Q1 2020 Earnings Call
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Good day and welcome to the Tenneco incorporated first quarter 2020 earnings Conference call. All participants will be in listen only mode. So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one all your telephone keypad twist draw your question. Please.
Press Star then too. Please note that this event is being recorded I would now like to turn the conference over to one night Gala. Please go ahead ma'am.
Thank you good morning.
Earlier today, we released our first quarter 2020 earnings result, unrelated financial information.
The station corresponding to our prepared remarks is available on the Investor section of our website.
Please be aware that are discussion today will include information on non-GAAP financial measure.
Oh, which are reconciled with GAAP measures in our press release attachments.
When we say EBITDA.
Adjusted EBITDA.
Revenue year over year comparisons are measured at 29 p. in constant currency rate.
Specifically described otherwise margin refers to value add adjusted EBITDA margin.
<unk> earnings release, and attachments are available on our web site.
Additionally, some of our comments will include forward looking statements.
Please keep in mind that our actual results could differ materially from those projected than any of our forward looking statements.
Over the next month, we will be participating in three virtual conferences, including the Keybanc capital markets Industrials and basic materials virtual conference.
Wolfe research.
To sum it up.
And then we should be.
Global Auto industry conference.
We look forward to connecting with many of you.
Our agenda for todays starts with CEO, Brian Kesseler, giving an overview of our cold It 19 response.
Current liquidity position in Q1 enterprise performance and highlight.
Then interim CFO can travel worthy of segment performance and we'll drill down a bit more into our balance sheet liquidity and the recent covenant amendments.
I will then provide color on her business outlook and Theyre closing comments before taking your question.
Now I will turn it over to Brian.
Thank you Wendy good morning, everyone and welcome I hope, everyone is staying safe and healthy.
Before we begin I'd like to take a moment to welcome back can travel.
Joints Tenneco as interim CFO on April 1st.
I'm pleased to have his experience and expertise back on the leadership team.
And im on todays call.
This morning, we reported tenneco's results for the first quarter and the company delivered solid performance in a truly extraordinary business environment.
To start let's turn to page for summary of Tenneco's response to the Cobot 19 crisis.
Some of the actions, we're taking to mitigate its impact we're focused on three key areas first we began our response to the crisis with a focus on the health and safety of our team members and the communities, where we live and work.
We've implemented rigorous clean protocols wellness checks and social justice seem measures at all of our facilities. Many of which continued operations says they supported critical central business customers in each region.
We're also proud to partner with general motors by supplying components to increase the production of ventilators needed to support the medical community.
First of these ventilators were delivered to hospitals the week of April 14th.
Just three weeks after the project began.
Supporting this effort to help mitigate the wide spread like a vital equipment allows aligns well with our values and who we are as a company.
Second any early stages of the crisis, we aggressively flagstar cost structure by temporarily suspending or reducing operations across the Americas AMEA and most of the APAC regions in response to government requirements and production suspension taken by some of our customers.
Of course safely continued work in our manufacturing sites distribution centers to meet the demands of our OE and aftermarket customers who were still operating.
Today, I'll Tenneco production facilities distribution centers and offices in China are now open and operating at near pre crisis levels.
And as of the first week of May approximately 75% of the company's plants. Some distribution centers globally. Our operated at various levels of production up from a low 47% during the first week of April.
We continue daily coordination with our customers our supply chain partners and government in public health officials as we work to safely restore operations to our facilities as they support our customers in the restart of their businesses globally.
Finally, we have taken action to preserve our liquidity and further improve our cost structure in order to optimize cashwell I'll discuss these financial steps in greater detail, but the bottom line is that based on available industry forecast and our estimates we believe kind of go as adequate liquidity to whether the current downturn.
And emerge stronger and we are ready for the recovery.
Turning now to page five.
For an update on our cost reduction initiatives.
As you recall, we initiated the accelerate program at the beginning of the year to further reduce operating costs and improved cash flow generation.
Accelerate program targets 200 million Dollarss of annual run rate cost savings by $250 million of working capital improvements by the end of 2021.
We remain on track to achieve a 100 million dollarss savings run rate from accelerate by year end 2020.
For calendar 2020, we continue to expect that the combined benefit from accelerate in the carryover synergy project benefits will yield $100 million of cost improvement.
Regarding working capital improvements, we anticipate achievement about half of the improvement in our targeted working capital metrics. This year also consistent with our original outlook.
Further we have taken incremental steps to adjust our cost structure since covert 19 to expanded its reach beyond China.
We have initiated additional restructuring actions expected to yield $65 million of annualized savings.
On a structural basis. These actions should benefit our mid to long term margin as we anticipate a small fraction of these costs will be added back after global production normalizes the.
The majority of these actions and associated savings are expected to improved 2020 cost performance and our spread relatively evenly across the four business segments and corporate.
We have also implemented a number of temporary actions to reduce costs, including salary reductions.
Unpaid furloughs and decreasing director fees. These actions will help support our business. Some 2020, but we do not intend that they will continue beyond the current year.
However, if the demand environment word and remain depressed for an extended period of time, we would reevaluate and make the appropriate adjustments.
As a reference point the company's cost base is largely variable what's materials and labor accounting for approximately 75% of our cost of goods sold giving us the ability to flex our cost base to adjust to the demand environment.
You'll see an update on our debt and liquidity position on page six earlier. This week, we announced the completion of a Covenant Amendment agreement with our bank group through the end of 2022.
We believe the update in terms give us the flexibility required to execute our operating plan in the current baldo environment.
Ken will discuss the terms the amendment and offer additional color about the state of our balance sheet and liquidity in a few minutes.
At quarter end, we had $1.57 billion, a liquidity, including $770 million of cash on hand, and $800 million of undrawn capacity on our revolving credit facility.
Operationally, we've taken a number of actions to fortify our liquidity, we lowered our capital expenditure target by 45% year over year, our current plans to spend less than $400 million compared to the well over $700 million in 2019.
We are flexing, our working capital, including a high emphasis on reducing inventory.
Further we are deferring cash outlays, where possible, including leveraging country specific business support programs.
As a reminder, we do not have any material near term debt maturities and our credit facility matures in late 2023.
Now turning to page seven I'd like to discuss some of our business highlights for the first quarter.
In January we implemented a streamlined leadership structure to enhance operational performance and leverage the strength of a single senior leadership team across the enterprise.
We continue to make significant progress on our ongoing board refreshment process, which is designed to add fresh perspectives and leadership to the board.
Our newest board members, Alex Smith, <unk>, Roy Armes and Chuck Stevens.
I'll bring significant industry in business experience.
As well as leadership to the team.
They have hit the ground running and I look forward to continue working with each of them and the entire board of directors to better position Tenneco for success.
In addition in April we adopted a shareholder rights plan to protect the availability of our tax assets preserving long term value for the benefit of all tenneco shareholders.
Across the business in every region. We saw examples are good execution on growth strategies. During the first quarter, we continued to win and launch new programs and strengthen our product portfolio for the future, which continues to garner recognition and accolades across the industry.
You examples include.
The ride performance advanced suspension technology team added a new kinetic program win during the quarter. This is an addition to the 10 advanced technology programs launching in 2020.
Our Motorparts group continue to win new business in North America in EMEA, securing more than $20 million, an annual revenue during the quarter as it continued portfolio when complexity optimization actions.
Improved profitability across key product categories.
Commercial truck and off highway continues to drive growth as a cleaner team captured new business wins in EMEA, and China and launched a number of new CTO each programs in India.
And the powertrain team was once again recognize for product innovation. When they were awarded a 2020 automotive news pace award for Iraq's to bearing technology. Our powertrain business group has had a successful history with pace hurting 17 awards since 2006, something we're very proud of.
Page eight as an overview of our performance. This quarter total revenues were $3.8 billion and excluding unfavorable currency of $97 million decline, just 12% year over year more global light vehicle production was down 23%.
Value add revenue was $3.1 billion I would like to point out that 43% of our value added revenue. This quarter comes from aftermarket and commercial truck off highway and industrial markets and it's not related to OE light vehicle production.
Our diversified end markets helped lessen the impact of the Cobot 19 crisis, which we estimate had a negative impact on value add revenue.
$340 million or 9%.
EBITDA was $239 million.
Translated to a 7.6% margin on value add revenues aggressive cost flexing in the quarter delivered better than anticipated decremental margin performance.
Adjusted EPS was a loss of 31 cents per share.
Now I'll turn the call over to Ken who will review the business segments and our balance sheet.
Thanks, Brian.
I'll start out with clean air on page 10.
In this segment, we estimate coated related demand declines reduced our sales by almost $150 million per quarter.
Clean air value add revenues were $845 million and decreased 19% year over year on a constant currency basis.
Light vehicle revenues fell 20% year over year, and outperform global light vehicle production by approximately 300 basis points.
Commercial truck and off highway and other revenues declined 19% year over year.
Segment, EBITDA was $104 million.
Definitely 26% below the prior year period.
Adjusted EBITDA margin was 12.3% versus 13% in first quarter 2019.
Year over year profit performance was negatively affected by the significant year over year production decline in China market, where clean air has significant presence.
Further the downtime experienced late in the quarter in the developed markets, particularly North America.
Negative effect on our margin performance versus the prior year period.
Please see page 11 per review of power.
Segment revenues were $997 million.
Down 13% year over year constant currency.
We estimate kobin related demand pressures decreased sales by $70 million.
Light vehicle revenues fell 12%.
Normally outperforming global light vehicle production.
Segments regional mix contributed a good portion of the outperformance this quarter.
On a consolidated basis powertrain as below our average representation in China.
And therefore was less affected by that market substantial year over year decline into first quarter.
Segment, EBITDA was $90 million and adjusted EBITDA margin was 9% decrease of about 90 basis points versus the first quarter of 2019.
Similar to clean air the segments leadership team managed the business well against the ball backdrop.
Area, where benefit from SG any cost reductions benefited year over year margin performance and mitigated some of the negative profit impact from volume declines.
Turning now to page 12 for the Motorparts segment, where we estimate kobin related demand pressures decreased sales by $55 million.
First quarter revenue decreased 9% year over year at constant currency.
Strategic decisions to exit certain product lines impacted revenue comparisons by $26 million and included our sale of the wiper product line in first quarter 2019.
In addition segment EBITDA was $73 million and adjusted EBITDA margin was 10.3% down 100 basis points year over year.
Hi cost control and the carryover synergy savings helped mitigate the negative impacts on lower demand.
Please turn to page 13 for details on ride performance.
First quarter revenue was down 17% year over year in constant currency.
Included portfolio changes $19 billion.
We estimate coded related to the end pressures decreased sales by $65 million.
Light vehicle revenue was down, 17%, which was 600 basis points better than the decline in global light vehicle production in the core.
Commercial truck off highway and other revenue was down 21%.
Segment, EBITDA was $16 million and margin was 2.7% compared to 4.2% last year.
Operating performance, including reductions SG hanging helped offset some of the pandemic and.
We're making progress as expected on capacity reduction in our ride performance manufacturing footprint in North America.
From four plants to too.
Operations at one of the two plants slated for closing have now and.
But the second to be close before the ended the year.
Turning now to page 14 per updates on a couple of key financials.
Before I discuss our updated covenant and liquidity situation.
We booked noncash impairments of $854 million pretax $737 million after tax which were entirely precipitated by the near term passive cobot 19, driven demand decline.
A little more than half of the impact related to asset write downs and goodwill and intangible impairment charges make up most of the balance.
These charges have no impact on the long term strategic value or the growth prospects of these businesses.
On this page our via our balance sheet items that covenant terms, we secured from our lenders and liquidity position.
Starting with our current leverage ratio and updated credit men.
At the end of Q1.
Our total net leverage ratio on a trailing 12 month basis was approximately four times.
A covenant amendment to our senior credit facility, we secured earlier this week.
Provides us with additional headroom to operate current economic environment.
The major changes you should be aware of include.
Our leverage ratio will be measured using senior secured debt.
Which will exclude our unsecured notes in foreign debt.
The maximum allowed senior secured net leverage ratio occurs in Q3.
9.5 times.
Steps down to four times by the fourth quarter 2021.
Starting with the first quarter 2022, our net leverage covenant ratio will revert back to a total net leverage covenant ratio commencing with a 5.25 times threshold and then declined to 3.75 times effective Q4 2022.
Our interest coverage ratio has that changed in two times for the second quarter of 2020.
Declines to 1.5 times, beginning with a third quarter two points one.
The interest coverage ratio types of 2.75 times effective with the second quarter of 20.1.
It stays at that level thereafter.
In addition, we can apply a maximum of $750 million of cash against our total debt balance until the fourth quarter of 2021.
That allowance drops back to $500 million effective with the first quarter of 2022.
In return for the met the spread on our credit facility and term Monet increases 50 basis points to LIBOR plus 250 as long as our consolidated net leverage ratio exceeds six times.
Spreads declines is our leverage ratio improves.
For more details please reference our form 8-K filed with the SNC on basis.
Yes. The chart on the right shows that we have no material debt maturities until 2022.
And finally, we believe we have adequate liquidity.
Managed through the current low production environment.
And more importantly support working capital requirements printer unit production recovers.
At March 31st we had $770 million of cash on the balance sheet.
And $800 million available under our credit facility.
We further bolstered the company's liquidity position by drawing the remaining amount available under this revolving credit facility.
Now I'll turn it back over to Brian for our views on the second quarter, some closing comments Brian.
Thanks Kim.
Please turn to page 16.
Due to the uncertainty and volatility in the global production environment, We withdrew our financial guidance in early April.
We plan on resuming offering revenue and EBITDA guidance, when the macro environment stabilizes.
However, we want to help you understand how we're thinking about industry dynamics in the near term.
For Q2, given the substantial light vehicle production downtime being incurred by our customers.
We believe our business all experienced meaningful sequential deterioration in revenue and EBITDA compared to Q1.
On a year over year basis, I chess currently forecasts of 47% decrease in global light vehicle unit production in Q2.
We're taking a more conservative view and are planning for a mid to high Fiftys percent range decrease year over year for global light vehicle production and commercial vehicle production in a major markets we serve.
We do believe production activity will improve month to month in the quarter.
But at a gradual rate.
The North American in EMEA aftermarket industry demand decline appears to have bottomed out, but as down significantly on a year over year basis.
We have seen improving trends since mid April and anticipate gradual demand improvement as a quarter evolves.
Our various cost reduction initiatives will start to contribute in Q2 with the majority of the benefits realized during the second half of the year.
In general, we expect demand trends to improve soon but our monitoring business trends carefully and stand ready to take additional cost actions if necessary.
In many ways. The current down turn is unlike last major economic downturn in 2008 in 2009. However, there are similarities and the challenges space in the business today.
We're fortunate that each member of our senior management team successfully managed businesses through that previous downturns, either here or somewhere else in the industry.
And today, we are implementing best practices from those experiences and implementing playbooks to navigate the business through the current environment.
Well there are similarities in this current challenges there is a significant difference and strength and tenneco's global composition and overall scale.
Each operating segment and the total company has a stronger regional presence and higher mix of end markets. It serves in light vehicle OEM commercial truck off highway industrial and the aftermarket.
This scale presence and mix provides revenue and profit diversification. Unlike many in our peer group. This is a key difference I see in tenneco operating in the current environment versus the O. eight or nine downturn.
We intend to capitalize on our past experiences and leverage our current strengthen composition and scale to emerge from this crisis a stronger tenneco.
Turning now to page 17, I'd like to provide a few additional comments before we open the lineup to your questions.
Despite the unprecedented challenges facing our industry I'm confident in the long term differentiators of our business that will deliver profitable growth and support resiliency and flexibility.
As I said today, we benefit from two diversified divisions drive and new Tenneco.
Better both well positioned to generate long term value.
In these current times, we believe the diversification and scale or the business will benefit us as a consolidated entity longer term, we continue to view a separation of the divisions as the best potential value proposition for all shareholders.
We're cognizant of the market conditions and highly focused on reducing our leverage metrics as demand recovers and before we move forward with any separation in the meantime, we will continue to Opportunistically review strategic alternatives that could be executed once industry and finance market trends stabilize.
Last but certainly not least I wanted to take a moment to thank our global tenneco team for their toughness and resiliency amid today's difficult environment I.
Im truly grateful for the extraordinary efforts from our team members and their families, including helping the company safely maintain operations during the crisis to provide products and services that are considered vital to public security health and safety.
And as always I'd like to thank you for all for joining our call. This morning and for your continued interest in Tenneco.
With that we're ready to take your questions.
Thank you well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the Keith.
You All your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Joseph Spak with RBC capital markets. Please go ahead.
Hi, Thanks, Good morning, everyone on Ken good to hear your out your voice on these calls again.
I guess to start on the Capex cuts, which you mentioned were significant.
Our expected to be significant can you talk a little bit more about how does that is that program related our maybe there's some areas or some things you thought you were going to do.
Or planning to do from a footprint perspective, or maybe even from a from a tooling perspective that now maybe doesn't get down or outsourced and what does that really mean for yeah, the company's sort of future growth opportunities.
Yes, Joe This is Brian let me, let me start with that one of Ken's thoughts on after.
That reduction primarily would it be delays and capex that we would do.
You know in the future. If you remember we did guide that we're going to just be spending about $100 million less.
From that 700 million plus level last year anyway as part of our initial plan. So we've delayed and cut some of those projects.
Program perspective, so we really don't see significant delays or cancellations of program. So it's not really related to program later this more.
Some of the.
You know items that we can choose to push out and or in the way until we see something to stabilize or.
Okay, and then maybe maybe just.
Hi, I'm on the rest of the.
Free cash flow sort of factors.
If you could help us a little bit on on maybe sort of working capital.
You know over over the coming quarters, and particularly with I guess, you know factored receivables I got still help the cash a little bit here. My guess is that should be going down and maybe working other why is sort of received the receivable balance goes lower but you could if you could help sold tomorrow at the free cash while that'd be helpful.
Sure Joe It's Ken Nice to talk to you again too.
Yes. So you mentioned the factoring program and you know the factoring program is one of our sources of liquidity couple of facts about at about half of what we had outstanding at the end of the year was related to the aftermarket and so as you know those are long dated receivables and factoring program, so really our customers back on programs that.
Given the timing on those.
I have some minor impact, but not very significant the elite which is the remaining obviously, we'll have a you know a short term impact but as production begins to ramp up here later this month and into June and July.
The.
Factoring opportunity we'll come back.
So we feel like given the liquidity, we have from the revolver and the other pattern of production that.
It's a short term impact I don't think it'll be a significant long term impact.
On the rest I mean, you heard Brian talk about.
The impact on improving our working capital metrics and significantly that's on inventory, we have a lot of inventory very.
Company, but by the time I joined is very highly focused on.
The opportunity to reduce that inventory.
Given what happened what the rapid decline in production.
And.
Right near the end of the first quarter, there's certainly some inventory that the company has available to use as production ramps back up before we have to map to start to replenish that so again I would expect inventory to be.
That have a tailwind to us, especially in the second quarter, but certainly for the full year as well.
Great. Thanks, Thanks for the cost.
Our next question will come from James Pecoriello with Keybanc. Please go ahead.
Hey, good morning, guys.
Just broadly on on the quarter's decrementals and thinking about the rest of the year.
What were the key factors in driving the quarters solid conversion.
And how would you expect decrementals to trend through the rest of the year. It does sound as though the second quarter might be a little worse and then.
You know better.
Better better performance in the back half so any color there would be helpful. Yeah, maybe let me start and then I'll turn it over to Ken.
So we obviously had been talking about the carryover benefit from a synergy work that we completed last year ahead of time and so that obviously helped us in the first quarter from a comparison standpoint.
Team got in early.
At least from the China perspective of our ability to flex out somewhat cost so.
I would say good execution operationally on on Flexon.
The cost down there.
Yeah.
It's kind of across the board.
Yes.
Operationally is where we flexed, yes, Q2 will be won't have that same decremental performance.
You had to think about it so with that sharpen the downturn quarter to quarter.
I would say probably in the mid to high 20 percents.
Would be the Decrementals in Q2, and then that would start to lift as the volume continues to come back.
Can you want you got any other thoughts on that.
No I think you said it well Brian I mean, you know just so just to reiterate certainly good performance in the first quarter year over year comps there were some.
Unusual things on the first quarter last year like a supplier bankruptcy in a couple of things like that that that's certainly helped make this up.
But better but Todd.
You know your point.
Decrementals will certainly be back in the normal range, maybe little bit higher from what we've seen in the past as you move into the second quarter.
Got it that's helpful and then.
Just to confirm I guess regarding the 65 million additional run rate cost savings how much do you think you could can achieve this year and and maybe how how are those actions dispersed across the segments. A is that targeted across you know that just two business units or is it is.
Pretty broad based.
Pretty well split evenly.
Across the three before business groups and corporate.
But good majority of that is going to be realized in.
The fiscal year in the calendar year 2020, and we would expect as I mentioned a little bit earlier.
I would expect to a meaningful portion of that to remain in our run rate going forward.
So that coupled with the 200 million dollar accelerate program from margin perspective, I think sets the stage.
For pretty good.
Pretty good cost control and margin performance going forward.
Got it and then just two things.
On on free cash flow inputs, let's say.
The can you can you can give us color on.
What you expect DNA to be given the lower capex now for the year that would be helpful. And then how are you thinking about restructuring spend cash spend this year. I think you you had outlined maybe $125 million an incremental.
Cash spend so I just wonder if there if anything has changed there. Thank you.
Yes, Ken maybe you want to maybe hit the free cash flow and I'll talk about the restructuring.
Yeah, you bet.
Again like like we said earlier right I think that the.
The free cash flow will be obviously impacted by by what's going on I don't think the capex impact on depreciation will be very significant.
I guess I would point out that.
With the impairment charges, we would talk there will be an impact on.
Depreciation as we move forward kind of hard to give you a really solid estimate that right now because that has to be allocated to the individual assets, but it was sort of took an average I would guess that actually depreciation related to the impairments will be lower by.
Something in the neighborhood of $50 million on annual basis, once we get that all pushed down the appropriate assets.
Yeah, and James we took a look at the incremental savings 65, we've talked about.
We shuffled the back a little bit and really prioritize the.
Faster payback projects.
So I don't know that will be meaningfully higher than the original 125 in the year.
We put back into queue, maybe some of the longer payback ones until we can see this environment stabilize force a little bit.
Thanks, guys.
Our next question will come from our Midas. Thanks. This is with Morgan Stanley. Please go ahead.
Great. Thanks for taking the question.
First on the on the leverage side, when you were able to renegotiate those covenants terms any any changes to the leverage for new tenneco.
<unk> spend it was previously 2.9 time than Im just wondering if there any changes to that.
Yeah, no no changes to that.
Okay, and then from a strategic standpoint, I'm guessing you. If you continue to evaluate transaction does that sort of been put on hold given the environment.
Or have you continue to have discussions here.
Well I I mean is I think the way you, where you started I will be environment.
We're going on right now I think everybody's hit the pause button on any strategic alternative assessments until until we see see our way through this.
Okay, Okay, great I appreciate the questions.
Thanks.
The next question will come from Clark or ski Electra. Please go ahead.
Yeah, just circling back on the factoring facilities any change to.
Any of those terms on those facilities.
No no changes in the terms I.
No that in the first quarter, there or you know because their funding cost went up there were a couple of fairly minor changes in the and the spread on those facilities, but you know we're talking a few basis points not anything that would be significant impact.
Thank you and then I may have missed it did you quantify the the.
Run rate cost savings for.
The salary and other adjustments you made in this DNA.
No we didn't do good temporary ones.
By definition, we don't we don't intend.
Carrying through but not a lot of that factored into Q1, and so obviously, we're still flex and hard does we don't see the production here coming here until mid April from a ramp up perspective.
Thank you.
This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
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