Q2 2019 Earnings Call
Good day.
And welcome to the Tenneco incorporated second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Rich clause, Vice President of Investor Relations.
Please go ahead.
Thank you. This morning, we released our second quarter 2019 earnings results, our latest financial information.
The earnings release attachments and presentation are available on our website under the investors section section.
Before we begin 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 also note that all pro forma comparisons are measured at 20% in constant currency rates and include the federal mogul acquisition in prior periods.
We will discuss year over year comparisons on a pro forma basis, unless specifically described otherwise margin were first the value add adjusted EBITDA margin.
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.
Now onto the agenda co CEO , Brian Kesseler will provide Q2 enterprise highlights and our updated enterprise outlook.
Brian and CFO , Jason Hollar will review drives business and segment performance and offer updated guidance for dry.
At that point co CEO , Roger would move you knew Tennecos performance and then he VP Ron had Zinski will discuss new Tenneco segment financial performance provide updated guidance as well.
Roger will provide summary enterprise thoughts before we take your questions with that out of the way I'll turn it over to Brian . Thanks, Rich good morning, everyone and welcome.
As we reached the midpoint of the year Tenneco was making solid progress both in achieving our long term strategies and on strength in our business fundamentals day by day and month by month.
We talked last quarter about expectations for sequential earnings improvement and the importance of capturing the synergies identified in our integration work streams.
And this quarter I'm pleased to report that we achieved both.
As a new tenant going drive teams continue operating as distinct divisions in preparation for the spin off Roger and I remain United in our commitment to deliver tenneco strategy and outlook.
Let's review some of the company's second quarter highlights on page four.
In the second quarter technical generated $4.5 billion in revenue, which was at the midpoint of the outlook, we provided last quarter.
On a constant currency basis. This performance represented growth of 1% year over year outpacing light vehicle industry production by 9%.
Second quarter, adjusted EBITDA margin increased 240 basis points sequentially to 11.1%, which was even with the prior year.
Considering the relatively flat revenues from Q1 to Q2. This is a notable demonstration of the effectiveness of our cost management and synergy capture efforts.
During the quarter, we continued our commitment to driving growth through innovation quality and performance across the business.
Highlights include our announcement that our leaves advanced suspension technology will be featured on a performance package for the all new pull start to the first all electric model from Volvo's, New electric vehicle brand.
In June we signed a strategic cooperation agreement with new cars on a leading Chinese China aftermarket channel and retail service company to further expand our motorparts business in China.
In North America, our clean Air team won conquests light duty diesel pickup business with a leading automaker and our new global exhaust valve technology was evident during the highly visible launch of the first mid engine GE and poor bad in July .
On slide five we provided our enterprise outlook for the third quarter and the full year.
Later on today's call, Jason Roger and Ron.
We'll provide more details around that outlook as it pertains to the drive and new Tenneco businesses specifically.
Starting with the third quarter, we expect enterprise revenue in the range of $4.3 billion to $4.4 billion. This would represent pro forma year over year revenue growth of 3% at the midpoint of that range and in constant currency.
In terms of profitability, we anticipate adjusted EBITDA to be in the range of 390 million to $410 million.
With year over year margin improvement of around 100 basis points in both the new Tenneco and drive divisions.
We remain on track to complete the spin of drive in mid 2020 and are confident that a separation will create significant value for our shareholders. We are making progress with the physical separation of the two divisions and have a clear path to separating the internal processes and systems by the end of 2019.
Operationally, we achieved our targets in Q2, we continued to anticipate leverage to be at that 3.3 times by year end.
As we are keenly focused on driving operating performance improvements. We also continue to evaluate additional alternatives to further reduce leverage and accelerate the separation of the businesses as you saw last quarter with the white papers business. We will consider options for businesses that are not core to our strategic portfolio and we'll continue to look for opportunities to reduce leverage and create value for our shareholders.
Let's now take a look at our full year 2019 enterprise outlook, which we are adjusting to reflect market conditions.
We anticipate achieving between 714.6 and $17.8 billion in revenue for the full year 2019 up 1% year over year on a constant currency basis strongly outpacing the expected light vehicle industry growth by 6%.
On this revenue outlook, we expect value add adjusted EBITDA margin for the year at the higher end of the previous given range or from 10.4% to 10.6%.
That tightens, the adjusted EBIT dollar range to 1.1 billion $515 million to $1.565 billion.
In addition, we are improving our outlook for interest expense and capital expenditures to the low end of the previously given guidance ranges.
For the progress we've made this quarter and year to date I want to thank the 80000 hardworking technical 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 quality and efficiency of our processes and ultimately create value for our shareholders.
Now turning to results for the drive Division on page six beginning with an overview of revenue and adjusted EBITDA for drives two segments.
Total revenue for drive was 5% lower year over year in the quarter. This comparison includes the sale of the wiper business and the only is acquisition both of which closed during the first quarter.
Excluding the portfolio changes drive revenue was lower 4%.
And ride performance revenues outpaced industry production by seven percentage points, mainly due to higher NVH solutions and advanced suspension revenue.
In the Motorparts segment higher aftermarket revenues in China, and India were offset by lower year over year sales in Europe , as well as North America.
In North America, we are beginning to see stabilization in the second half of the year in the aftermarket.
The positive headlines for the second quarter as a strong earnings improvement.
With adjusted EBITDA dollars up year over year in total and in each segment.
Resulting in drives EBITDA margin rate expanded 110 basis points to 9.8%.
This improvement was driven by effective cost control and the benefit from the acceleration of synergy actions. We're now on track to have the forwarding synergy savings of $115 million annually implemented in our run rate by the end of 2019.
Our core 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 from the quarter include.
We continue to win new aftermarket business, gaining new customers and launching new products in all regions and the ride performance team continues to capitalize on our advanced suspension technologies to drive new business wins.
In fact during the second quarter, we were pleased to announce that our CBS A.D. intelligent suspension technology will be available on the 2019 BMW three series as well as the new Toyota Supra GR sports Coupe.
Now I'd like to end by Jason to take us through the Motorparts and ride performance results in a little more detail.
Thanks, Brian turning to page seven for a closer look at the Motorparts segment with the charts on the right showing a walk from Q2 2018 pro forma to Q2 2019 actuals starting with revenue.
Volume and mix were the main drivers the results this quarter and including inventory adjustments by two retail customers in North America, and overall soft market conditions, mainly in western Europe .
As we mentioned on last quarter's call, we did deliver sequential growth for Q1 for both regions.
Asia Pacific region delivered another good quarter with growth in China, and India, and China aftermarket growth continued from e-commerce customers and large national accounts.
We continue to expand our presence in China, adding 247, new mineral shock installers and 281, new break installers in the quarter.
But as Brian said the key takeaway here is the earnings improvement.
In the second quarter adjusted EBITDA margin was up 170 basis points year over year to 15.1% with higher earnings driven mainly by synergy achievement cost control and other operating performance improvements.
But our earnings performance in the second quarter adjusted EBITDA margin for the first half of 2019 was 50 basis points higher than the first half of 2018.
Right the pharma segment results on page eight.
Revenue in the second quarter was 2% lower on a constant currency basis strongly outpacing global light vehicle production that declined 8% versus last year.
Light vehicle revenues outpaced the market driven by advanced suspension system content and ramp up of NVH performance materials business with an electric vehicle customer in North America.
Commercial truck revenues were up slightly in the second quarter.
Right performance adjusted EBITDA was $50 million from an adjusted EBITDA margin rate improved 100 basis points year over year to 7.1%.
Movements and operational performance included the benefit of synergy actions and timing of certain customer recoveries.
I'd like to wrap up the drive comments with the outlook on page nine.
Starting with revenue.
We expect third quarter revenue of around $1.5 billion or around 3% lower in constant currency with new aftermarket business wins in North America, beginning to offset previous years channel conflict losses.
North America team continues to make good progress on re securing that business in the medium term.
Right performance will benefit from additional new program launches in China, while managing lower volumes in North America due to the planned rationalization of low margin programs the exit over the next several quarters.
For the full year, we anticipate revenue to be in the range of $6.0 billion to $6.1 billion lower by 3% to 4% in constant currency.
In terms of profitability, we anticipate year over year, adjusted EBITDA margin improvement of around 100 basis points in the third quarter and an improvement of 20 to 40 basis points for the full year.
In terms of EBITDA dollars at the midpoint.
Consistent with our prior full year guidance.
We expect earnings improvement in the third quarter and second half of the year to be driven by our focus on maintaining disciplined cost management and continue to ramp up on synergy actions.
In fact, we now expect to achieve the full synergy run rate by the end of 2019.
Finally for full year, we expect Capex in the range of 250 million to $260 million, which is an improvement to the lower end of the previous range.
With that I will turn the call over to Roger.
Thank you Jason.
Please turn to page 10.
In Q2, new Tenneco generated $2.2 billion of value added revenue down 2% year over year on a constant currency basis.
New technical modestly outperform global light vehicle production and realize good growth in the CTO each business.
FX represented more than a 3% headwind to revenues on a year over year basis.
Adjusted EBITDA was $263 million and value added adjusted EBITDA margin was 12% versus 12.7% in the prior year period.
On a sequential basis division margin expanded 150 basis points, which exceeded our guidance for a 100 basis point increase.
The clean Air group had a strong operating quarter and propelled our performance more on that in a little bit.
On a year over year basis, excluding FX and incremental corporate costs for our divisions decremental margin was approximately 16%, which was significantly better than our Q1 performance and better than our target decremental range of 20%.
Taking a step back and looking at the intermediate to long term, we continue to win new business. During Q2, we won conquest business for light duty diesel pickup truck platform in North America with a major customer.
Clearly our business is quoting a significant number of programs in the second half and we intend to preserve our record for above market growth for that business well into the future.
In the near term, we're focused on flawlessly executing customer launches and capitalizing on emissions content opportunities in China and other markets as we move into 2020 and beyond.
Now I will turn it over to Ron for a review of new Tenneco's segments.
Brian .
Thank you Roger and good morning to everyone.
Please turn to page 11, and we will begin our review of New Tenneco's segment performance.
The clean Air segment delivered value AD revenues of 1.05 billion down 2% year over year on a constant currency basis clean air value added revenues increased 1%.
North America value added revenues increased year over year and more than offset slight declines in EMEA and APAC.
On an application basis light vehicle revenues were flat and CTO age increased modestly year over year.
Adjusted EBITDA was $168 million and increased 4% year over year.
Value add adjusted EBITDA margin approximated, 16%, which represented 90 basis points of expansion year over year.
On a constant currency basis clean air EBITDAC contributed 11 million of EBITDA growth against an $8 million increase in sales.
The business benefits from a step up in engineering recoveries year over year and improved labor efficiencies in the developed markets, which enabled us to nicely outpaced our incremental margin target of 15%.
Now turning to page 12.
Our chain sales were 1.13 billion and Q2 down 9% from the prior year period.
On a constant currency basis sales declined 5% year over year.
OEM volume declines and unfavorable mix, including lower diesel volumes were contributors to the organic decline.
Adjusted EBITDA measure to $118 million down 20% from $148 million in Q2 of 2018.
Adjusted.
Sales declined year over year and was a headwind to our profit mix in the quarter.
Powertrain also experienced continues sales decline in light vehicle diesel products, which impacted margin performance versus Q2 last year.
We expect restructuring actions and lower year over year inflation headwinds to benefit the second half adjusted EBITDA margin performance relative to our first half actual.
On page 13, we have updated new tenneco's full year guidance and introduced a Q3 forecast for Q3, we estimate new tenneco's value added revenues on a constant currency basis to be in a range of negative one to plus 1% on a year over year basis.
We estimate adjusted value added EBITDA margin to expand approximately 120 points basis points year over year. This performance, but represent about a 50 basis margin increase versus Q2 sequentially.
For the full year, we reduced our constant currency value add revenue to be flat to negative 2% year over year from our previous guide of 1% growth at the midpoint.
Our revision is driven by incremental light vehicle production declines in China and Europe since our last update.
Our substrate revenue estimate has increased due to business mix changes on the margin front.
We slightly reduced our value added adjusted EBITDA margin forecast to a decline of 40 to 60 basis points year over year compared to 30 to 50 basis points year over year decrease previously.
We have trimmed our capex forecast by 10 $10 million compared to our prior guidance.
And now I'll turn it over to Roger for a summary, Roger.
Thanks, Ron.
Turning to page 14 here are the key takeaways for the enterprise.
First we increased margin from Q1 without a meaningful lift in revenues synergy and cost actions are becoming more impactful to our results.
Second we feel good about our second half outlook and we'll continue to manage our cost structure carefully in a changing demand environment.
Third we're committed to the spin and preparing diligently.
We plan to be operationally ready by the end of 2019, we are working to put the divisions in the best possible balance sheet position ahead of the spend.
As Brian mentioned, we continue to evaluate additional alternatives to further reduce leverage and accelerate the separation of the businesses.
We are incurring onetime costs in 2019, approximating $200 million that should decline by about half next year and benefit our cash flow.
We believe executing our margin improvement plan, coupled with lower integration and transaction spending next year will provide a meaningful improvement to our free cash flow performance in 2020.
Thank you for your continued interest in Tenneco and for joining us this morning.
And with that we're ready to take your questions.
Thank you we will now begin operator stunned and answer session.
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Our first question today will come from Colin Langan with UBI, Yes. Please go ahead.
Oh, great. Thanks for taking my questions.
Any color I mean overall margins are expected to improve in the second half, we're just sort of the broad.
Drivers of that.
Just continuation of what we've seen this quarter or anything additional helping.
Well, thanks relatively flattish.
Yes, Collin this is Brian I think what you'll see is the continued cadence of synergy.
Captured coming through as we mentioned on the drive side, we're expecting to get that fully into our run rate our target fully into the run rate by the end of the year and other cost management items that we've been doing.
And then obviously, we've been rationalizing some of our some of the portfolio run which has begun to lift margins too. So a combination of a bunch of different things Roger I don't know if you see it much the same model revenue Tenneco side Cowen.
And some of the cost actions that were implemented through the first and second quarter haven't been fully realized when they were implemented but they get realized more and more as time goes on throughout the year. So as those things come in.
More and more that's helping us to achieve the expectations that we have a second half.
And when I look at the.
The segments I think the only one I believe it's down year over year powertrain.
Well I mean, obviously, that's a lot of diesel I think in the past you said there are operational issues in Europe .
Higher issues are those operational issues back then should we start seeing that recover by the end of the year.
Hey, Tom This is Ron.
I think that in the second half of the year the sales growth in the powertrain business is down more than it is in the clean air So really it's a function of the volumes in the second half of the year and we've taken some.
Restructuring activities, but they're not getting the detrimental it's too early at this point is still slightly high in the quarter say, 30%, 31% I believe it was what it was so that's where it's coming from the clean air businesses have shown little more topline growth or slightly I think flattish where the powertrain business is still seeing some decline in the second half of the year you had a complement around a little bit Collin. This is Roger.
The operational issues that you were talking about were largely.
Accomplished throughout the second quarter the actions that we're taking.
We're.
Meaningful to the results that we had in the second quarter and we believe they are going to continue to help us throughout the rest of the year.
The clean air side as Ron said.
Came on strong powertrain improved greatly in the second quarter over the first quarter.
If you recall the first quarter Decrementals were much higher they did a great job of getting them more in line, but they are still working on.
Continuing to improve on that front so.
Those European issues are getting resolved for us.
Got it.
And just lastly, any benefit in clean air from the China emission standard pull forward is not actually helping the rest of the year outlook or with that kind of anticipate.
Yes, there is a benefit.
To that in the light vehicle side we.
The content per vehicle is the real story with those bill as both in the light vehicle and the commercial light vehicle, we're seeing about a 30% content per vehicle increase in commercial is significantly.
Higher than that commercial comes and following so start beginning into next year with the light vehicle is starting this year and that is helping us in that side of the business.
Got it all right. Thanks for taking my questions.
Our next question will come from Rod Lache with Wolfe Research. Please go ahead.
Good morning, everybody had a couple of questions just.
A couple of housekeeping first Roger you mentioned, the one time costs, which presumably or tax leakage advisory and the cost to achieve synergies and that those would decline by half next year could you just remind can you just repeat what what numbers those were.
Ill, let Jason answer that for the specific numbers, but I did I did mention that in the last part of the.
The presentation, where we felt that we would spend about.
That would drop by about half from what this year's run rate was but I'll, let Jason give you the details.
Yes, so the overall onetime costs inclusive of transaction fees as well as the cost to achieve the synergies that are specific to the transaction or approximately $200 million.
This year is going to be more weighted on the the synergy work streams as we highlighted in the prepared remarks, we're pulling ahead some that stingy activity. So we're spending the dollars associated with our restructuring activity a little bit earlier than what we had in north normally anticipated. So we're going to pull in a little bit more of that and likewise, we would the timing of the spending in 2020, we deferred some of the tax leakage costs until next year. So this year, it's primarily transaction in synergy costs and next year.
It will be more heavily weighted towards the actual tax tax work and as the leakage associated with that.
The remaining legal entity separations.
Okay. So it's 200 and for this year and about 100 different sources this year and next.
Sounds like and.
Just to clarify it sounds like your your EBITDA like for that for the enterprise EBITDA minus interest and cash taxes and Capex around 250 million and then you have these friction costs. This year, so that brings it down around 50.
Next year.
That would go up by a 100 million plus.
The the rollover of some of those synergies that you're you're achieving this year.
Yes, Hi, guys I got a little roll off some of the numbers you threw out but in terms of in terms of synergies for for this year, our run rate as of the second quarter is the 150 million. So we pulled that forward from the original expectation of being at the end of the third quarter and we anticipate that 150 run rate going to the 200 million by the end of the year. We started this year, if I recall correctly at about 100.
110.
100, 100 $110 million and so.
Then we get the full anniversary effect of that run rate effect of that into next year.
When you ask specifically around cash flow so.
The 50 million rack do turn at the $50 million plus the margin improvements will improve free cash flow performance.
After we have all those transaction costs and other costs.
On the way.
Okay, and just lastly, you mentioned that you're evaluating.
Alternatives to further reduce leverage.
Could you just just talk to us a little bit about what you're thinking in terms of realistic balance sheets less leverage for each division.
By the time you guys execute this then how should we be thinking about the downside sensitivity just because the motorparts in powertrain decrementals were pretty high at around 30% at this point so.
What how should we sensitize this for for different macro scenarios.
Yeah, I think if you look at the overall business Roger Enron highlighted the target Decrementals are the incremental 15% decrementals in the Twentys London.
Our ride performance business would be something close to that incrementals on the.
Motorparts business.
Start with something with a two in front of it.
And then probably 10% difference on the downside into the Thirtys, just because the profitability and on those on those product lines.
From an overall portfolio assessment letters.
Pieces and parts of each of our portfolios that.
In a matter of linked quarter matter less some matter more.
As we take a look at it if we find very much like the white papers business.
There is a better owner for that in the long term as we prioritize our.
Our capex and capital allocation, we would look at.
You are putting those out or accepting accepting people who want to look at those coming in all obviously have to big make sure that it's the right shareholder value.
Increment for.
So the decision.
I don't know that we have a specific number in mind for.
Leverage because there is a lot of moving parts that we'd be looking at but we like where we're at and we're continuing to get to that mid 2020 spend but I think thats changed its strategy. It's really key to complement on what Brian just said, we're confident in the direction that we're headed right now in terms of of that mid 2020 spin date, there were on but with that said given in any business situation. It always has merit to evaluate the portfolio to make sure that we're focused on.
What we need to be in the pieces that may not need to be in it and that will be at any ongoing scenario. Its not that we need to do something of that nature, but we're just and good business management, making sure we're focused on.
Continuing to look at that.
Are the types of things that you're contemplating could they make a meaningful dent and leverage or are they relatively small.
I think there's a mixed bag of there.
Yes, I agree.
All right.
Thank you.
Our next question will come from Ryan Brinkman with JP Morgan. Please go ahead.
Hi, Thanks for taking my question you know could you help us in terms of what are the big puts and takes relative to total company combined free cash flow as you walk from 2019 to 2021st maybe just on the starting point again does your 2019.
Year end leverage target imply roughly 100 million of negative FCF. This year and and then you mentioned 100 million of lower onetime cash cost from 2020 can you help connect some of the other dots, though like.
The ongoing level of restructuring and the effect of the cost saving the general trend in earnings and then just considering all these things do you have an estimate in mind of normalized free cash flows for the business either on a separate or combined basis.
Yes. So this is Jason I'll go ahead and start here and try to provide as much color as I can were certainly not providing a 2020 free cash flow guidance today, but we can provide some thoughts as to what we think some of the key elements will look like next year as we've already talked through a little bit one of the biggest items will be the reduction of the onetime costs associated the transaction, so that $100 million difference from the 200 to roughly half that level next year, we'll obviously be free cash flow savings.
And then our run rate synergies as we as we talk through through earlier.
Starting 2019 at close to 100 million and ending at close to 200 million, we should get the EBITDA benefit flowing through next year in that regard in terms of the other elements I would say it's probably.
A little certainly opportunity on both sides of the business.
Specifically within drive we do have some more substantial unusual costs. This year that should not reoccur in a quote unquote normalized state, which I'm not saying is 2020, but we should get closer in 2020.
And those two key areas restructuring beyond the actual synergy work streams, we did spend a fairly substantial amount of restructuring dollars. This year as well as capex to finish or progress I should say the the footprint rationalization for the North America ride control business as well as the Beijing plant move those two significant activities are going to drive probably somewhere in the at least a $50 million range, perhaps up to $100 million of incremental cash outflow. This year that we would not expect next year.
We'll define that more precisely later.
Given some of the market moves we had a little more restructuring also within the new Tenneco side.
I don't think quite the level of Capex that that's been associated with that but theres certainly some some opportunity across both businesses further there.
In terms of cash taxes interest expense those items I would expect that to be generally the same in terms of taxes from a rate perspective, and interest, especially given the current rate environment I want I would not expect that to be materially different.
And then of course working capital we will be.
$180 million to date.
By the end the year, we would expect it to be.
In that similar type of range and then within the following 2020 to get the remainder of that for the $250 million target. So we still have high conviction that by the end of the second year. There within 2020, we'll be able to get the rest that working capital and so that is a question how much do we get out of this year versus next year and certainly given our progress to date, we do feel good about about that and our ability to perhaps it's actually more but we'll see how the balance of your goes and we'll go from there.
Okay. That's very helpful. Thank you and then just lastly for me I wanted to gauge your comfort level relative to your credit facility Covenant does the stronger trend to earnings and outlook. Today mean that you don't need to pursue any relaxation of the required leverage ratio or does it still make sense, maybe to look at getting more breathing room there as some other suppliers have recently done.
Yes, so we continue to feel very comfortable with our current credit facility and everything that we've talked about here is not any different than what we highlighted before that the credit facility gives us the flexibility to transact. There is the spin covenant, you're referring to that we have to continue to look at but first and foremost we need to get ourselves ready to go at those levels and we believe that the credit facility will facilitate that.
We also think that there is potentially some flexibility within there if we feel that's the right thing, but weve not by any means come to that type of conclusion at this point. So it certainly will help facilitate the rest of this process, but also as a reminder, it's it's early on in his life and if for whatever reason. This is not the proper moment to spin it will continue along without needing additional adjustments. So we're well positioned with the flexibility provides us.
Okay very helpful. Thank you.
Our next question will come from our Manchester soon could we see us with Morgan Stanley . Please go ahead.
Great. Good morning, Thank you for taking the question.
Yes, there the margins suggests that there is.
As you mentioned the operational improvements I think last quarter. There was some talk that.
Software in integrating that was.
It was a bit challenging I don't know, if it's more or less than expected, but maybe you could talk about the integration of federal mogul.
How thats progressing how the software integration is has been moving along here from from the first or the second quarter.
Yes. This is Brian from an integration standpoint, but I think on both sides of the divisions were very pleased with the progress we're making.
Systems.
Harmonization of separation are on schedule by by the end of this quarter, we'll have as we mentioned kind of in the in the.
Scripted, but there we will be fully.
Separated operationally.
By the fourth quarter inside the fourth quarter. So.
Specialty there's really no.
Intertwining of sort of the two divisions.
After the fourth quarter. So we're real comfortable where we're at as you can see the synergies are starting to flow.
Overall, I think the teams have come together.
Very well to.
No impact the results.
Okay, and then on the driver side last quarter.
The aftermarket business was a bit of a challenge.
Particularly for your products.
Maybe you could talk to how that has progressed here in the second quarter.
And.
Any any.
If there is any challenges with the channel side or you know those are sort of fully resolved.
Yeah, I think as Weve talked subsequent to our earnings call in a few different forms.
I think it was better to to judge the Motorparts division in the first half performance because there were a lot of things going on late in the quarter in Q1, and we started to see him.
Where we expect to get back to early in the second quarter.
Our margins in Q in the first half of 2019 or actually 50 basis points higher than the first half of 2018, so making the progress that we would expect.
Second quarter started out pretty strong started to weaken a little bit again in June you could hear that in our customer's commentary july's coming.
You'll come along like we expected it to and so we will start lapping some of the previous years.
Channel conflict losses. This second half for the year will be completely lapped by the time, we get out of the year.
So with that our new business wins the team has been doing a nice job, we lost probably about $300 million in that North America channel conflict about 25% of that is what we're feeling this year and we feel we've recovered about 25% that are about already and we.
Gaining in getting the confidence of our customers back and our intention is to get that business back in North America over the next couple of years in the medium term so.
Dr. just moving along as expected, we're making the right long term plays on footprint in some of our more challenged parts of the business.
We like where we're at.
Great and last one for me here any sensitivity around leverage you're ending the year at three three.
As you think about the spin obviously, you mentioned a couple of levers here, but.
At what point and as the leverage become.
A bit challenging for the dry business, it's a bit hard without comps here, but just how you're thinking about it would be helpful.
Yes from the dry perspective, one of the one of the things that will be.
Targeting from a performance standpoint is to be 100% free cash flow conversion company in the medium term, meaning on the outside of so you have a three year window beginning to make progress there. So with the changes that were making the efficiencies we're gaining in some of the things we'll talk more about in the future around complexity and and simplification inside of the product lines.
We're comfortable with where we could see the leverage coming down on the spend and if we find other ways to de leverage will be even in a better position. So like I said were.
Confident in the direction were taken.
Great much appreciated.
Thank you.
Our next question will come from Joseph Spak with RBC capital markets. Please go ahead.
Hi, Thanks for taking the question.
So you guys provided a lot of.
Helpful commentary on Incrementals, and Decrementals, but I guess I just want to better understand.
The quarter here again, because were I guess with the exception of clean Air. If you look at just sort of the volume factors. It was it was high twentys low thirtys. So thats worse than you said and your targets how much of that.
Was the mix related stuff from.
Our diesel higher margin than than sort of gas products is that is that whats the extra.
Pain on the downside.
Hey, Joe This is Ron yes that was a contributor to act.
We saw that in the first quarter, we continue to see it on the powertrain business in the second quarter also the lost sales in China are a higher margin as well so that combination diesel in Europe for powertrain and China sales coming down with higher margins. So those are two headwinds that would prevent us from in our decremental margins in the powertrain business as you know the clean Air was was tremendous performance year over year.
But I would say that sequentially powertrain had a very good job on the sequential but the year over year was more of a challenge more.
Yes, I think it's worth mentioning Joe This is Roger I think it's worth mentioning the comfort level around so that that.
We expect on the powertrain side is going to be a bit more challenging to get down to the targets that we've set for the business then the clean air side, just because of the fundamental differences in the business. So they've made tremendous progress from the first quarter to the second quarter. They continue to work on that so it's not all that unexpected for from our perspective my perspective.
The powertrain side.
The previous federal mogul powertrain side would be a bit higher than the clean air side.
Yes from Motorparts side, we're right in the range, where we kind of think the decrementals scope of work right Im still a little higher were around 30%.
In the quarter.
Trying to get that down into the Twentys into 22 major things that impacted it one is the China volumes were down that's a better business for us and a lot of turmoil there as we wrap up the relocation of the Beijing plan into the new facility or the other the other thing is we're starting to see the volumes ramp down on programs that we chose not to replace and did not meet our hurdles from a margin perspective. So we've got to move through those over the next several quarters into next year to be able to get that fixed cost structure out as we move from four point us to two so that's going to impact it for a while but we get on the other side of our footprint moves here in North America, then I think we get right back into both the upside and the downside, it's where we where we would expect them to be.
Thats very helpful. I guess maybe to follow on.
As we think about the CTO, each and industrial business.
Especially heading into next year, I know, you're not exposed to class eight as much as some other companies, but theres. There is also growing concern on some of the other segment. So that roll into that so is that are those incrementals and decrementals any different on on that business versus what you typically see on the on the light vehicle business.
Yes. This is Roger from from our side of the of the business, we would see those.
A bit higher the positive thing that we're looking at though is the increased content in that side of the business that we're currently working on launching for.
For the CTO waste business, specifically over in China with the regulation changes long term, we're really excited about that side of the business because we see tremendous growth opportunities.
As those regulatory changes come in all through the world actually the Americas and Europe .
Increase in the regulatory framework, but in the Asia Pacific Arena.
Over the next 10 years, its a significant lift in both.
Content as well as volume so that side of the businesses is a source of real exciting for us from a dry perspective, the commercial truck off highway is less as a percentage of dynamism.
New tenneco, but the.
Margin ins and outs are about the same as our light vehicle so not no different start for us.
Okay, and then just real quick on the Capex reduction for this year.
Sorry, if I missed this but what.
What was that really do is are there any sort of efficiencies from maybe from the merger that you internalize beforehand is it timing related as a cancellation of of any projects or.
It's.
Mostly mostly the first two that you mentioned, one where we are getting some some benefit of scale off of leveraging the buy but then there are some programs that are pushed out too.
Yes from a.
From other telco side of the business we.
A really focused heavily on that as we look at increasing our cash conversion.
Efficiency in the overall organization our capital is an area that we're focused on we will spend capital where it's necessary to support the business. There is no question about that.
But we believe that across the enterprise, we have opportunities to be more efficient in the way we do it.
Okay. Thank you.
As a reminder, if you would like to ask a question you May Press Star then one.
Our next question will come from David the timber Reno with Goldman Sachs.
Please go ahead.
Okay. Thank you.
Gentlemen, I think it was a little bit touched on.
Want to get a little more clarity on it what really needs to be done to hit the targets to split the internal operations by year end.
What's still co mingled between the two will be standalone entities and what's currently already bifurcated.
The last the last step is our IP systems and we're back on that this quarter.
Then we will work through all the.
Buttoning up of anything we find there. So it really is just that operationally the management teams or are already dedicated.
We'll have some t. assays between the two organizations that are.
Less than a hand to handfuls that we'll be managing.
For a very short period of time, but it really is just the IP systems cooling car.
And we get that behind us at the end of this quarter work on anything that we have to in the very beginning of fourth quarter and we're ready to roll.
Okay, and there won't be any shared plant footprints or plant facilities.
Okay, a couple here and there, but they're already separate anyway.
Most almost all cases, it's two separate buildings on one campus. So it's very easy to separate.
Very very few very little of that David.
Okay.
And then just a last one steel costs I mean pricing in the market from coming down since the beginning of the year.
Any benefits coming in at PNM and the back half for as we progressed in the 2020.
Well, yes.
Those get mixed in with a lot of different tariff discussions steel discussions obviously on the ride performance side, we had our challenges over 16 quarters, where we absorb $60 million, but we got all of the.
Recovery mechanisms in place and so.
It's hand to hand combat in those discussions generally.
Especially with the are we so.
A lot of different moving pieces, there, but we don't see it having a meaningful effect one way or the other on on where the progress, we're making them within the quarter or the balance of the year forecast a lot of moving pieces as Brian highlighted but we did not see anything significant impacting really any of the businesses.
Okay same thing of a new telco side.
Okay understood and the last one from a list for perspective is there anything imported from China into the U.S. for your businesses.
No no no no impact.
Hi, Thanks for taking my questions.
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