Q3 2021 Tenneco Inc Earnings Call
Good morning, and welcome to the Tenneco's third quarter earnings Conference call, all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Renee Gala Vice President of Investor Relations. Please go ahead.
Thank you and good morning earlier today, we released our third quarter 2021 earnings results and related financial information are presentation corresponding to our prepared remarks is available on the investors section of our website.
Please be aware that our discussion today will include information on non-GAAP financial measures all of which are reconciled with GAAP measures in our press release attachments and other earnings materials.
When we say EBITDA it means adjusted EBITDA.
Unless specifically described otherwise margin refers to value add adjusted EBITDA margin.
The earnings release and other earnings materials are available on our website. Additionally.
Additionally, some of our comments will include forward looking statements.
Please keep in mind that our actual results could differ materially from those projected in any of our forward looking statements.
In the near term, we're looking forward to participating in the virtual Barclays Global Automotive conference on November 17th and speaking with many of you there.
Our agenda for today will start with CEO, Brian Kesseler, giving an overview of the third quarter and our C. O O. Kevin Baird, we'll provide more details on our performance at the segment level.
Our CFO Matti Masada niche will discuss our balance sheet progress and provide an updated outlook for 2021, Brian will then wrap up our prepared comments before we move into the question and answer session.
With that introduction I'll turn it over to Brian.
Excellent.
Good morning, everyone and welcome please turn to page four for a review of the key themes from our third quarter.
As we're all aware the operating conditions in the end to end supply chain environment are unprecedented.
Semiconductor shortages affecting our OE customer bill rates to freight and labor availability, so escalating raw material and component costs, we're managing through a unique operating landscape.
Joining them for more of the same through the end of 2021 and into 2022 more specifically in the very near term. We're planning for Q4 global light vehicle production to be about the same as Q3.
With that as a backdrop.
It is important to note that our global scale and market mix and structural cost improvement actions helped us mitigate the impact of the challenging operating environment.
Year over year basis, our volume and mix was down only 5% compared to a 20% decline in global light vehicle unit production.
On a constant currency basis, our light vehicle value add revenues outperformed global light vehicle production.
And our position in various commercial truck off highway and industrial end markets and the aftermarket helps support our revenue performance.
Material cost recovery actions with our customer base are on track and contributed to revenues in the quarter, but with no margin.
Importantly, our accelerated cost structural cost actions more than neutralize the effects of unanticipated manufacturing inefficiencies related to the light vehicle semiconductor shortages during the quarter.
<unk> ahead, we've initiated new structural cost actions that will add to the $35 million benefit from the accelerated cost program that are expected to carryover in 2022.
We are well positioned to benefit from the eventual recovery of light vehicle production volumes.
Lastly, our core growth drivers continue to build momentum.
Water parks in the commercial truck off highway industrial space delivered revenue growth year over year. Our performance solutions segment is launching 34, B EV and hybrid programs expected to yield annualized revenues of $200 million.
Kevin will add more color on the launches later in the call. But in addition, our advanced suspension technologies or ASP business within performance solutions.
Where supply advanced passive and semi active suspension for light vehicle and specialty markets.
Seems very positive reviews in the automotive press for our innovative suspension technologies equips on new <unk> from <unk> and Gili.
Turning to page five let's take a look at an overview of our third quarter results.
Revenue was $4 3 billion up 2% year over year, driven by our diversified end market mix and includes $1 billion of pass throughs substrate sales as a reminder, substrate sales were only in our clean air segment and are pass through to the customer at cost plus a small handling fee.
Excluding substrates are value add revenue was $3 3 billion down 2% year over year, excluding the impact of foreign currency exchange rates.
As I highlighted on the previous page. This compares favorably to the industry light vehicle production decline of 20% and includes material cost recovery of $110 million.
The scale and diversification in our regions and markets served are evident in the charts on the right in the third quarter just over 50% of our business was generated from aftermarket and commercial truck off highway and industrial applications.
Adding the light vehicle portion of our performance solutions business, which is agnostic to the vehicles powertrain, 65% of our value add revenue is unrelated to OE light vehicle ICT technologies.
We expect this mix to expand to 80 plus percent by the end of the decade.
Adjusted EBITDA was $279 million in.
And adjusted EBITDA margin was eight 5%.
Despite the volatile production environment, we maintained strong liquidity and our third quarter net leverage ratio improved one one times since the end of 2020.
On page six we show our enterprise performance on the left side of the slide light vehicle production declines due to the semiconductor and supply chain shortages negatively impacted our volume.
We estimate the value add revenue impact of the semiconductor shutdowns during the quarter was approximately $400 million.
And our most important geographies experienced the largest adjustment.
A normal operating environment, we would've expected to produce a low twenties incremental EBITDA margin on that revenue contribution.
Also our third quarter value add revenues included $110 million of material cost recovery.
Price in the quarter.
Although no margin dollars came with that contribution.
On the right side of the page.
Adjusted EBITDA was $279 million at a value add margin rate of eight 5% down 330 basis points with almost half of the year over year margin rate declined due to temporary cost actions put in place last year that were not expected to repeat this quarter.
Material cost recovery lag also represented a significant margin headwind compared to Q3 2020.
We remain on our plan to recover the higher commodity costs, but there's a lag in.
Each of our business segments, our recovery arrangements vary based on region and customer, which creates timing differences on a comparative basis.
In the box on the right you can see our accelerate plus restructuring savings more than offset manufacturing inefficiencies associated with the supply chain shortages, which resulted in positive other operating performance of 60 basis points versus the prior year.
Overall solid performance by the operating teams in the quarter, and we value their resilience and fortitude and a difficult operating environment.
I'll now turn it over to Kevin for a review of the segment performance.
Evan.
Thanks, Brian, let's turn to our motor parts business performance on page eight.
Aftermarket revenue was $769 million up 4% year over year on a constant currency basis on continued strong demand and relative to the second quarter. It is in line with normal seasonality. We saw revenue growth in all three regions, including Americas, EMEA and Asia Pacific in spite of the lengthening supply chain lead times there.
Having effect on our components and finished goods availability.
Adjusted EBITDA for the quarter was $115 million delivering a 15% EBITDA margin.
Compared to the prior year margin was impacted by nonrecurring temporary cost actions taken in the third quarter of 2020, as well as higher commodity price recoveries in the quarter.
Margins.
Before I discuss the OE segments, you will hear some common themes across all three including the impact of nonrecurring temporary cost actions on margins and the state of our net material cost recovery.
As Brian mentioned earlier, our commodity recovery agreements differ by product region and customer Steve.
Steel is our most important raw material input and is used by all three OE segments also clean air and powertrain have differing commodity exposures, which I will touch on shortly in addition, the late notice on OE customer production schedule changes trapped inventory of approximately $250 million as of quarter end.
And.
Please turn to our performance solutions segment on page nine.
Third quarter revenue was $686 million down slightly year over year in constant currency light vehicle applications, representing approximately two thirds of the business were down 10%, excluding currency outperforming industry production by 10 percentage points commercial truck off highway and other applications were up 58.
<unk> year over year and made up almost 20% of revenues.
Adjusted EBITDA was $38 million in the third quarter for a margin of five 5%.
Year over year earnings comparisons were impacted by the flow through of lower volumes the impact from temporary cost actions taken in the prior year and net material price inflation due to the recovery lag.
Earlier, Brian mentioned the positive Mark reviews on our advanced suspension technology on the roofing and electric pickup truck program.
In addition to our <unk> product line, we also supply that program with NPH and system protection products.
As a reminder, the five product lines in this segment are agnostic to the powertrain technology in the vehicle in the third quarter. We continued to win new business and are making inroads with China domestic OE manufacturers in their EV platforms earlier. This week, we announced our Cvs AE electronic suspension technology.
I'll make it as China debut on the new premium electric brand Zika from Chile.
Lastly, approximately 80% of our alternative propulsion launches in 2021, our battery electric vehicles.
On page 10, we show clean Arris results.
Clean air value add revenues were $897 million and fell 8% year over year, excluding foreign currency effects light.
Light vehicle value add revenues declined 22% year over year, However, commercial truck off highway and industrial value add revenues increased 48% year over year.
Clean Air China commercial truck revenues as well as North America's and Europe off highway revenues expanded nicely year over year driving the bulk of the segments CTO Hei growth commercial truck off highway and industrial comprise 27% of the segment's value add revenues in the third quarter compared to 19%.
For all of 2020.
Adjusted EBITDA was $137 million.
Value add adjusted EBITDA margin was 15, 3% compared to 15, 6% in the prior year period.
Strong manufacturing performance and effective material cost management helped offset most of the negative impact from weaker volume and the non recurrence of benefits from temporary cost actions realized in Q3 of 2020.
In addition to base steel clean air uses large amounts of stainless steel and its operations.
Page 11 is a summary of powertrain.
Constant currency revenues were about flat versus the year ago period, CTO Hei and OE service revenues, both expanded more than 20% year over year, which helped offset a 13% decrease in light vehicle revenues powertrain experienced broad strength and its CTO hei and OE service in Europe and benefited.
From the strong year over year volume in the North America on road commercial truck market.
Adjusted EBITDA was $74 million and adjusted EBITDA margin was seven 9%.
The year over year margin decline was attributable to material cost inflation due to recovery lag and nonrecurring temporary cost actions in the year ago period.
Steel is powertrains, most important raw material input, but the business consume several other metals, including significant amounts of aluminum and copper.
Accelerate plus restructuring savings more than offset inefficiencies related to the semiconductor volume losses.
I'll now turn the call to Matti <unk> to discuss our balance sheet and guidance.
Thanks, Kevin I'll begin my comments on page 13 as of September 30, our net leverage ratio was three two times, which represented a one one times improvement from our year end ratio with.
With net debt approximately even with year end.
Our free cash flow performance year to date has been neutral.
As a reminder, the normal seasonality of our cash flow was weighted towards the fourth quarter. The leverage improvement is driven by higher LTM adjusted EBITDA.
We are staying focused on cash conversion, while managing a volatile customer order schedule and the challenging supply chain environment.
Focus includes net working capital efficiency and reducing capital intensity.
Our mid term net leverage target range is one five to two times.
We ended the quarter with strong liquidity of $2 1 billion with a revolver undrawn and no significant near term debt maturities as.
As we have in the past we plan to stay opportunistic regarding our future refinancing needs.
Page 14 shows our updated 2021 guidance.
We have revised our fiscal year 2021 value added revenue guidance.
To a range of $13 55 billion to.
To $13 65 billion.
Which compares to our prior range of $13 8 billion to.
<unk> to $14 $1 billion, the change largely stems from lower global light vehicle production relative to our last update.
Our guidance assumes Q4 global light vehicle production volumes of approximately $16 5 million units flat with the third quarter, which is more conservative than IHS. This most recent Q4 update.
Actual customer production schedules have deviated from their releases over the past several months and this has continued into the fourth quarter.
Our guidance incorporates a sequential market volume decline in our key off road markets and a sequential volume decline in our aftermarket business consistent with normal seasonality.
We expect our material cost recovery via price to continue to build but will be dilutive to our margin rate comparisons.
We have reduced our 2021 adjusted EBITDA range from $1 25 billion to $1 $2 8 billion.
From a range of $1 $36 billion.
To 144 billion. The primary driver of the change is lower global light vehicle production due to the semiconductor shortages.
The EBITDA decline associated with the loss revenues is slightly higher than normal because of the sudden nature of the shutdown since mid year. In some cases, we have received little notice from the customers that production was being cancelled, creating inefficiencies and trapped costs.
We continue to recover the higher material costs, but there's a lag and commodity inflation remains elevated.
We believe that the lag from material cost inflation will continue into the first half of 2022 is our commodity recoveries timing gets caught up and assuming year over year inflation growth rates begin to stabilize.
For the full year 2021, we continue to expect year over year savings of $110 million from our salary plus cost reduction program.
We expect our net debt to improve to approximately $4 3 billion at year end seasonally Q4 is our largest free cash flow quarter.
Relative to our expectations, our inventory levels remained elevated in the third quarter due to the sudden and sharp light vehicle production reductions at several of our customers.
As Kevin mentioned, we estimate the trapped inventory approximately $250 million in the third quarter.
We are working diligently to reduce the inventory and expect that to partially unwind and contribute to our free cash flow generation in the fourth quarter.
We have reduced our estimate for full year capex spend by $50 million due to the softer operating environment and our cash taxes are estimated to be approximately $140 million $10 million lower than prior expectations.
The work our team has done since the beginning of 2020 and lowering our capital intensity and our focus on free cash flow conversion has us in a strong liquidity position with significant cushion on covenants and management team remains focused on improving our balance sheet.
I'll turn the call back to Brian for concluding remarks.
Thanks, Matti turning to page 15, I'll close with a summary of our major priorities to increase shareholder value first we have taken a significant structural cost out of the business and we're not stopping with accelerate plus program.
<unk> identified and initiated new projects that we expect will contribute meaningfully in 2022 on top of the $35 million of carryover savings from accelerate plus.
I want to emphasize that this continued focus positions the company to materially improve its margin rate performance one supply chain constraints are relieved.
And production volumes begin returning closer to 2019 levels.
Second we have lowered the capital intensity of the business to enhance our free cash flow conversion.
We remain disciplined with our capital spending levels and intend to continue to enhance our working capital turns.
In the mid to long term, we target a free cash flow to EBITDA ratio in the neighborhood of 25% to 30%.
Third we are investing in our businesses that have above average growth characteristics and returns on capital.
We believe the investments being made today in key businesses with our motor parts in performance solutions segments will enhance the company's organic growth over the long term.
Further we have significant opportunities to grow our <unk> revenue base over the next several years as new regulations in our key geographies increase quote and content opportunities.
On a go forward basis, we believe the 65% of our revenue base not associated with light vehicle IC applications can outgrow the market and drive above market value add revenue growth for the entire enterprise as the company transitions to a predominantly non light vehicle IC revenue mix by the end of the decade.
On behalf of the leadership team, we'd like to thank the more than 73000 Tenneco team members around the world for their commitment and focus in these extraordinary times and for taking care of each other and working to keep our facilities operating safely.
Proud of the high level of service they deliver to our customers as they continue to improve our operating performance. Thank.
Thank you for taking the time to join US today, operator, we will now answer any questions.
We will now begin the question and answer session.
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We will pause momentarily to assemble our roster.
Got it.
The first question comes from Colin Langan with Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my questions.
Just one I mean can we just broadly go through the puts and takes as we go into 2022.
Is there how much additional of the restructuring plan is left or are you kind of complete at this point.
Commodities do you actually get some tailwind from recovery.
From this year if they stay at these levels or are you still have some headwinds to go in.
And then what kind of you know you had some pretty rough decrementals on the guidance contemplates some relative to value added sales.
That quickly reversed should we see very high incrementals on that recovery.
Yes, Collin this is Brian.
The restructuring as we kind of alluded to in our comments.
We reaffirm the carryover.
Impact of the accelerated plus program about $35 million into 2022, and we've initiated an.
Started execution on some further structural cost improvements.
We believe.
Meaningful benefit into 2022.
I'll highlight the details on that more in our Q4 earnings call as we look forward into 2022 from a material cost perspective.
Do you see the impact on our revenue.
With the recovery of the price.
We're on are on track with those recoveries kind of where we expect to be.
That obviously are those revenue dollars are empty calories. They don't they don't they only recover costs. There is no margin in there.
And we would expect our.
Lagged too.
Increase a little bit.
This quarter.
From where we're at $710 million going up some as we get into the new year.
As commodities stabilize the LIBOR X the other way.
Price days, depending on the contract.
With the customers were where were negotiated we would see a tailwind of benefit as they stabilize and go down and so.
That's kind of that restructuring world and the tailwind world.
If you look at the Decrementals because actually if you just look on a volume perspective.
We're taking our volume down.
CTO H and then seasonally on aftermarket those are a little bit of our.
Higher margin product lines, and so that's a little bit of an impact but again the aftermarket is a seasonal so its thats kind of a usual decline Q4 sequentially and CTO, which is getting a little soft, particularly in China.
As as Theyre looking to.
Kind of phase out their phase five and get another there or.
China's five and get into their China's six a little bit more so those are some of the contributors.
Got it and can you just remind us of the.
The net impact on sorry to your income from commodities.
Or was it in the quarter year to date.
If you're looking at the quarter, we sized that at about $43 million is on the enterprise slide that the net impact of commodities on us and on a full year basis.
Will carryover about $60 million to it would be recovered into 2022. So as it is about 70 basis points impact to our full year margin.
Okay, alright, thanks for taking my questions.
Thanks Carl.
Again, if you have a question. Please press Star then one.
Our next question comes from Bret Jordan with Jefferies. Please go ahead.
Hey, good morning, guys good morning, Brett.
On the aftermarket side of the business could you talk about sort of on an apples to apples.
Volume comparison, I mean, I guess, there was some market share shift this year into the chassis category, but.
Yes.
Could you talk about what you saw in growth in aftermarket demand yes.
Volume volume was.
<unk> been maybe a bit up year over year.
Just like everybody else is especially as we're talking to our aftermarket customers.
The length of the supply chain coming out of coming out of Southeast Asia, and China put some availability constraint honest, but teams holding up pretty well as we're talking to our customers.
We're probably performed better.
From a Phil so theres still some availability gaps that.
Is that supply chain starts to loosen up and we also have now.
<unk> 30 days ago, 60 days ago, you put in the necessary orders to fill that longer cycle time from order to delivery.
It seems holding up pretty well on the fundamentals on the aftermarket still remains strong U S car sales are record prices can't get new cars. So people were.
Pay more attention to their repairs and the vehicle miles traveled is returned into the pre pandemic level. So.
We like where we're positioned.
On a year to date basis, the motor parts basis is up.
Sort of way so.
Yes.
And I guess on the fill rate topic.
You sort of give us a feeling for what your fill rates looked like maybe versus the third quarter of 19 sort of on a next pandemic basis has the supply chain look.
It's actually up from Q3 was we had.
<unk> had troubles back then.
Last year, there is still not where we want it from an available.
Not <unk>, we looked at <unk> 98, and our fill rates, yes, Oh, yes, 19 is probably down.
10 points.
Okay.
And I guess on aftermarket pricing are you have you gotten I think you'd commented in the prior question about timing of price increases, but as <unk>.
Largely pass through what Youre seeing on supply chain and materials costs and the aftermarket or is that lag.
We have we have a bit of a lag.
With Q3, we're caught up right now for Q4 paying real close attention to what's going on with the commodities as we're sitting here in this quarter, but the team has done a nice job of getting those pass through so.
<unk>.
Bit of a benefit than it is this thing stables stabilizes a little bit that legal work its way out for the year.
Okay, great. Thank you.
With no more questions. This concludes our question and answer session I would like to turn the conference back over to Brian for any closing remarks Gregg.
Great. Thank you. Thank you again for your interest and your questions. We just wanted to wrap up our call with a few comments.
Our disciplined execution in <unk>.
Operating environments has really yielded solid performance by the team since the beginning of the pandemic we.
We remain committed to delivering consistent results and create shareholder value both in the near and the long term.
The improvements in our structural costs firmly positioned us to materially benefit from the eventual return of light vehicle production volumes to pre pandemic levels in the near to mid term.
The targeted investments in our growth engines are beginning to yield both top and bottom line benefits and have set a solid foundation for our portfolio evolution through the end of the decade.
We look forward to stabilize and operating environment.
That allows us to accelerate our progress. Thanks again for your time and attention and we will look to speak with you soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.