Tenneco segments Ron.
Thank you Roger and good morning to everyone.
We will begin our review of technical segment performance on page seven.
Cleaner segment delivered value add revenues of 997 million down 1% year over year.
On a constant currency basis.
Clean air value added revenue increased 1%.
Regional growth was largely similar across geographies.
Might be OCO revenues grew and CTO h. revenues were flat.
Adjusted EBITDA was 157 million and increased 5% year over year.
Oh, you added adjusted EBITDA margins was 15.7% and expanded 90 basis points year over year.
The second consecutive quarter of strong margin expansion.
On a constant currency basis clean air EBITDA contributed 9 million EBITDA growth against an 11 million increase in sales.
Business benefited from volume and operation operating efficiencies.
To help with your models cleaner experienced the majority of divisions revenue and EBITDA impact from the GM strike and that trend should continue in Q4.
Let's turn to page discussed powertrain.
Our change sales were 1.08 billion in Q3.
Down 4% from the prior period.
On a constant currency basis sales declined 2% year over year.
Alright seasonal volume in Europe demand declines in India, and China, and softening volume in the heavy duty truck and industrial markets, where the principal drivers of the year over year decline.
Adjusted EBITDA measured 109 million flat with Q3 of 2018.
Adjusted EBITDA margin was 10.1% and increased 40 basis points year over year and benefit from better operating performance and favorable FX.
On a constant currency basis.
Our tranches to Eva EBITDA decreased 3 million year over year versus a negative 17 million decline in revenues represented 18% decremental margin.
Relative to initial expectations part chain sales and profit performance moderated more than expected, particularly in the second half the quarter.
Our commercial truck and industrial customers cut back on orders later in the quarter and those end markets tend to carry above average margins relative to the powertrain segment average.
On page nine we have updated new tenneco's full year guidance and provided details on Q4.
For Q4, we estimated value added revenues to decline in the range.
They have to tenant half percent year over year on a constant currency basis.
Sales will approximate 1.9 billion.
We anticipate 95 million to up negative sales impact into fourth quarter from the general Motors strike.
We're not factoring any production recovery for the lost volume experienced.
At the midpoint, we expect fair value add EBITDA margin to approximately 10% in Q4, which is at 340 basis points to decrease year over year.
On a year over year basis, our margin this being negatively affected by the GM strike and declining commercial vehicle and industrial demand.
Incremental light vehicle production declines in North America apart from the neighbors stoppage as well as decrease in Europe also are negatively impacting our revenues.
Further we expect timing of certain recoveries to extend past year end.
On the Capex, Brad we have trimmed our forecast by another 10 million route to the prior guidance.
Now I'd like to turn over to Brian for our view of dry Brian . Thanks, Ryan, Let's turn to results for the drive Division on page 10.
Total revenue for drive was down 3% in the quarter.
This year over year constant currency comparison includes the sale of the wafer product line and the Olin's acquisition, both of which closed during the first quarter.
FX was a 3% headwind to our revenues in the third quarter.
Ride performance revenue was up 1%, which outpaced industry production by four percentage points, mainly due to advance suspension technology content growth and higher NVH solutions revenue.
In the Motorparts segment revenues were 7% lower mainly due to customer inventory reductions in North America, and Europe , and the impact of past channel conflict issues on a positive note. The third quarter, we began to see signs of stabilization in the North America aftermarket.
Strong earnings improvement continued in the quarter adjusted EBITDA dollar performance was $142 million, a 14% year over year increase and EBITDA margin was up 170 basis points on a pro forma basis to 9.7%.
This improvement was driven mainly by capturing the benefits of synergy actions effective cost controls and portfolio rationalization actions in each segment.
We remain ahead of schedule on synergy actions and on track to having a full earnings annual savings of $115 million in our run rate by the end of this year for the ride performance business. The GM strike negatively impacted EBITDA by $2 million in the third quarter.
Our results this quarter highlight the diversification of drives the mix of aftermarket no we product solutions with the Motorparts and ride performance businesses combining to deliver strong margin growth.
As shown on the graph from a top left of the page the Motorparts aftermarket segment represented more than 70% of our third quarter EBITDA.
Overall, the outlook for our growth drivers remain strong and we continue to deliver a unique set of technologies brands and services to satisfy our customers' needs.
Some of the highlights include our ride performance. The team continues to capitalize on our advanced suspension and NVH technologies to drive new business wins, particularly on electric powertrain platforms, which represent a growing portion of our development work.
During the third quarter, we won new NVH solutions business with several large North America customers for their battery electric programs and both are NVH and ride control team secured new business, where the U.S. based all electric vehicle automaker.
This is an addition to 12 incremental advances venture programs that will be launching in 2020.
In July we announced that are only you've adjustable frontstretch said rear shock absorbers will be offered on the new pull start to the first of all electric model for Volvo.
We always theme is a great addition to our portfolio and in preparation for 2020, we've begun the work to combine our Monroe intelligent suspension team with the only in this business to create our advanced suspension technologies product group.
This group will be solely focused on the growth opportunities afforded by the macro trends in connectivity autonomy shared mobility and electrification and are creating unique opportunities for significant future growth and profitability. We expect the advanced suspension technologies group revenues to grow double digits over the next.
Several years.
Yes that has already been secured.
In Motorparts, we continue to win new aftermarket business, gaining new customers and launching new products in all regions in North America, we're making good progress when in fact business that had been lost to the previous channel conflict.
We are on track to secure roughly 25% of that lost business by the end of year.
This year, we have highlighted decisions that we made related to product categories and product lines that are expected to continue improving our future financial performance. For example, the wipers product line divestiture and programs in our North America ride control business. The drive team continues to rationalize our product portfolio.
Region by region and category by category in both Motorparts and ride performance, while these decisions will likely affect our topline in the near term, we fully expect meaningful sustained margin rate and cash flow performance improvement from any actions.
And our teams people and financial capital on fewer specific product lines in each region that business group will accelerate stronger profitable growth and as a key enabler entertain any one of our primary objectives to deliver top quartile performance in return on invested capital.
I'd like to them they invite Jason to take us through the Motorparts ride performance segment results in a little more detail.
Thanks, Brian turning to page 11 for a closer look at the Motorparts segment with the charts in the right showing a walk from the Q3 2018 pro forma to Q3 2019 actually.
The revenue chart volume and mix for the main drivers of the results.
Similar to last quarter, we saw inventory adjustments with a couple of large retail customers in North America, and then EMEA overall soft market conditions continued.
Distribution customers reduced inventory levels, mainly in western Europe .
In addition, the portfolio changes Brian mentioned in the federal mogul related channel conflict lost business impacted revenue by around 4%.
Solid year over year margin improvement continued in the third quarter with adjusted EBITDA margin up 160 basis points to 15.2%.
Earnings results were driven mainly by improved operating performance synergy achievement and effective cost control.
Right performance segment results are on page 12.
Third quarter revenue was up 1% on a constant currency pro forma basis strongly outpacing global light vehicle production that declined 3% versus last year.
Light vehicle revenue was impacted by our plan program rationalization in North America and included the benefit of growth in NVH in advance, especially technology content.
Commercial truck off highway and other revenue was up 11% and includes the addition of the holdings business.
Right formats, adjusted EBITDA was $42 million and adjusted EBITDA margin improved 120 basis points on a pro forma basis to 6.3% driven mainly by improved operating performance and synergy achievement.
Quick update on two recent restructuring initiatives and ride performance.
Just completed the relocation of our shock manufacturing operations in China.
And all manufacturing processes are now under one roof.
We're also on track with our footprint consolidation in North America, moving from for manufacturing site to too by the end of 2020 to help improve our cost competitiveness.
I'd like to wrap up the drive comments with the fourth quarter and full year outlook on page 13.
Starting with revenue, we expect fourth quarter revenue of about $1.36 billion down 7% to 10% in constant currency, including a $30 million headwind from the GM strike.
Before we expect continued softness in the EMEA OE and aftermarket and the North America ride control program rationalization will continue to impact revenue as planned.
The full year, we now anticipate revenue to be down around 5% in constant currency or it's about $5.9 billion, which includes an estimated currency headwind of 3%.
In terms of profitability, we anticipate year over year, adjusted EBITDA margin improvement of around 50 basis points in the fourth quarter, including a negative impact a 50 basis points or about $10 million from the GM strike.
For the full year, we're raising our margin rate guidance to the top of our previous range and expect improvement of 40 basis points year over year front adjusted EBITDA margin rate of 8.5% in 2019.
Finally, we expect full year capex to be in the range of $240 million to $250 million, which has a $10 million improvement from the prior guidance with that I'll turn the call over to Brian . Thanks, Jason.
Turning to page 14, let me give a few comments before we take questions first I want to Echo Roger's comments about the team members of Tenneco, who come to work every day and find solutions for driving revenue managing costs and optimizing our product lines for stronger margin performance.
Half of the entire leadership team I want to thank our team members for delivering strong results and for their continued commitment.
Tenneco delivered a solid quarter one the demonstrated many of the fundamental strengths to support our long term success, we showed strong execution through a volatile market and increased margins 100 basis points year over year. Despite the GM strike and continued industry weakness.
This industry weakness is expected to continue through the end of the year and into 2020.
We remain committed to improving cash flow performance and delivering a strong fourth quarter and full year earnings.
Earnings in working capital synergies continue to ramp and we continue to maintain our focus on outperforming the market and managing our cost structure against expected volatility.
As an update to the status of the separation of driving new Tenneco, we continue to receive strong support from our investors on the logica the separation as the business rationale remains sound, we're creating two purpose built market leaders with strategic and financial flexibility as well as operational focus to drive long term.
Q.
And we're creating an optimal financial structure, allowing each business to allocate capital based on its specific business needs.
We've made significant progress on the administrative separation of the divisions.
I expect to be operationally ready to separate by the end of this year in particular, earning synergy capture has been pulled forward ahead of schedule.
To a full run rate by the end of this year financial and operating system separation is nearing completion.
Consistent with our original transactional plan the majority of the integration costs related to the federal mogul acquisition, our been incurred in 2019, and we purposely deferred additional significant costs until the final stages of the separation.
We continue to believe that the separation of the drive business is the right.
To deliver enhanced shareholder value.
And creating an environment for both businesses to be best as a student position for long term success.
We continue to evaluate additional alternatives to further reduce leverage.
To facilitate the separation of the businesses.
Our work to date has reinforced our view that we have additional pass to achieve our objective.
The evaluation of several alternatives has already begun and we believe that tax friction costs are manageable in most scenarios.
As Tenneco continues to execute as planned for the spinoff, we intend to pursue more aggressively some of these alternatives to support our plan.
Certain of these options could help mitigate the impact of challenging market conditions, which if current trends were to continue would likely affect our ability to complete a separation in the mid year 2020 times range.
Ultimately the timing of separation will coincide with the appropriate market conditions, and we will be ready to execute a separation when those market conditions are supportive and or a potential strategic option is executed.
To ask a question you May press Star then one I touched on telephone if you are using a speaker phone. We do actually you. Please pick up your handset before pressing the keys.
So it's all your questions you May press star into.
Our first question today comes from Armintas seek a vicious from Morgan Stanley . Please go ahead with your question.
Great. Good morning, Thank you for taking the question.
When I look at the guidance for 2019, you're reducing adjusted EBITDA by about 105 million that includes general motors that about 35 million.
Can you help me bridge the remaining gap because third quarter results were in line with consensus expectations here. So it implies.
I would say that.
A more significant portion of the EBITDA.
Hi, This reduction is on new Tenneco side. So as addition to general Motors I would say on our side. There is approximately another $20 million of lower CTG for Asian industrial we've seen continued softness in that market.
We have some unfavorable powertrain mix or about five.
That's helpful.
And then with regards to the the strategic options to facilitate the separation.
Any way you can help us contextualize some other things that you're considering.
Not really say too much about that right now I think the thing to take away from this is that we introduce US excuse me ended the second quarter earnings call and since then we've been favorably impressed with the market response and the interest.
Of those statements. So we really can't provide any more detail at this point, but we will as soon as we as we can.
And then my last one here with the covenants.
Yes.
Yes, I think he's the right where is that we have we have flexibility, but I think the primary focus that we wanted to come across in this this call. In this release is what Roger already highlighted.
And Brian in the prepared remarks.
That's something that we want to spend on timeline and get a better understanding of what those alternatives looked like we have other alternatives as it relates to pretty flexible current credit facility allows us to manage through this process and then that spin covenant that you're referencing as something that could also be addressed but it's one of many tools that we have available to.
Great appreciate it thank you.
I know, you're not going to name businesses, but on the categorization of certain assets as core non core what characteristics make an asset.
Pat.
Yes, and this is Brian I think.
We'll always look at core noncore assets.
Assets or or business lines. This as a matter of course, so I wouldn't call that a special.
Anything thats cores, so that we believe as good long term growth prospects contribute well to the scale the business.
Kind of match up with the macro trends.
Opportunities are alternatives there are several some bigger than others in some of that could come to fruition as a as a one action or a combination of a couple action. So so obviously as you understand it's difficult for us to be able to put any context around that as we're in the in the middle of a bunch of different evaluations and Ryan This is Roger maybe.
I can just build out about what.
Right and says complement what he said we said at the second quarter earnings call. When we introduce this that.
We were going to make sure that we didn't do anything to hurt either one of these two businesses. So.
We're going to look at the.
Parts of the portfolio that don't necessarily fit but in as Brian said, some are quite large and some maybe not so not so large but at the end of the day. Both of these businesses are going to be good robust businesses going forward.
Okay. Thanks, and then I know you expect to be separated of course, but is there an updated view you could provide on the puts and takes or pro forma combined company free cash flow in 2020 versus 2019 Im not sure with what granularity you want to discuss the outlook for earnings in 2020% 2019, but are you able to help at least with the later.
In terms of the moving pieces relative to your restructuring costs combination and separation costs, including tax and working capital.
Three CACI and is there a higher level a targeted conversion.
EBITDA into free cash flow that you have the business over time in and how much.
Sure, Yes, Jason.
When we think about the total transaction costs, we went through that in some additional detail on last call I would say not much has changed since then which is we at that time highlighted a couple of hundred million dollars roughly $200 million of transaction cost this year and about half that is expected for next year.
As was highlighting the opening remarks were.
Doing well they tend to postpone as much of that till later ended the process. So that we can work through all these alternatives and just to ensure that we're not spending any money that could be needless depending upon what those alternatives and outcomes look like so with that said I do see that 200 million being probably a little heavy for this year I think while under spend that.
But then depending upon the outcome that could be then pushed off into some some part of 2020, but I think that overall aggregate number it's probably about right. The other elements of free cash flow for 2020 that we've highlighted is that relative to 2019, we would expect capex and restructuring to be lower by 50 to 100 million.
Get a better understanding of.
One the majority of more transaction costs advisory fee costs related to be tied to the decision on separation. So it's going to be highly variable to whenever that decision is made and we go execute one to the other thing on.
Some of the out strategic alternatives and I mentioned that in the prepared remarks with the work we've done the tax friction costs on the majority of the alternatives. We're looking at right now is very manageable and so we're pleased with that from the ability to increase our flexibility. So.
Hope that gives you which inning.
Yes very helpful. Thank you.
Once again, if you would like to ask a question. Please press star and then one.
Maybe yourself from the question Q, you May press star into.
Ladies and gentlemen, the conference has concluded we thank you for attending today's presentation. You may now disconnect your lines.