Tenneco Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.31.13 | About: Tenneco Inc. (TEN)

Tenneco (NYSE:TEN)

Q4 2012 Earnings Call

January 31, 2013 9:00 am ET

Executives

Linae Golla

Gregg M. Sherrill - Executive Chairman and Chief Executive Officer

Hari N. Nair - Chief Operating Officer and Director

Kenneth R. Trammell - Chief Financial Officer and Executive Vice President

Analysts

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Patrick Nolan - Deutsche Bank AG, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

John Lovallo - BofA Merrill Lynch, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

Adam Brooks - Sidoti & Company, LLC

Richard J. Hilgert - Morningstar Inc., Research Division

Operator

Good morning, and welcome to Tenneco's Fourth Quarter and Full Year 2012 Earnings Release Conference Call. [Operator Instructions] Today's call is also being recorded. If you have any objections, please disconnect at this time.

Now I would like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

Linae Golla

Good morning. About an hour ago, we issued our earnings release and related financial information. In a bit, I will turn the call over to our Chairman and CEO, Gregg Sherrill; Hari Nair, our Chief Operating Officer; and Ken Trammell, our Chief Financial Officer. They will spend the first half of the call taking you through a detailed explanation of our fourth quarter and full year performance. Slides related to our prepared comments are available on the Investors section of our website at tenneco.com. We will then open up the call for questions, and the conference operator will explain the process for asking a question at that time.

Before I turn the call over to Gregg, I need to note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release attachments. The earnings release and attachments are posted on our website.

In addition, some of our comments today 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.

With that, I will turn it over to Gregg.

Gregg M. Sherrill

Thank you, Linae, and good morning, everyone. A year ago, I said that we would continue building on our positive momentum in 2012, and I'm pleased to report that the results showed just that. Our solid performance in the fourth quarter and for the full year reflect the focus and resilience of Tenneco's global team as we delivered strong execution on our growth opportunities, improved our operations and effectively worked through macroeconomic challenges.

For the full year, we delivered record high results on key financial metrics, including revenue, net income, earnings per share and EBIT, and recorded our lowest ever leverage ratio. We also reported records in net income, earnings per share and adjusted EBIT in the fourth quarter.

Turning first to revenue on Slide 4. For the full year, total revenue was $7.4 billion, up about 2% from last year. If you exclude substrates and currency, revenue was up 7%. We leveraged stronger industry light vehicle volumes in North America, China and India and benefited from incremental commercial vehicle revenue. The aftermarket in North America also had a solid year with sales up in both product lines.

These positive drivers helped us counter weaker volumes in Europe and South America, where macroeconomic issues impacted the entire industry. While we had weakening in our Europe OE volumes in the second half of the year, our fourth quarter revenue overall is still up about 2% after adjusting for substrate sales and currency. Finally, the industry as a whole continues to struggle in Australia, with lower volumes impacting revenue for the year.

Taking a closer look at our commercial vehicle business on Slide 5, I'm pleased with how we continue to leverage this opportunity. New program launches are going very well, and for the full year, our total commercial vehicle revenue was $804 million, close to what we anticipated at the end of the third quarter when we saw further volume softening in both Europe and North America. Overall, commercial vehicle revenue grew 22% over 2011.

Now having said that, it's worth reminding everyone that market conditions for our commercial vehicle business, particularly off-road, were very challenging in 2012. The capacity we have installed based on our customers' original volume expectations is currently significantly underutilized due to current market conditions. This temporary underutilization is approximately 45% across North America, Europe and South America, and in my view, makes our 2012 performance all the more impressive and bodes very well for the future when markets recover.

The regulatory and technology drivers for this market have not changed, nor have our strategies for delivering growth. Tenneco is well positioned with market-leading aftertreatment solutions and engineering capabilities to execute on a very robust book of business, as shown on Slide 6.

Most importantly, we continue to win new business with the world's leading commercial vehicle and engine manufacturers. In the fourth quarter, we won on-road aftertreatment business with Mahindra in India, and in Europe, we were awarded off-road business with Scania, which is an addition to the on-road Scania business we announced last quarter.

Now turning to EBIT on Slide 7. We delivered our highest-ever fourth quarter adjusted EBIT. It rose to $94 million despite industry volumes further softening toward the end of the year. Our fourth quarter earnings also included a $5 million expense for deferred and long-term stock index compensation, which represents $0.06 per diluted share as a result of our stock price increasing 25% in the quarter.

Our fourth quarter EBIT contributed a record high full year adjusted EBIT of $443 million, up 11%. The full year results reflect Tenneco's strength in capitalizing on higher light vehicle volumes, mainly in North America and China; good execution on incremental commercial vehicle launches; and the benefit from higher aftermarket sales in North America. We're also seeing operational improvements as our new plants in China, India and Thailand continue to ramp up production on new programs.

Our earnings results were also evidence of how we managed difficult economic conditions in Europe. We countered some of the impact by flexing our operations to lower customer production schedules, implementing a number of cost-reduction initiatives and continuing to make operational efficiency improvements. As a result, I am very pleased that we delivered margin improvement in both the fourth quarter and for the full year. Our adjusted EBIT margin on value-add revenue rose to 6.9% from 6.5% in the fourth quarter. And for the full year, it increased to 7.8% from 7.2%.

Finally, I want to highlight our outstanding cash performance. We generated a 21% increase in cash from operations in the quarter, which contributed to $370 million for the year, driven by higher earnings and continuing to effectively manage working capital.

In closing, I would summarize 2012 as a year of overall solid operating performance, including successful launches that position Tenneco well for market recoveries. Our team of 24,000 employees around the world is performing well by all accounts, capturing Tenneco's outstanding growth opportunities, executing on new programs and with new customers and managing through industry challenges. I thank them for their hard work and for delivering a very good year.

And with that, I'll turn it over to Hari to talk about our segment results.

Hari N. Nair

Thanks, Gregg. Beginning first with North America on Slide 9. OE revenue in the quarter was up 5%, excluding substrate sales and currency. We leveraged volume in some of our key platforms, including the Ford Focus and Flex, the Dodge Ram, and benefited from an increase in revenue with John Deere.

In the North America aftermarket, revenue was up [ph] 1% driven by higher ride control volumes, which more than offset slightly lower emission control sales during the quarter. Adjusted EBIT for North America increased 17% to $55 million. This improvement was driven by leveraging volumes in both OE businesses, managing our operational costs and continued strong aftermarket sales. For the quarter, our value add adjusted EBIT margin increased by almost 1 percentage point to 8.8%.

Turning to revenue for the Europe, South America and India segment on Slide 10. Europe remains a challenge, with economic weakness continuing as a negative driver throughout the region. Total Europe OE revenue was down 9%, excluding substrate sales and currency, largely driven by volume declines on some of our largest ride control platforms. To a lesser extent, the revenue was also impacted by volume declines in the emission control business.

Europe aftermarket revenue was down 6%, excluding currency, driven by a sharp decline in emission control sales. The aftermarket continues to suffer from the recession across Europe as consumers put off discretionary spending. While we've seen some stronger ride control sales in Eastern Europe, the declines in Western Europe have more than offset these gains, and the aftermarket in general remains depressed.

As we look at Europe, it's clear that it will be a prolonged weak industry environment as the entire region works through recessionary economic conditions. Therefore, we continue to take actions that adapt our footprint and cost structure to align with this environment.

During the third quarter, we announced our intention to close an aftermarket plant in Vittaryd, Sweden. We have completed our consultations with the works councils and are moving forward with this action. Today, as detailed on Slide 11, we've announced our intention to take additional actions in Europe that will reduce our structural fixed cost by $60 million annually, including the Vittaryd closure.

Our goal is to align our operations with what we expect future markets will demand based on our customers' plans, industry forecasts and expectations for economic recovery throughout the region. We'll provide more details as we're able to announce specific actions. We expect that costs related to these actions will be approximately $120 million with most of the expense recorded over the next 2 years, and we anticipate reaching a full savings run rate in 2016.

In South America, fourth quarter revenue was down on negative currency. And in India, revenue increased year-over-year on higher light vehicle volumes as we continue to execute well on our growth. Adjusted EBIT for the Europe, South America and India segment was $18 million versus $28 million a year ago. The EBIT decline for this segment was driven by unfavorable currency of $4 million, a 7% decrease in European light vehicle production, lower European aftermarket sales and the impact from underutilized capacity across Europe. Value-add adjusted EBIT margin for the segment decreased 1.4 percentage points to 3.4%.

Our Asia Pacific results are on Slide 12. Excluding substrate sales and currency, revenue increased 17%, reflecting the strength of our China operations. We leveraged higher volumes with our position on strong selling platforms, especially with Ford, General Motors and Volkswagen. Adjusted EBIT for the Asia Pacific segment was up 50% to $21 million, driven by the strong production environment in China and manufacturing cost improvements as we continue to ramp up programs at our new plants. We also benefited from volume recovery and growth in Thailand and the restructuring and operating improvements we've made in Australia. For the entire Asia-Pacific segment, value-add EBIT margin increased 2 percentage points to 9.7%.

Finally, I think it's important to point out that our strong execution and focus on controlling costs is always accompanied by a commitment to safely operating our plants. During 2012, Tenneco's global total case rate improved 29% to 1.13 [ph], the lowest in our history and evidence that safety remains our #1 priority as we continue to grow.

To conclude, despite some tough economic conditions, we executed well on winning and launching new business, converting on our revenues and delivering strong operational performance. With that, I'll turn the call over to Ken.

Kenneth R. Trammell

Thanks, Hari. I'll start with the quarter's adjustments on Slide 14. The restructuring charge of $3 million or $0.04 per share primarily relates to closing the aftermarket manufacturing facility in Sweden we announced last quarter. Second, related to the European cost reduction efforts that Hari discussed, we recorded a non-cash charge of $7 million or $0.11 per share to write down certain assets in the European ride control business. There is no tax benefit on this write-down. The charge is included in the total anticipated cost of $120 million. Finally, we recorded a tax benefit of $2 million or $0.03 per share related to an adjustment of prior-year estimates.

Now on to Slide 15. Because we no longer have a valuation allowance on our U.S. net operating loss, beginning with the first quarter of 2013, we will no longer adjust taxes to the 35% U.S. federal statutory rate in our quarterly earnings release. Prior to establishing the U.S. valuation allowance, our tax rate was usually in the range of 35% to 40%. In the fourth quarter, cash taxes were $26 million. That's about even with $27 million last year. Full year cash tax payments were $80 million; that's consistent with our most recent guidance.

Turning to Slide 16. Our interest expense was $21 million in the quarter. That's down 22% compared with $27 million last year as a result of the debt refinancing we accomplished in 2012's first quarter.

Now as you can see on Slide 17, cash generated from operations in the fourth quarter increased to $244 million, up 21% compared with last year's performance. The improvement of $43 million was driven by earnings and our continued focus on managing working capital. On a last 3 months' basis, our days sales outstanding, excluding factoring this quarter, was 56 days, even with last year's metric. Inventory days on hand was 41 days, up from last year's 35 days. Days payable outstanding was up 2 days at 72 days.

Moving to Slide 18. Capital expenditures were $77 million, a little lower than the $80 million in the prior year quarter. We continue to make capital investments to support our future growth in both light and commercial vehicle programs and new projects related to recent customer wins. For the full year, capital expenditures were $263 million.

Finally, on Slide 19, I'll take you through debt and available liquidity. As of year end, debt net of cash balances was a record low $957 million, down from $1,010,000,000 a year ago. Our leverage ratio improved to 1.5x, a record low. I'm very pleased with the progress we're making to reduce our net debt to strengthen our financial position. At December 31, we had $710 million in unused borrowing capacity under our revolving credit facility. Additionally, cash on hand was $223 million, and we had the capacity to sell another $105 million of receivables.

With that, let me turn the call back to Gregg.

Gregg M. Sherrill

Thank you, Ken. As we wrap up, let me say again how proud I am of our employees and their ability to successfully launch programs and manage through some challenging conditions in 2012, especially in Europe and our commercial vehicle markets, and deliver record results for the fourth quarter and the full year.

I want to remind everyone that Hari, Ken and I, along with other members of Tenneco's senior leadership team, will be in New York on February 14 to host an investor meeting. At that time, we will provide our guidance for revenue, CapEx, interest expense and cash taxes and give a more detailed review of our strategy and operations.

However, today, I do want to give some color on the first quarter and what we see in terms of our outlook there. Looking at the forecast from IHS Automotive for the first quarter on Slide 20, global light vehicle industry production is expected to be down 2% year-over-year in the markets where Tenneco operates. We anticipate economic weakness to continue in Europe with North America and India also down, while China and South America will be up compared with last year's first quarter production.

Turning to the outlook for commercial vehicles. As we start the year, we see a production environment that looks very similar to the last quarter. We expect the relatively weak economic conditions to impact both the on-road and off-road markets and anticipate their first quarter industry volumes will be lower year-over-year. Power Systems Research is forecasting a 17% decline in North America Class 4 through 7 production, and we expect no improvement in the emissions-regulated off-road market, which is Tenneco's largest commercial vehicle business.

Despite the current volume pressure in the commercial vehicle markets, we are obviously very pleased with our book of business. As I mentioned upfront, we continue to win new business with leading commercial vehicle and engine manufacturers, and I'm confident we'll benefit from this strong position as industry production cycles begin to recover. In the aftermarket, we expect the first quarter to be essentially flat year-over-year in North America with European aftermarket remaining weak due to the ongoing macroeconomic conditions throughout the region.

So considering the lower global light vehicle forecast and our expected first quarter commercial vehicle volumes, we anticipate that our total revenue for the quarter will be down slightly year-over-year, and macroeconomic and political issues in the U.S. and Europe continue to create uncertainty in the potential for further production weakness. While we anticipate the revenue guidance we'll give you in a couple of weeks will show good full year growth, including in commercial vehicles, it will clearly be weighted toward the second half of the year.

In conclusion, Tenneco delivered a very solid performance in the fourth quarter and a strong year in 2012. We begin the new year with some near-term volume weakness but with great opportunities before us as we continue to win new business, execute on program launches, expand in the fastest-growing markets and keep driving profitability.

And with that, we will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Rick Kwas.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Wells Fargo Securities. Gregg, I don't want -- or Ken, I don't want to steal your thunder for a couple of tab [ph], but given the European outlook for production here for the first quarter down 10% -- over the last couple of quarters, Gregg, I think you've been a little bit out in front in terms of talking about weakness and indicating how trends are going in Europe, and you've been out with the forefront a little bit. If you look at the year and how it's playing out, most suppliers are assuming down 3%, which is pretty much in line with IHS. What's your views of the risks on both sides of the ledger here when you look at '13 on that front?

Gregg M. Sherrill

And you're talking about specifically Europe still?

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Yes, yes.

Gregg M. Sherrill

I truly think with the levels we're at, at Europe right now going into 2013, the IHS numbers, in my view, are likely about as good as you can triangulate in on at the moment. If there's -- I don't see upside, okay? There's clearly potential for downside. I mean, we can have -- fairly quickly announced production interruptions, scheduled -- or unscheduled downtime, that sort of thing. But overall -- which could just make the year a little bit lumpy quarter-after-quarter. But overall, I would say that several percent down that they're looking at is pretty good, because we're already in a pretty low level. And what I have said is that I think it's going to stay in this range for several more years. We just don't see it getting much better with the situation they face.

Kenneth R. Trammell

Yes. I mean, Rich, if you take out the crisis year, the projection for 2013 in Europe is a number that's about consistent with 1997's production level. So it will be the lowest since that time. So it -- like Gregg said, it's certainly low. There's some rest to the downside, not much to the upside. But we think that's probably the best estimate that we could use right now.

Gregg M. Sherrill

We've really kind of taken all that into account as we really finalized these recent restructuring plans and feel like we sized that restructuring now pretty well. I mean, things could still change, but we -- and we'll be flexible if they do. But we still got -- we know there's eventually going to be upside opportunity in Europe. We know the emissions play is still going to be there, we know our ride control business will come back to some point out there in the future, but we're just anticipating Europe operating fairly low for some period of time and -- in the any foreseeable future, not coming back to where it once was.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Gregg, and that leads into my next question. So the restructuring, what volume assumption are you looking out for the next several years? It sounds that -- Ken, you alluded to -- it sounds like you're assuming something in the $18 million to $19 million range for total Europe for production. Is that right when we take into account -- when we're looking at the -- what you're doing on the restructuring side?

Kenneth R. Trammell

Well, I mean, certainly, we're expecting some recovery in the market, but a lot of that recovery is in the commercial vehicle side. A fair amount of what we're doing is focused on sizing the business and moving our cost base to places where it's a little less expensive to operate, some manufacturing capacity expansion in Eastern Europe. But we've certainly taken into account what we think will be some recovery in Europe and light vehicle, and certainly, some recovery in the commercial vehicles.

Gregg M. Sherrill

A lot of recovery in light vehicle. Remember, a lot of our capacity in light vehicle -- although over years, we have already taken some capacity out in Europe, there's a lot of legacy capacity there. Commercial vehicle is not legacy capacity for us. We've only recently installed it. So we haven't installed it necessarily to the levels the light vehicle was installed to years and years ago. And as I indicated, kind of on average across the 3 big regions, we're considerably underutilized, but we do anticipate over the next several years that coming back.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay. But it's fair to say you're not assuming -- longer-term, you're not assuming the light vehicle production in Europe stays at the current level in '13?

Gregg M. Sherrill

Not at the current level, no. I mean, it's going to eventually come back. But I'm not convinced that it'll ever come back to the full levels that it ever was, that -- I can't remember what that was now. It seems so long ago.

Hari N. Nair

22.

Gregg M. Sherrill

Okay.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Right. And then last one just from me is on rest of world EBIT margin, continued progress there. Are you kind of through leverage -- how far are you in terms of leveraging the China investments? I know you'd put up capacity in there, fixed cost in there, and you're starting to lever that. But how far along are you on that front?

Kenneth R. Trammell

We've made some pretty good progress, Rich, that we're going to continue, I'm sure, to add capacity over the next few years in China. But in terms of the fairly significant series of investments we made about 18, 24 months ago, those are filling up nicely. Some of the plants have still got a ways to go, but most of them are -- certainly, we've done a pretty good job of absorbing it. So there's probably still a little bit to go just in terms of the leverage on the fixed cost. But I think we've seen most of it in the margins at this point. It's volume growth that will continue to...

Gregg M. Sherrill

Yes, I agree with that totally. We're pretty happy, obviously, I think, with our margins, in China in particular. And the next catalyst in China will clearly be the significant upturn in commercial vehicle volumes, which we still can't say for sure when that will be.

Operator

The next question comes from Patrick Nolan.

Patrick Nolan - Deutsche Bank AG, Research Division

It's Deutsche Bank. So a couple of questions. Can you just talk about how you see the -- I know you don't want to talk about margins, but maybe if you just kind of help us think about how the impact of kind of the breakdown of Europe will play out next year? So the biggest declines are going to be in the first and second quarter, and then if you believe the IHS forecast, there'll be a rebound in Q4. Are the decrementals on the declines we're going to see in Q1 and Q2 going to be a lot worse than the historic kind of decremental levels just because you're not going to be able to take out cost as much, because you'll have to be able to ramp back up in the back half?

Gregg M. Sherrill

It's -- right now, it's really tough. Obviously, we don't give specific margin guidance. Last year, clearly, I did give directions -- directional information for you. In fact, in the beginning of the year, we said we were going to improve margins quarter-over-quarter throughout the year, and obviously, with this last release, we did in fact do that. We're very pleased with it. Overall, our margin trajectory is still positive. But I have to say, in the first quarter, with the conditions that we're seeing, light vehicles basically down, commercial vehicles down to certainly not getting any better, that it would be very challenging to show year-over-year margin improvement of any significance in the first quarter. I mean, clearly, we still got some pluses: China is still a plus, and it's up some in the first quarter. Operating improvements will continue. But we're coming up against -- we're sitting there underutilized by 45% right now in the commercial vehicles, and light vehicles themselves are not going to be as big as a help as they have been this year. So early on, it's going to be a challenge. The overall trajectory, I still feel very good about. But I'm not going to forecast it on a quarter-by-quarter basis this year like I did last year.

Patrick Nolan - Deutsche Bank AG, Research Division

All right. And just to follow up on that 45% underutilization. It that -- I assume that's just kind of brick-and-mortar capacity, not really man capacity?

Gregg M. Sherrill

Well, it would be capital capacity. It certainly would not be pure man capacity. We flex that, clearly, and it's flexed almost thoroughly in North America and reasonably well in Europe and South America.

Patrick Nolan - Deutsche Bank AG, Research Division

Okay. Have you seen any content -- have your content on your commercial vehicle businesses kind of stayed consistent with your expectations throughout 2012?

Gregg M. Sherrill

Yes, we have. Yes.

Operator

The next question comes from Chris Ceraso.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Crédit Suisse. If our math is right, it looks like your commercial revenues were actually down a couple percent year-over-year. Can you speak to that? Can maybe you break down how much business was coming on in the quarter versus programs or markets where you saw weakness that was offsetting that number?

Kenneth R. Trammell

Launches for Tier 4 interim, this is the last year, so most of that business was already launched earlier in the year. We did see some uptick in the Brazilian numbers because the volumes have come back a bit from where they were earlier in the year there, not a lot, but a little bit. But like Gregg said, the weakness is both in the on-road markets, especially here in North America, Class 4 through 7, and a fair amount of the non-road business, and that's really both regions, Europe and North America.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. So it's just volume weakness on existing programs offsetting any new business that was coming on, and effectively, you didn't have much new coming on in Q4. Is that right?

Kenneth R. Trammell

Most of the launches for this year certainly occurred earlier in the year. We'll start ramping up a very little bit. We started in the fourth quarter of this year for the final phase-in of Tier 4 interim. Tier 4 final launches begin later in 2013.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So when is the next slug of new commercial business that starts to come on, and what pocket is it? Is it Europe, is it North America? Is it on-road, is it off-road? Just give us an idea of what it is and where it is.

Gregg M. Sherrill

It's primarily off-road and is Tier 4 final, launching towards -- beginning to launch. That will be a 3-year phase-in as well. So the first year phase-in begins the launch towards the end of this year. And that will affect, I think, North America for the most part, some in Europe as well. And that's really where we'll sit. Up until that point in time, it will be a volume-driven story, until those launches begin to ramp up.

Kenneth R. Trammell

Chris, the China regulation is still officially on the books to change July 1, 2013. We have heard that they're actually selling canned fresh air in Beijing right now. So hopefully, that bodes well for that. But again, like we said before, even if that official date stays there, we expect a very slow ramp in. So there probably would not be a lot of China right away, but we should see a little bit of volume if that official regulation stays on for July 1 of this year.

Gregg M. Sherrill

But -- yes, but just to reiterate, the most significant thing is Tier 4 final beginning towards the end of the year, and then that's a 3-year phase-in as well, as we've said. Both North America and Europe.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Okay. So you're kind of exposed here in the early part of '13 until we get to the back end and some of this new stuff begins to ramp?

Gregg M. Sherrill

It will be a macroeconomic industry volume story up until then.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

.

Does that help explain why the utilization is so low? Is that mainly a commercial issue?

Gregg M. Sherrill

That is commercial. In fact, that was off-road.

Kenneth R. Trammell

The 45% that Gregg talked about is the commercial vehicle underutilization.

Gregg M. Sherrill

It may be total commercial, but it's predominantly off-road.

Kenneth R. Trammell

Yes, the biggest underutilization is on the off-road side.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And when -- what's the timeframe for that getting better? How long will it take to fill up that capacity? It sounds like a big number.

Kenneth R. Trammell

It was -- certainly, the capacity was put in place based on the assumptions that our customers had in terms of volumes at the time. They're down. I mean, if you listen to all of our customers' releases, they talk about how weak they are right now.

Gregg M. Sherrill

They're down, and they've been pulling a lot of inventory down. You've probably read a lot about that. So the good news is I think their inventories are getting very much in line, and then that would bode well for some production recovery. And then it's going to depend on the economic conditions and the confidence of the industries that utilize that equipment.

Operator

The next question comes from Pat Archambault.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

From Goldman Sachs. I just wanted to follow up a little bit on Chris Ceraso's question. It looks like if you take the, what is it, $172 million that you did for commercial in the fourth quarter and annualized that rate, just very simplistically, that's kind of in the $688 million. So that would -- that run rate would imply very simplistically that it would be down on a full year basis from the $804 million that you did in '12. And just given the conversation you just had, I don't want pull ahead stuff from the 14th, but given the conversation you just had with some sort of limited launches, I mean, could we really be thinking about a commercial vehicle that's flat or even slightly down in 2013? Or is there at least enough stuff to offset the volume headwind?

Gregg M. Sherrill

Yes, let's be clear. I think the way we interpreted the last question was relative to that full underutilization and sort of when were markets coming back to that. We are expecting some pickup in the back half of the year in the commercial vehicle markets as well, plus we got a little -- some launch help coming on. So we would anticipate still, at this point in time, and this will be an economic sort of driven thing, that we're still going to grow commercial vehicle business year-over-year, but it's going to be back half weighted.

Kenneth R. Trammell

Yes, in fact, in the section when Gregg was talking about, near the end of the -- our presentation, he pointed out that we'd expect to see good growth overall for revenues this year as well as some better-than-average growth for the commercial, vehicle because there is still business...

Gregg M. Sherrill

All the way back to that full utilization this year.

Kenneth R. Trammell

And there is still business that's launching this year.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. That's very helpful...

Kenneth R. Trammell

When we present, we will be up year-over-year in commercial vehicle revenues when we give you the numbers in 2 weeks.

Gregg M. Sherrill

Right. We are going to support that.

Kenneth R. Trammell

Just to put a fine point on it.

Gregg M. Sherrill

I think I said that earlier. Again, it was a little confusing. We were -- that last comment was more at when do we get back to normal. But there should be some recovery, we think, at the back half of the year, just not all the way back to normal.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, great. No, that's very helpful clarification. Maybe just one -- 2 more real quick ones. Number one, out of the $120 million you're spending for the European restructuring, can you just give us a sense of how much is cash, how much is write-downs? And then my final question, maybe this is more for Hari Nair, but you guys have done a very, very good job in terms of cost performance over these last couple of quarters. I mean, obviously you have to make your own assumptions, but it just seems that there's been $10 million, $15 million plus every quarter of just operating efficiencies and performance. How much low-hanging fruit is there for that to be carried forward into subsequent quarters?

Kenneth R. Trammell

So I'll start with the restructuring question to address that. Out of the $120 million, certainly a big piece of it, and I'm going to say probably in the neighborhood of 3/4 of it, will be cash. Maybe a little bit more, maybe a little bit less. But we -- as we're able to give you specifics about those actions, then we'll give you some more details on the cash.

Hari N. Nair

And on the second question, Pat, I mean, clearly, we've been working hard on continuing to improve our operations, which really cover the spectrum all the way from pricing, material costs to -- down to the plant performance. And yes, we have been improving pretty much across the board in all regions, focusing very hard on Europe for the reasons already discussed. And we plan to continue the effort, all the initiatives we have in place with our Lean programs in manufacturing, the Six Sigma initiatives, and really staying very, very focused on the commercial side, as well as materials management. I mean, it's really an across-the-board effort across the globe, and that will just continue.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. So you can sort of sustain rates that we have seen in the past couple of quarters?

Hari N. Nair

And that's exactly how we're planning to manage, yes.

Operator

The next question comes from Brian Johnson.

Brian Arthur Johnson - Barclays Capital, Research Division

Barclays. I just want to maybe talk a little bit more about the aftermarket trends both in U.S. and in Europe. Let's start with the U.S. It seems to be a no-drama segment now. You were up 1%. Is there anything, remembering we had a weak first quarter last year, partly mix, partly weather, that you're seeing in terms of your order rates or what you're seeing on the -- your category management, the shelf there as you look forward?

Kenneth R. Trammell

Yes, I think the aftermarket in North America is kind of back to that slow growth period that we've been predicting for the last 3 years. You've seen it kind of ramp down over the course of 2012, whereas we had a number of quarters of double-digit growth and then some high single digit quarters were kind to back to that normal pattern. At this point, we don't see anything that indicates that's going to change.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. And on Europe, I guess a couple of things. I guess we're all braced for a weak aftermarket in Europe, especially after seeing the Ford service parts results. But what is accounting for this vast difference between ride and emissions? Is it still the Western versus Eastern European? And then how are you thinking about aftermarket rolling into the year? Is this deferred maintenance that will have to come back but lack of consumer confidence puts it off? Or is this a -- as you've talked about with the OE builds, just a structurally lower level of demand?

Hari N. Nair

This is Hari. In general, as I described it, obviously, the macroeconomic environment is a big factor overall affecting industry demand. When you look at the regions, I touched on it, Eastern Europe is still showing some growth, not a lot, but Western Europe is in general collapse, particularly as you go towards Southern Europe. And the other factor across our product lines, clearly, there are some differences in demand patterns, and the stainless steel effect from years ago is still having an impact, negative impact on overall industry demand patterns. So the demand -- fundamental industry demand continues to decline. And that's just -- remains in place, compounded by the economic factors. And on the ride side, there is a factor where the ride sale process is a little more impacted by safety and other factors and our -- and frankly, our market and brand positions are just so strong that we're able to offset some of the industry environment factors. So there are some different patterns, but overall, the economic environment is what's driving general industry demand conditions, and we're able to manage it a little better on the ride side than on the emissions side, simply because the emission industry is declining so rapidly.

Brian Arthur Johnson - Barclays Capital, Research Division

And on the emissions side, if you try to break that 19% into -- what's the hangover of longer-lasting emission systems because of stainless steel? What's that ongoing drag? And then what's over and above that deferred maintenance of specters that might actually come back, assuming there's fairly strict emissions testing and someone's going to have to do something at some point?

Gregg M. Sherrill

And I -- let me interject one thing here. I do -- and I think Hari and I have talked about this. We think the European aftermarket is probably -- I can go out on a limb here maybe a little bit -- to bottoming, right? But when you're worried -- when you're talking about the deferred maintenance and all of that, they're still a big sort of issue in Europe in the fact that 2 million cars were scrapped that will never have maintenance done on them, right? And new cars were put in their place a couple of years ago. And that will sort of, I still think, delay the overall recovery of the European aftermarket. But it should be getting close to a bottom, where we're seeing things now. And then it has to start coming back at some point, I just think that 2 million scrap units is going to lengthen the comeback time.

Hari N. Nair

I just want to add, the 2 million were in the segment where -- which are most critical for exhaust replacement. So that is also having an impact -- a greater impact on the emissions side because of...

Operator

The next question comes from John Murphy.

John Lovallo - BofA Merrill Lynch, Research Division

It's actually John Lovallo on for John Murphy, and it's from Bank of America. I guess the first question would be, how are you guys kind of thinking about cash at this point and the priorities for cash maybe between investing in the business, potentially paying down some debt or maybe some share repurchases?

Kenneth R. Trammell

So John, it really hasn't changed from what we've talked about for at least the last 2 or 3 years. Clearly, our primary use of cash remains funding the organic growth. With the change in emission regulations that we're dealing with, especially on the commercial vehicle side, some other opportunities that will give you a bit more view on when we get to the February 14 meeting, our growth opportunities are still significant. So we'll certainly continue to make CapEx and the required working capital investments to fund that. So that's our #1 priority. There is still, we believe, some debt work that we can do, so like we've said for a while, we still think there's probably some more progress that we'll make on the balance sheet, talk a little bit more about that in mid-February as well. That takes us to growth opportunities that might come from strategic things. And we've done in the past technology acquisitions, things that will add to the growth opportunity on our key strategies, on the emissions side in particular, but also the ride side of the business. And we'll continue to look for those. Not right now expecting anything overly significant, but we'll continue to look at that. And that gets us to the last one, which is your question, right, which is shareholder returns. That didn't even used to be on our list. Over the course of the last 3 years, we've announced share buybacks designed to offset growth in shares that go for employee compensation purposes. We expect to continue to do that in the near term. But I think with the other priorities, we've still got a little ways to go before it would be greater than that.

John Lovallo - BofA Merrill Lynch, Research Division

Great, that's very helpful. And what are you guys currently seeing on the raw material front? And any expectations heading into 2013?

Kenneth R. Trammell

Really, I don't think there's a lot of sort of movement either direction that we're seeing right now. So sort of no news is good news, I guess.

Gregg M. Sherrill

I think the macroeconomic conditions are keeping that in check right now.

John Lovallo - BofA Merrill Lynch, Research Division

Okay, great. And finally, if you could you just remind us who your largest European aftermarket customers are and what inventory levels look like at this point.

Kenneth R. Trammell

I think our largest is TEMOT? Yes.

Hari N. Nair

Yes, TEMOT Group is our largest. And we trade with all the big groups, and then when you look at individual countries, ADI France would be one of our biggest customers. But they really -- it's quite fragmented, so you got to look at the buying groups, and TEMOT stands out as the #1.

Gregg M. Sherrill

We don't have, to the rest of your question, a good view on their inventory, so we can't tell you for sure where they stand.

Operator

The next question comes from Brett Hoselton.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

KeyBanc. The $60 million in annualized savings you hope to achieve by 2016, how do we think about the ramp-up of that kind of -- I mean, is this -- we're just suddenly going to turn on the light switch in 2016 and get $60 million? Or do you get like $5 million this year, $10 million next year, that sort of thing?

Gregg M. Sherrill

Not -- as we're able to give you, again, more detail about the individual actions, we'll give you a little bit more specifics. But I would not count on very much this year at all because it certainly takes a while to start to get the savings to come in. We'll start to get a bit of it in 2014, more in 2015 and then just get the run rate by 2016.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And then as we think about this year's non-light vehicle growth, it sounds like you're thinking you're go to see some improvement in the back half of the year. My question is, is that more production recovery driven? Or is it more new business launch driven? Or is it kind of equally weighted between the 2?

Gregg M. Sherrill

Yes, it's between the 2. It's probably pretty close to equally weighted. But we are anticipating some production recovery in the back half of the year and then the course, we know we'll be launching some content in the back half of the year. At what volume still remains to be seen based on that production recovery. But it'll be a little bit of both. And like I said, we are anticipating growth year-over-year in the commercial, as well as total revenues.

Kenneth R. Trammell

We'll be up on both. And we even think that sequentially, the run rate on commercial vehicle picks up in Q1 compared to Q4.

Operator

The next question comes from Joe Spak.

Joseph Spak - RBC Capital Markets, LLC, Research Division

It's RBC Capital Markets. Just wanted -- appreciate the color on the utilization and the commercial vehicle. I just want to get a better sense for -- because as I understand, that was capital capacity, so how you're actually able to flex? I mean, are we at a volume run rate where the commercial business is actually detrimental to overall margins? Or is it just not incremental at these levels?

Kenneth R. Trammell

It's certainly not as strong a pull as it will be when we get there. But like we've always said, the commercial vehicle business, because it's higher technology, it's larger stuff, does pull better margins. We talked about, several times during the course of 2012, that the ramp up on commercial vehicles was a positive for margins, especially in North America, so I don't think, overall, that's changed.

Gregg M. Sherrill

That's right.

Joseph Spak - RBC Capital Markets, LLC, Research Division

So you've been able to flex accordingly to sort of have it still be a positive contributor?

Gregg M. Sherrill

Yes, I mean, had we not been able to do that, I don't think we'd have shown a positive margin improvement throughout the year. Right?

Kenneth R. Trammell

Yes, especially in North America, where it's very easy for us to flex on a very short notice. A little bit more difficult in Europe, but because we hadn't built the manning up in Europe yet, we haven't had too much difficulty in managing that either.

Joseph Spak - RBC Capital Markets, LLC, Research Division

;

Okay. And then just getting -- and I know -- not to steal thunder from the 14th, but as I understand it, the phase-in on the off-road on the interim, there was still -- and I think you even said, there's still -- that the smaller engines only begun to phase in last year. So given that volume that is expected to recover, or you're expecting to recover at least in the back half of next year, shouldn't you still have an incremental content gain on top of that because the production of those small engines was lower in 2012?

Kenneth R. Trammell

Yes, and that's basically what we said, that we've got the phase-in of the final piece of Tier 4 interim. That happens -- we started launching it in late 2012. That'll kind of ramp in, in 2013. And then later in the year, we have the beginning of a launch of the next phase-in for Tier 4 final, both North America and Europe, and that will be a benefit as well. The key driver, the key variable between now and then, is simply the volumes. Like we said, even looking sequentially, Q4 to Q1, Q1 will be higher than where we stood in Q4.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And then maybe one housekeeping, and sorry if I missed this, but did you give an update on the pension, the underfunded status or where the discount rate has ended up for at the end of the year?

Kenneth R. Trammell

No, we didn't. We'll give you a little bit more pension detail on February 14, but there's nothing surprising there. We'll make, probably, the same level of contributions in 2013 that we did in 2012, maybe up just a little bit, because at this point, we have decided not to take advantage of the funding holiday that Congress passed. But we'll get more information on that February 14.

Operator

[Operator Instructions] The next question comes from Andrew Thurlow .

Andrew Thurlow

It's Andrew Thurlow and it's Automotive News. I was just wondering, I'm double-checking if you guys have any new contracts with any North American automakers?

Kenneth R. Trammell

Absolutely. I mean, we have business that is bid on -- it's probably a quarterly basis. So certainly, we continue to win new business with our North American guys.

Andrew Thurlow

Any with the big 3?

Gregg M. Sherrill

Yes, there would be. I can't be platform-specific this morning, but absolutely.

Andrew Thurlow

Okay. Can you give me any kind of an idea?

Kenneth R. Trammell

It's certainly with all 3, and we've not lost any platforms, and to any extent, we continue to win platforms. But beyond that, I don't think we can speak to specific platforms.

Andrew Thurlow

And I wanted to paraphrase here. At the end, you guys said total revenue was down year-over-year because of the European recession?

Gregg M. Sherrill

Say that again? I don't think we quite caught it.

Andrew Thurlow

Total revenue was down year-over-year because of Europe's recession?

Gregg M. Sherrill

No, total revenue for the company was up year-over-year in spite of the European recession.

Operator

The next question comes from Adam Brooks.

Adam Brooks - Sidoti & Company, LLC

Sidoti & Company. Just 2 quick questions. On the China side, you continue to outperform, it seems, by 15% to 20% at almost every quarter. Can you talk about how sustainable that is heading into '13 and even looking out to '14 and '15 as well?

Kenneth R. Trammell

Our benefit comes from the strong mix that we have there. We're on the platforms that are selling well. We have great representation with, I think, the General Motors platforms, the Volkswagen platforms, the Audi platforms, the luxury platforms that are selling well, and that's really what's been the driver for us.

Gregg M. Sherrill

We're extremely happy with our China business. We see no reason that it's not going to continue along the lines that you've seen it historically. And really, we're going to be ready to give you a lot more color along with everything else when we get to February 14 as we look forward to the next couple of years.

Adam Brooks - Sidoti & Company, LLC

Okay. And then just real quick, could you talk a little bit about off-road being a tad weak? Can you maybe talk a little bit about Brazil and what you're seeing on the trucking side there?

Gregg M. Sherrill

Brazil is really on-road, by the way, and there has been, I think, some recovery in the fourth quarter. It's still not to where it should be, and I think we're seeing -- I don't think we're seeing any deterioration coming in the first or second quarter in Brazil, but it's not taking off like...

Kenneth R. Trammell

Yes, certainly, there's a hangover from the pre-buy, which we all expected, and then I think combine that with relative weakness that everybody saw in the Brazilian economy earlier in the year, we've seen a bit of a more of a delay, I think. But yes, Brazil is certainly doing fine. No concerns there.

Operator

The next question comes from Chris Ceraso.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Just a quick follow-up. Can you remind us what your current mix of business is in commercial by region? How much is North America, Europe, Asia?

Kenneth R. Trammell

Chris, I don't think we've given the percentages. Clearly, the launches occurred first in North America. That has -- weights, certainly, the off-road business toward North America. And we haven't seen the ramp-up as rapidly in Europe on the off-road business. On the other hand, we have more on-road business in Europe than we do in North America. So that's certainly been a benefit for us as well. But at this point, the North American piece would certainly have, I think, the greater piece of that total commercial vehicle business.

Operator

And our last question comes from Richard Hilgert.

Richard J. Hilgert - Morningstar Inc., Research Division

It's Richard Hilgert. Ken, if they're selling canned air in Beijing, maybe Tenneco's next strategic move should be to introduce personal breathing apparatus particulate traps.

Kenneth R. Trammell

That's a good point, Richard.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. Just wanted to follow-up on the aftermarket questions from earlier. The European carpark and the EU-27 is 230 million, 240 million vehicles. So you swap out 2 million for new vehicles, that's only 1% of the carpark. And we've got Marchioni making comments that we're not going to see any kind of meaningful recovery until sometime in 2014. And then we've got Gone [ph] Yesterday making comments that we're in a secular trough for at least the remainder of this decade and we won't see meaningful recovery until 2020. Doesn't it make sense that the aftermarket business, then -- you can only postpone these purchases for so long. Wouldn't it make sense if we start to see some comeback maybe in that market by 2014?

Gregg M. Sherrill

I don't think we're saying there won't be some comeback. In fact, we said we think we're seeing a bottoming, right? There's a lot of factors that go into the aftermarket, and it is a big discretionary buy. At some point, you're right, and it is a big carpark. The 2 million don't ratio against 200 million, though, they ratio against a certain age of vehicle, and they were in prime age, okay? They're a factor. We're not saying it's the whole factor, but it's certainly a factor in European aftermarket recovery. But if we're saying it's bottoming, we're -- it certainly means we're expecting that we're going to see some recovery beginning in probably the not-too-distant future. But it is a discretionary buy. It will depend on the confidence consumers have and where they're willing to spend their money.

Kenneth R. Trammell

Yes, I mean, the average age of vehicles in Europe is still a good bit younger than in North America as well, so that has an impact. In North America, I know, we were at 12 years. We're probably down a bit now. But last I saw it, the average age in Europe was around 8. So that's an impact as well.

Richard J. Hilgert - Morningstar Inc., Research Division

Yes, it is. Obviously, they've had a lot more cash-for-clunker programs than we've had.

Kenneth R. Trammell

That's right, and that's the 2 million that you talk about, so you're right.

Gregg M. Sherrill

Yes, those lasted longer than a month.

Richard J. Hilgert - Morningstar Inc., Research Division

Yes, that's for sure. Last question, I wanted to follow up on some of the tech questions. Given the cash flow of the company, the growth that we're going to see from commercial vehicle over the next 3 to 4 years, does it make sense to get a little bit more flexibility in the capital structure by maybe getting rid of some of the covenants, the financial covenants and restrictions that you have under current credit agreements and indentures?

Kenneth R. Trammell

Yes, Richard, in the first quarter of 2012, we did a pretty significant refinancing of the sort of the top part of the capital structure that gave us a lot more flexibility. Certainly, a lot of that flexibility was in being able to pay down debt without penalty. We moved, if you remember, a term loan up into the revolver, and we moved a bond issue up into the term loan, and that gave us a lot more flexibility, and that's one piece of it. We've got more flexibility from the covenants, but I think that we've still got to make some more progress before we're able to completely get rid of those covenants. Now we've always been very aggressive at financing when the market's ready and taking advantage of those opportunities. We'll continue to do that. And as soon as we can, we'd certainly like to get out from under the covenants. But I'm going to make an assumption that investment grade and auto supplier may be difficult to use in the same sentence still for a while, at least for the rating agencies, and so consequently, we'll continue to make sure we can operate within the covenants that we can get from our lenders.

Richard J. Hilgert - Morningstar Inc., Research Division

Yes, yes. I know that you've long said that auto supplier and investment grade are mutually exclusive, Ken, but I think you're headed there.

Kenneth R. Trammell

We're certainly making a lot of progress. And we're in -- Richard, we've said for a long time, we want to look at how the market trades Tenneco's debt, not what the rating agencies put on it. Because that, at the end of the day, is the best indicator, and we're certainly heading in the right direction there.

Operator

Thank you. And I would now like to turn the call back to Linae Golla for any closing remarks.

Linae Golla

Thank you. This concludes our call. An audio replay will be available on our website in about an hour. You can also access the recording by telephone. In North America, you may reach the playback at (800) 756-3941. For those outside North America, the number is (206) 369-3592. This call information is also found in our press release.

Operator

Excuse me, Linae. This is the operator. For the toll number, it's actually (203) 369-3592.

Linae Golla

Thank you.

Operator

Thank you.

Operator

Thank you. And that is in the press release also. If you are an analyst or an investor with additional questions, please follow up with me, and reporters with additional questions can contact Bill Dawson, Executive Director of Global Communications at (847) 482-5807. Thank you for joining us today.

Operator

Thank you. That concludes today's conference. All lines may disconnect. Thank you for your participation.

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Tenneco (TEN): Q4 EPS of $0.66 in-line. Revenue of $1.75B misses by $0.03B. (PR)