Tenneco Inc. Q4 2008 Earnings Call Transcript

Feb. 5.09 | About: Tenneco Inc. (TEN)

Tenneco Inc. (NYSE:TEN)

Q4 2008 Earnings Call

February 5, 2009. 10:30 am ET

Executives

James Spangler - Vice President, Global Communications

Gregg Sherrill - Chairman and CEO

Ken Trammell - EVP and CFO

Analysts

Rich Kwas - Wachovia Securities

Pat Archambault - Goldman Sachs

Himanshu Patel - JPMorgan

Brian Johnson - Barclays Capital

Chris Ceraso - Credit Suisse

Operator

Good morning and welcome to Tenneco’s Fourth Quarter and Full Year 2008 Earnings Release Conference Call. All participants have been placed on a listen-only mode until the question-and-answer session. (Operator Instructions). Today’s call is being recorded. If you have any objections you may disconnect at this time.

Now I would like to turn the call over to Mr. James Spangler, Vice President of Global Communications. Thank you, Sir. You may begin.

James Spangler

Good morning and welcome to our call. Earlier this morning, we issued a press release and associated financial information on our fourth quarter and full year performance. In a minute I will be turning the call over to Gregg Sherrill, Tenneco’s Chairman and CEO, and Ken Trammell, our Chief Financial Officer.

Gregg and Ken 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 their prepared comments are available on the financial section of Tenneco’s website at www.tenneco.com. The two of them will then take your questions during the second half of our call.

The conference call operator will explain the process for asking a question at that time, and we will do everything possible to address all your questions today.

Please note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers as shown in our press release attachments. The press release and the attachments are also posted on our website.

In addition to reviewing our fourth quarter and full year financial results, 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.

And with that I will now turn the call over to Gregg.

Gregg Sherrill

Thank you, Jim. Good morning everyone and thanks for joining us. As you well know, the global auto industry is facing an extraordinary downturn. The factors driving this are clear. We are in the middle of a global economic crisis that has rapidly forced essentially every major economy into recession, with [seized] up credit markets, rising unemployment and record low consumer confidence.

The impact on our industry has been staggering. As slide four points out, we are seeing significant sales and production declines in major markets around the world, and the speed in which these downward changes have taken effect are unprecedented.

Faced with all this, industry companies from the largest OEMs to the smallest suppliers are forced to respond quickly to these new realities. Tenneco's fourth quarter and full year 2008 results, as detailed in our news release issued earlier today, reflect these current realties in what was the most difficult fourth quarter or any reporting quarter for that matter this company has faced in its nine year history as a standalone company.

But I believe our performance also shows that we are a company facing these challenges head-on, and we are beginning to see progress from the actions we are aggressively implementing worldwide.

In a few minutes, Ken will walk you through the numbers, but before he does, I want to discuss the key actions that we are taking to help us weather this economic and industry storm, and ultimately position Tenneco to rebound quickly during a recovery. These actions revolve around our number one near-term priority, generating and preserving cash.

First, in the fourth quarter, we launched a global restructuring program that we estimate will generate annual savings of about $58 million once fully implemented by the end of 2009. The restructuring program which has a pay-back period of less than one year includes permanently eliminating 1,100 jobs worldwide, which is in addition to 1,150 jobs previously eliminated in 2008, closing three North America manufacturing plants and an engineering facility in Australia; suspending [matching] contributions to employee 401-K programs and cutting spending on information technology, sales and marketing programs.

Second, we are flexing our operations to market conditions. This includes our ongoing process of implementing temporary layoffs of hourly workers in our plants worldwide that are impacted by customers plant shutdowns. In North America, where customer production cuts have been the greatest, we have taken this a step further by initiating salaried employee furloughs. We began this effort as of the first of this year. In Europe, we eliminated all temporary positions and we are working successfully with various work [schedules] to pursue similar cost reduction efforts including reduced work hours.

On the compensation front, we have frozen 2009 salaries at 2008 levels and implemented other salary control actions and we have cut total compensation on average for the top 50 executives by more than 60%.

Third, we are strategically reducing capital expenditures in engineering investments, where possible, without compromising our long-term growth prospects. On the capital front, we are eliminating or deferring regional expansion projects, cutting spending tied to delayed customer launches, redeploying assets where feasible and eliminating all discretionary capital spending. These actions will allow us to reduce our 2009 capital expenditure by 28% versus 2008.

As for engineering investments, we are focused on developing technologies and capabilities tied to business launching within the next two to three years. The exception being those instances where the customer is paying upfront for engineering and advanced technology developments, on programs launching in 2012 and beyond.

This has allowed us to continue all programs critical to our growth with minimal near-term cash impact. Fourth we are generating cash flow through working capital improvements. We are making good progress in reducing inventories and strengthening our management of payables and receivables.

Quite frankly, we were pleased with our fourth quarter working capital performance, given the declining production climate, especially with our ability to generate $115 million in cash largely from accounts receivable and inventory improvement. Going forward we firmly believe there are considerable opportunities to generate additional cash from working capital in 2009.

Finally, we continue to focus intensely on eliminating all discretionary spending. In short this organization is pursuing every opportunity to continuously improve our cash position, reduce costs and strengthen our operations, and I am pleased to report that the alignment and execution around all of these steps is strong throughout the Tenneco role.

One important metric that reflects our progress, is the fact that our SGA&E expense excluding restructuring was down significantly year-over-year in the fourth quarter. And despite the sacrifices we have placed on our employees at all levels, I am constantly encouraged and impressed by their relentless commitment to Tenneco’s ultimate success.

Before I turn it over to Ken, I want to take a moment to discuss the commercial success we continue to see in the form of new business awarded by our customers. We were pleased to announce yesterday a joint development agreement with General Electric. They will expand Tenneco’s NOx reduction technology portfolio and strengthen our position to grow our adjacent market business.

Tenneco will work with GE Transportation to further develop the company’s hydrocarbon selective catalytic reduction aftertreatment technology in the complete diesel aftertreatment systems for both the locomotive and off-highway vehicle markets. This technology, along with our own ELIM-NOx urea-based SCR aftertreatment solutions will allow our customers to choose from a full suite of NOx reduction technology solutions.

Additionally, Tenneco has been awarded the development contract for GE Locomotive projects, and is positioned to become a long-term strategic supplier of diesel aftertreatment solutions to GE Transportation. This is further evidence of our success in capturing new opportunities in adjacent markets by leveraging our emission control technologies and capabilities in new applications.

In the fourth quarter, we won new or replacement contracts for 18 different models with nine customers for ride control and emission control products. In addition, in the first quarter of this year, we are launching products on 31 OE platforms globally. As you can see, we are focused on managing through this near-term crisis while continuing to serve our customers worldwide by providing market-leading products, systems and services for 2009 and well into the future.

And now I’m going to hand it over to Ken, who will review our fourth quarter results.

Ken Trammell

Thanks Gregg. Slide 7 shows our financial results for the fourth quarter, which across the board were impacted by industry conditions. Revenues fell on sharp OE production volume declines and/or lower aftermarket sales. EBIT was negatively impacted by lower volumes in both, our original equipment and our aftermarket businesses, unfavorable vehicle mix, volatile currency movements, and a charge to write down the goodwill related to our North American Elastomer business.

Although we aggressively reduced cost and flexed our operations based on customers’ production schedules, we could not offset the extreme production volatility and other negative drivers in the quarter.

Before I get into the specific geographic segments, let us cover the adjustments for fourth quarter 2008 and 2007 which affect year-over-year comparisons and are detailed on slides eight and nine.

Here I want to call out the non-cash goodwill charge of $114 million in this quarter. We must evaluate the carrying value of our goodwill at least annually. The significant decline in production caused us to write down the value of the goodwill related to our Elastomer business that was acquired back in 1996.

In addition, we took restructuring charges of $24 million as part of the global restructuring initiative that we announced last October. We anticipate another $7 million in charges related to this restructuring effort through the remainder of 2009. And again, once fully implemented we estimate this initiative will generate annual savings of about $58 million.

Finally, we recorded tax adjustments that totaled $144 million. There are several components to point out here. We recorded $101 million impairment in the carrying value of our US deferred tax assets. This is attributable to the continued decline in vehicle production and is similar to the charge we recorded in the third quarter of 2008.

Accounting rules do not permit us to assume an economic recovery or give any give way to future business growth in evaluating the carrying value of this asset. We also recorded $11 million in adjustments in deferred tax liabilities for changes in tax rates primarily in Mexico and Spain. The impact of not recording a tax benefit for the US net tax operating loss combined with other jurisdictions around the world, where we cannot record such a tax benefit was $20 million. The balance relates to various tax adjustments primarily for prior income tax returns in several jurisdictions.

Now let me spend a minute on the impact that currency had on our results. We saw unusual changes in currency exchange rates during the quarter as a result of the global economic crisis. Currency changes negatively impacted revenue by a $123 million in the quarter and currency translations and transactions reduced EBIT by $21 million.

Now turning to the North American results on slide 10, our OE revenue was $498 million, down 16% year-over-year from $592 million. This includes $32 million in revenue from our Kettering, Ohio ride control operations, which is a passenger car business we acquired last June.

These results reflect a dramatic industry production decline in North America in the fourth quarter, where industry in light vehicle production fell 24% year-over-year. Excluding substrate sales and the impact of currency, revenue was $331 million versus $345 million in the prior year. We felt this impact across both our ride control and emission control businesses with volume declines on vehicles like the Toyota Tundra, GM's Duramax pickup trucks, the GMT 900 platform, the Chevrolet Trailblazer and (inaudible).

In addition to volume weakness, our results were also impacted by vehicle mix in the quarter. Revenue from SUV and pickup business made up 49% of our sales in the fourth quarter down from 69% in the fourth quarter 2007. For the full year 2008, SUV and truck business accounted for 54% of revenues versus 72% in 2007.

In the fourth quarter, our North American aftermarket operations generated $113 million in revenue down 8% from $122 million a year ago. If you adjust for the impact of currency, revenue was down 6% at $116 million. The decrease in revenue was due to softer sales for both ride control and exhaust products partially offset by price increases for steel recovery.

Fourth quarter total EBIT for our North American operations was a loss of $131 million compared with earnings of $16 million a year ago.

Fourth quarter 2008 included the goodwill impairment charge of $114 million and $9 million in restructuring costs. Fourth quarter 2007 included $2 million in restructuring expense. After adjusting for these items, EBIT was a loss of $8 million in the quarter compared with earnings of $18 million a year ago.

Clearly our EBIT performance was hardest hit by lower OE production volumes particularly related to pick up trucks and SUVs and manufacturing fixed cost absorption related to these declines. Lower after market sales also decreased EBIT. All of these drivers accounted for $29 million of the North American EBIT decline in the quarter. Compounding the volume mix and absorption impact was a negative currency impact of $14 million due to translation and transaction losses on the Canadian dollar and the Mexican peso. Helping to offset these factors were lower SGA&E spending and the benefit from new OE business launched in the quarter. The EBIT performance is detailed on slide 11.

In Europe we really saw in the fourth quarter, the impact of the spreading global economic crisis and deteriorating industry conditions, as industry light vehicle production fell 27% year-on-year and our revenues fell sharply as a result. The OE revenue generated by our European operations was $352 million, which was a 31% decline from a year ago at $511 million. Excluding substrates and the impact of currency, revenue fell to $329 million from $373 million.

The recently acquired Marzocchi Suspension business added $18 million in revenue. The revenue decline was driven by a drop in the emission control business where revenue was down 19% year-on-year excluding substrate sales and currency. Detail on our Europe OE revenue is on slide 12.

Now turning to slide 13 in the European aftermarket, revenue was $76 million, compared with $96 million a year ago. Excluding the impact of currency, revenue was $89 million. The revenue decline was driven by a decrease in sales volumes in most regions and in both product lines, and was partially offset by price increases or higher material costs.

Our South America and India operations were not immune from worsening industry conditions in the quarter. As you will see on slide 14, after 23 quarters of year-over-year revenue gains, South America and India revenue declined to $72 million from $96 million in fourth quarter 2007. Excluding substrate sales and currency, revenue was down 4%. Lower production volumes in Brazil and Argentina accounted for most of the decrease.

On slide 15, total EBIT for Europe, South America, and India in the fourth quarter was a loss of $12 million compared with earnings of $19 million in fourth quarter 2007. Adjusting for restructuring in each quarter, EBIT was $3 million versus $35 million a year ago. Our efforts to reduce overhead costs and cut discretionary spending, the benefits from new OE business launch has only partially offset the negative impact from OE production volume declines, unfavorable vehicle mix, lower aftermarket sales volumes, and the related fixed cost absorption. These factors reduced EBIT by $29 million in the quarter, and were compounded by $7 million negative impact from currency translations on the euro, and the transaction loss on the Brazilian real.

On slide 16, fourth quarter revenue for our Australia operations was $27 million, a decline of 46% from $50 million a year ago. Excluding substrate sales and the impact of currency, revenue was $34 million compared with $43 million in fourth quarter 2007. As in other regions of the world, our results in Australia were impacted by lower OE production volumes, the vehicle manufacturers taking significant downtime, in the fourth quarter.

And last, we will take a look at our revenues generated in Asia. The slowing industry growth in China is perhaps one of the most telling indicators that we are working through a global industry downturn. In the fastest growing automotive market, industry production was down 11% in contrast to double digit growth in the first half of the year. The OE production volume decline in China was the biggest driver of our decrease in Asia revenue which fell by $70 million versus $98 million in fourth quarter 2007. We were particularly hard hit by volume declines on GM and BW supply and platforms.

Excluding substrate sales and currency, revenue was $46 million versus $62 million in fourth quarter 2007. EBIT in Asia Pacific this quarter was a loss of $2 million compared with earnings of $8 million a year ago. Again, lower OE production volumes in our two largest markets in this region China and Australia, and the related manufacturing fixed cost absorption drove the decline in earnings.

Now let me run through some of the other financial metrics of the quarter.

On slide 17, gross margin in the fourth quarter decreased to 12.6% from 14.3% a year ago. Gross margin was negatively impacted by lower OE production volumes, vehicle mix, manufacturing fixed cost absorption and the negative impact of currency. For comparison, gross margin in the fourth quarter 2008 included $8 million in restructuring. And there were $16 million in restructuring [spends] in fourth quarter 2007.

Our entire organization continues to do a very good job of keeping overhead costs down and eliminating all discretionary spending which drove down year-over-year SGA&E expense in the quarter before the impact of $14 million in higher restructuring costs.

On slide 18, you will see the depreciation and amortization was $54 million for the quarter, relatively even with $55 million in fourth quarter 2007. For the full year depreciation and amortization was $222 million versus $205 million in 2007. For 2009, we anticipate the depreciation and amortization expense will be about the same level as in 2008.

Moving onto slide 19, interest expense in the fourth quarter was $25 million, which included a $6 million benefit from our fixed-to-floating interest rate swaps. In the fourth quarter, we terminated these swaps and as a result collected $6 million in cash from the swap counter parties. For full year 2008, our interest expense was $113 million, which included a $7 million benefit from the fixed-to-floating interest rate swaps.

On slide 20, we recorded a $126 million tax expense in the latest quarter, which includes the items I previously discussed. Cash taxes for the fourth quarter were $12 million compared with $15 million in the prior year. For the full year of 2008, cash taxes were $62 million compared with $60 million in 2007. For 2009, we expect cash taxes will be in the range of $40 million to $45 million.

Now I would like to turn to our cash and debt position.

First on slide 21, you will see our debt position at the end of the quarter. Total debt was $1.451 billion versus $1.374 billion a year ago. Cash balances were $126 million compared with $188 million at the end of fourth quarter 2007. And debt net of cash balances was $1.325 billion compared with $1.186 billion at December 31, 2007.

Our cash flow performance is on slide 22. Typically, the fourth quarter is our strongest cash flow quarter. Given the environment, we were pleased with our strong cash flow performance for we generated $126 million in cash from operations in the fourth quarter, including $115 million in cash from working capital largely attributable to accounts receivable collections and inventory reductions.

I should point out here that the lower level of activity during the fourth quarter also resulted in a decrease in factored accounts receivables at $47 million which reduced our receivables collections.

On slide 23, I would like to point out that the rapid decline in global production impacted our working capital metrics in the quarter. So I am going to use the last three months' activity rather than the last twelve months' activity as a comparison.

Day sales outstanding excluding the impact of factoring was 56 days at December 31st compared with 53 days at the same time last year and improved from 64 days at September 30, 2008.

Inventory days on hand were 44 days versus 36 days last year. This reflects the rapid production decline we saw during the fourth quarter and represents an area where we will show improvement in 2009.

Days payable outstanding were 67 days this year, virtually unchanged from the 66 days we had at year-end 2007.

On slide 24, you will see that we have two financial covenants that we must meet each quarter. Our [target] debt compliance ratio is the leverage ratio and at December 31st our leverage ratio was 3.66, below the maximum level of 4.25. Our interest coverage ratio was 3.64, which was above the allowed minimum of 2.10.

As we indicated in our press release this morning, we have launched the process to amend our senior secured credit facility in light of difficult economic and industry conditions globally. Conditions we expect will continue through the year. Amending our senior secured facility is a necessary step in managing through this volatile period. Our revolving credit facilities are funded by approximately 19 banks and other financial institutions. We have established good relationships with our lenders and they have been very supportive of our strategies through the years.

I think we are all aligned on the fact that seeking this amendment is clearly driven by the external operating environment. I can’t give you any number details at this point other than to say that we will meet with our banking group later today. We expect to complete the amendment by the end of this month.

Now, on slide 25, you will see that we extended our $120 million US receivable securitization facility through March 2, 2009. As we indicated in our press release, the revised terms will reduce the percentage of Tenneco’s US accounts receivable that the sponsors will purchase. We estimate that they will purchase between $10 million and $30 million less of our receivables than in the past. Also, the cost of the facility will increase by about $4 million annually.

Prior to the expiration date, and concurrent with the completion of the senior secured credit facility amendment, we expect to renew the facility for an additional 364 days. As a reminder, our limit for securitizing receivables under the credit facilities is $250 million and we had the flexibility of using several sources to maintain that program. Of course, we are always looking to optimize the benefits from our securitization program and take full advantage of the $250 million available to us, but given the current environment and the low level of receivables, it is unlikely we will ad significantly until production begins to recover.

Our worldwide factored receivables were [$100 million] as of December 31, 2008 compared to [$157 million] a year ago.

Now, slide 26 summarizes our capital spending. We spent $45 million in the fourth quarter of 2008, down from $77 million in fourth quarter 2007. For full year 2008, capital spending was $221 million compared with $198 million in 2007. This increase was mostly in the first half of the year. It was in anticipation of new business launches and for projects in some of the expanding markets like China, India, and Russia. For 2009 we expect capital spending will be about $160 million.

Now I will turn the call back to Gregg.

Gregg Sherrill

Thank you, Ken. 2008 was certainly one of the most difficult years ever to hit this industry and the global economy and 2009 by virtually every estimate will not be any easier. As we entered 2008, no one could have predicted the depth of the current recession, the speed at which it occurred or the unprecedented impact on our industry.

As we enter 2009, we are in the midst of the lowest OE production schedules in decades and the outlook for the next several quarters is uncertain, although some economists are predicting the beginning of a recovery toward the end of the year. In the meantime, Tenneco will continue to plan [conservatively], aggressively manage our cash and keep our operations well positioned for a recovery.

Given these conditions, it is not possible at this time to provide any OE revenue guidance. As I said in the new release, future global OE production projections are just too unreliable for us to provide guidance regarding our OE revenue growth. At the same time, I want to reiterate what has not changed. That being the fact, that Tenneco continues to benefit from new stricter emissions regulations.

Our highly competitive technology is driving content growth in new business over the next five years in traditional and adjacent markets including on-and-off road commercial vehicles and locomotives. In fact, content and not just volume is the significant growth driver for Tenneco. Some of which is scheduled to launch as soon as the fourth quarter of this year.

In closing, let me reiterate that our game plan is straight forward and appropriate for these times. We will work each day to generate and preserve cash and improve our operations with greater efficiencies while also relentlessly serving our customers with leading technologies, quality products and outstanding service to help insure their success and ours.

And with that we could open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from Rich Kwas. You may ask your question and please state your company name.

Rich Kwas - Wachovia Securities

Hi, Wachovia. Good morning Ken and good morning Gregg.

Gregg Sherrill

Good morning Rich.

Rich Kwas - Wachovia Securities

Just a question on Europe. Some of the other suppliers have talked about going and having the opportunity to go to three and four day work weeks with their labor agreements. Do you have that available to you right now or is it that something that is [being] negotiated?

Gregg Sherrill

We already have it available and negotiated in certain locations in Europe and we are continuing the negotiations in others. But what we are seeing in this downturn is considerable cooperation across the whole gamut of our European labor unions and their representatives. I mean everybody pretty much understands the economic situation, and as I just said, the cooperation is unlike anything I have ever seen. So it is already in place in certain regions and plants and we are getting there in the others.

Rich Kwas - Wachovia Securities

Okay. And how much would you say is in place right now as a percentage of your European operations?

Gregg Sherrill

Oh I could not say I had some percentages. Let me get back to you though on that Rich – it is fairly significant – it is not trivial. I just don't want to quote a wrong number right now.

Rich Kwas - Wachovia Securities

Okay. Okay.

Gregg Sherrill

We have had – the emphasis is on what we have already accomplished here; not just what is out there in the future.

Rich Kwas - Wachovia Securities

Sure.

Gregg Sherrill

Okay.

Rich Kwas - Wachovia Securities

Just switching gears on yesterday's announcements. It looks like GE has worked on the HC-SCR technology for quite sometime. I know here in the release – at the end of the release you talked about not being able to say much more, but could you give us a little more color on [what's your brains at] the table, I know you are planning on licensing the technology to other end markets, but I am just curious on how much you are bringing to the table and the potential value add?

Gregg Sherrill

That is a little bit of what you just said. And again we cannot go in to a great deal of detail. But just to suffice to say it is very complementary with what we bring to the party from an overall knowledge of the physics, the chemistry, et cetera of emissions reductions, particularly in this particular case; NOx reductions coupled up with some of the work they had done specifically on hydrocarbon. Both parties saw it as a way of bringing the technology to the market quicker and it is just very complementary. Again I don’t want to go in to a great deal of detail there.

Ken Trammell

And Rich, the other thing is – I mean you will probably recall our Chief Technology Officer has talked about a further development of SCR being hydrocarbon SCR for sometime. That is something that Tenneco had being studying and the guys at GE have made some advancements, so it is just a good marriage between the two if you will.

Rich Kwas - Wachovia Securities

Okay. Okay. And then Ken on the goodwill write down, what is the risk here of additional write downs going forward here, given the production environment?

Ken Trammell

That goodwill write down Rich, relates to an acquisition that was made back in 1996 in the US and that writes down the full amount of goodwill for that acquisition.

Rich Kwas - Wachovia Securities

Okay. Then since the lower production levels do not affect right now – do not affect the other goodwill or other acquisitions you have done in the past.

Ken Trammell

The goodwill that remains in the books, the way things appear right now has plenty of room, maybe the best way to put it.

Rich Kwas - Wachovia Securities

Okay, great. Thanks so much.

Operator

Thank you. Your next question is from Pat Archambault. You may ask your question and please state your company name.

Pat Archambault - Goldman Sachs

Hi, I am calling from Goldman Sachs. Good morning.

Gregg Sherrill

Good morning.

Ken Trammell

Good morning.

Pat Archambault - Goldman Sachs

Yes. I guess just wanted to follow up on Rich’s question on Europe. So it sounds like as things stand, you have basically taken all the temporary people out and obviously you still saw a very significant contraction I think it was like 350 basis points on your margins there year-on-year. How do we think about that going forward? I mean, is this kind of a headwind that is likely to get steeper as the volume headwinds probably get a little harsher in the first half, and it sounds like at least the low-hanging fruit on the restructuring side maybe has been addressed. Or perhaps you have only done it recently and maybe some of the benefits have not flowed through. Can you just help us a little bit, think about how that cadences out as we get into the first half of 2009?

Gregg Sherrill

Let me just offer a little bit of qualitative analysis to that. Yes, the temporaries of course, which is the way you flex in Europe and any of those labor markets where certain regulations kind of [four] should it be that way. They were gone very rapidly. Okay? The thing that we have to remember with Europe is the production fall off occurred very, very rapidly; it was just beginning at the very end of the third quarter. I think we even commented on it in our last call that we were beginning to see Europe coming down very rapidly, and it did in the fourth quarter. I mean, very, very rapidly, so all of the – and that is going to continue for a while. So that’s the [headwins].

So temporary coming out is some of the positives, the volumes falling off and now probably continuing to leak a little bit as we go forward – still are part of the headwind. The other items that we are talking about that Rich brought up are now beginning to flow in as some positive. Okay? Because you just could not get all that done immediately, it fell off so quickly. You could not get all those negotiations done in a matter of days or anything. So there is going to be some improvement from those actions now as we go forward offsetting. And I know that is all a lot of qualitative stuff and of course the volume piece is still the biggest uncertainty. But there is still some improvement to come from all the work is being done with the local unions over there.

Pat Archambault - Goldman Sachs

And one thing that we have clearly heard from a lot of suppliers is that the cancellations were very last minute in nature which prevented people from adjusting accordingly.

Gregg Sherrill

Right.

Pat Archambault - Goldman Sachs

How much of an impact do you sort of think that that had, I guess, in the fourth quarter and net-net is that perhaps one reason to be optimistic that costs can be better controlled as we go forward?

Gregg Sherrill

Well, again qualitatively costs are being, if you want to use the word, better controlled only because it took a little time to get there; obviously it just was not in it. You could not react quickly enough based on how rapidly the volumes sell off. I am sure that is what you are hearing from everyone.

As I have said, there will be some positive flow through. I cannot quantify it for you today, but with the additional short work we – things we are negotiating, et cetera in Europe as we go forward.

Pat Archambault - Goldman Sachs

And then how about just moving to North America? It looks like the cadence of margin deterioration there is starting to level off. Is that something that is based on, I guess, standard expectations of production being done about 18% across most data providers? Is that a reasonable expectation as the work that you guys have done there on the restructuring side continues to pay dividends?

Gregg Sherrill

In North America obviously, production volumes are just extremely low at the moment. I am not telling you anything you do not know. I mean, January is about as low as we have seen them in I do not know how many years. Everybody is kind of running out of adjectives to describe it. But, a lot of the restructuring and the quick stuff coming into North America is continuing to build through the year. So there should soon be improvements there, and quite frankly North American production at the moment is considerably lower than North American sales.

At some point that inventory correction has to occur even at low levels of sales that we are seeing today because production is so low and we should start seeing some production coming back. I am not talking about a recovery. I am just talking about coming back from levels that we are at right now as we go through the year.

Pat Archambault - Goldman Sachs

Got it, okay. I don't know if you touched on it, but I know that typically you guys closed out most of your steel contracts at the end of the year. So, I assume you have pretty good visibility on your costs there. Could you just share a little color on how that is lining up for you in 2009?

Ken Trammell

Yes Patrick, we are really not seeing any headwins from steel in 2009. So, let us say things are about much more stable than they have been for the last several years.

Pat Archambault - Goldman Sachs

So net-net, in our [logs] here we should probably just have that as a neutral?

Ken Trammell

That is about what we are seeing.

Pat Archambault - Goldman Sachs

Okay. Those were really my main questions. Thanks a lot.

Gregg Sherrill

Thank you.

Ken Trammell

Thanks, Patrick.

Operator

Thank you. Our next question is from Himanshu Patel. You may ask your question and please state your company name.

Himanshu Patel - JPMorgan

Company is JPMorgan. Can you talk a little bit about the aftermarket business? I think you saw roughly 5% to 7% revenue declines on both sides of the Atlantic. How much of that was end market demand weakening versus any sort of customer destocking?

Ken Trammell

Himanshu, I don't have exact numbers, but it is mostly end market demand. What we have seen is just that the overall conditions, the [bay traffic] has been down. I don’t think we are seeing much in terms of customer destocking at this point.

Himanshu Patel - JPMorgan

And Ken, any sort of color you could provide on how that decline sort of played out over the course of the quarter. Did it get worse by the end of the quarter or was it any better by the end of the quarter?

Ken Trammell

And now I would say it was about the same.

Himanshu Patel - JPMorgan

About the same, okay.

Ken Trammell

Yes.

Gregg Sherrill

Yes. We have seen very little change in the aftermarket, over the last number of months, nor are we really anticipating any significant changes in the next several months.

Himanshu Patel - JPMorgan

Okay, working capital, can that be a source in 2009?

Ken Trammell

We are working very hard on making sure that that we can generate cash from working capital. I think you heard Gregg say in his part of the discussion and then I talked about specifically inventory. Our inventory days on hand were actually up at the end of the year compared to last year simply because the fact that we couldn’t react quickly enough to the production declines at the end of the year. And so that will work its way through and we should generate some cash from inventory in 2009.

Himanshu Patel - JPMorgan

Okay. And then I think there were two acquisitions on the [comps] what was it, Marzocchi and Kettering? I know they added to revenues. Did they add to EBIT?

Ken Trammell

There was some – pretty yes, certainly some EBIT benefits from those. But remember we are still integrating them. And so we are still working on some of the improvement actions that we have got there.

Himanshu Patel - JPMorgan

Okay very good. Thank you.

Gregg Sherrill

Thank you.

Operator

Thank you. (Operator Instructions). Our next question is from Brian Johnson. You may ask your question and please state your company name.

Brian Johnson - Barclays Capital

Barclays Capital.

Gregg Sherrill

Good morning, Brian.

Ken Trammell

Good morning, Brian.

Brian Johnson - Barclays Capital

A couple of questions. Can you help us think your [decremental] margins looked like it was 41% North America, but somewhat less in Europe. I think that was distorted in North America by the Kettering ride control acquisitions? Should we – and so if I back that outlook more like 23% in North America? Are those about the levels we should be thinking about, and then are cost saves just sort of treading water to keep you at that 21%, or can we have cost saves that would flow through to EBIT to offset some of that [decremental] margin?

Ken Trammell

Brian, I guess maybe the best way to answer your is, I mean obviously from a go-forward perspective, we don’t have – (a) we don't give guidance, (b) we don’t have a lot of visibility for sure as to what is going to happen from production. But you have seen the decline in North America over the last several quarters, and I think the margin impact has been relatively consistent, and I do not see anything that iss going to change that significantly. The restructuring actions that we are undertaking should begin to show benefits, but it is going to depend on what happens to production, as we move through the year, as to how much of that actually flows through to EBIT.

Brian Johnson - Barclays Capital

Okay. And second, in terms of sizing the GE relationship, how should we be thinking about that in light – as compared to your current backlog and current commercial business?

Ken Trammell

We don not really have any revenue projection to give you on GE. I should point out that the regulations actually change for locomotives in 2014 or 2105. But the retrofit is to the extent that there is a retrofit opportunity – a retrofit solution available would begin to occur earlier, maybe as early as 2010 or 2011 as we think about that. But at this point there is really not a way to give you, I think, a good feel for what that opportunity is. [Another key to] point out to I think is that once that hydrocarbon SCR solution is developed, it is also a very good off-road –

Gregg Sherrill

As other applications other than directly with GE.

Ken Trammell

Yes, so you do not have to –

Brian Johnson - Barclays Capital

Right.

Ken Trammell

So you do not have to carry urea to say a bulldozer that is – that you just cannot get to a urea [pond].

Brian Johnson - Barclays Capital

Could you give us something of an update on the debate over SCR for Class A North America, for 2010, 2011. I think there is some commentary in the marketplace that led by comments in the Ever Star about again moving away from SCR.

Gregg Sherrill

My only comment there is – I really haven't changed my position from day one regarding that debate. The vast majority of our customers are moving forward with SCR and very aggressively for all the reasons we have stated in the past. It is the number one, most effective; it hands down will nail the NOx, and so it is a certain solution for NOx, and it is such a good solution that it allows you to run the – re-calibrate the engines such that you get the improved fuel economies we have talked about in the past. So we have really not seen any change whatsoever. To us right now that is still just a little bit of noise out there in the system that has had no impact whatsoever on orders, on development work we are doing and all the customers that we are working with.

Ken Trammell

Again, pointing out to Brian, we said in the press release; we now have on road commercial vehicle contracts with 11 different customers around the world for these regulation changes. So, like we have always said, we think SCR is going to work well but even to the extent that there is not SCR on some of the vehicles, they still require diesel particular filters and diesel oxidation catalysts that we currently provide.

Brian Johnson - Barclays Capital

Okay. Thank you.

Gregg Sherrill

All right. Thank you.

Operator

Thank you. Our next question is from Chris Ceraso. You may ask your question and please state your company name.

Chris Ceraso - Credit Suisse

Thanks. Good morning. Credit Suisse.

Gregg Sherrill

Good morning.

Ken Trammell

Good morning, Chris.

Chris Ceraso - Credit Suisse

Ken can you just take me through the taxes in the quarter. I am just trying to understand how you still end up with a benefit from tax given all the valuation allowances you have taken?

Ken Trammell

Yes, you bet. Chris, the way that we want to try and present this is – is taxes assuming 35% rate and then show you what the impact of not being able to record a benefit for the US NOL is. So, that is what you see on the reconciliation we got, and that benefit like we said in the press release was between the US and a couple of other foreign – US was $16 million and then we had a couple of other foreign jurisdictions as well. They were about $4 million.

Chris Ceraso - Credit Suisse

I am still unclear though because on an X items basis you had a loss of like $30 million pre-tax and then a tax benefit of $10 million on that $30 million loss – right?

Ken Trammell

Yes, again like I said, that reflects; let us call it a normalized tax benefit of 35%.

Chris Ceraso - Credit Suisse

Is that something you have to true up later in the year or?

Ken Trammell

No because what we have done and maybe I just was not clear in trying to explain it a minute ago is showing you in the net tax adjustment line what the impact of not being able to benefit the US NOL is. Okay? So, we have just given you a normalized 35% to try and make it easier to understand and then the benefit of not being able to record that NOL in the US was – sorry [the loss], the expense not being able to record the NOL was $16 million in the quarter.

Chris Ceraso - Credit Suisse

Okay and you pulled that out separately?

Ken Trammell

Yes. That is in – if you look at the chart it is in $144 million and then in the bullet points below it tells you what the $16 million impact is.

Chris Ceraso - Credit Suisse

Okay. So on a go-forward basis should we just model it as a tax benefit of 30% or how do we deal with this?

Ken Trammell

The delay on the go-forward basis Chris that we intend to report is to show that when I call this, [meningeal] the normalized 35% tax rate and then to show you separately what is in the tax line that changes it from that, which would include the impact of not being able to benefit the US net operating loss.

Chris Ceraso - Credit Suisse

Okay.

Ken Trammell

Did that make sense?

Chris Ceraso - Credit Suisse

Yeah it does.

Ken Trammell

Okay. This is the simplest way that we could figure out to try and show it.

Chris Ceraso - Credit Suisse

Okay. There was a question before about the aftermarket. What is your view on the theory that, as people hold their vehicles longer because they are obviously not buying new ones, that maybe, they will need more aftermarket parts. Clearly it does not look like we are seeing that yet. Is it just too soon or what is your view on that?

Gregg Sherrill

I think it is maybe a little too soon. The problem right now is people are just virtually not buying anything except what they would consider to be mandatory from where I sit. So even the aftermarket is, I mean, it is easy to make that decision and especially on the types of products that we provide; there is a discretionary spend and they are just kind of holding back on it.

But at some point as the fleet ages, clearly there has to be a positive influence on the aftermarket. This is very difficult to predict, and we talked about it before you have all these seasonalities. So you will only see it over a little bit longer period of time. You will not see it quarter-to-quarter really.

Chris Ceraso - Credit Suisse

Yes. Okay. Any change as we look to 2009 in terms of pension expense and/or cash funding for the pension?

Ken Trammell

I think we included an attachment that would show you what that impact is going to be and I think it is pretty consistent year-over-year.

Chris Ceraso - Credit Suisse

Okay.

Ken Trammell

2008 to 2009.

Chris Ceraso - Credit Suisse

Okay. And then lastly –

Gregg Sherrill

It is actually on the back of the deck.

Chris Ceraso - Credit Suisse

When do you hit that full run rate on the expected $58 million in restructuring cost savings?

Ken Trammell

Surely, by the end of this year. We should get actually – probably about – I think, we said $50 million or so of it in 2009. So the remainder comes in as we kind of get toward the end of the year.

Chris Ceraso - Credit Suisse

Okay. And the cash-out this year for the program is how much?

Gregg Sherrill

This year?

Ken Trammell

I think we said we expected another $9 million or so in charges related to the program this year and probably –

Gregg Sherrill

7.

Ken Trammell

I am sorry, 7.

Gregg Sherrill

7.

Ken Trammell

And probably a little bit of the cash that was accrued at the end of 2008 will be spent in the first quarter of 2009. But, yes, if you use $7 million that is probably a good assumption.

Chris Ceraso - Credit Suisse

Okay. Thanks a lot.

Gregg Sherrill

Thank you.

Operator

Thank you. Our next question is from [John Irish]. You may ask your question and please state your company name.

Unidentified Analyst

Company name is Ore Hill. I guess my question – I am not sure if you have covered this, I have joined late. But the MIMA appeal to the government, that has kind of been [topic] for the last 24 hours. Could you maybe comment on that, and what your perception, I guess, is of the knowledgeability and maybe the Obama administration in terms of the disruption that could potentially come off of major supplier failures over the next couple of months?

Ken Trammell

I am not sure if I understand the 100% of your question, so once I am done, let me know if I have not answered it.

Unidentified Analyst

Okay.

Ken Trammell

We understand that the group went to the Treasury to discuss, it sounds like is sort of two programs. Number one is a loan program for suppliers, and number two is a program that would be designed to use existing [pass-pay] programs to accelerate the collection of receivables by the supply base for some period of time just to work through this economic decline. And obviously the supply bases are very interconnected, so it is not just GM or Chrysler, but also Ford, Toyota, Nissan. So I got to assume there is a growing appreciation for the fact that the interconnectedness makes it necessary to be sure that all the different pieces are addressed.

Unidentified Analyst

Okay. Well, have you guys actually made a direct appeal to them or are you participating in this and any – I know there was a CEO round table that was of CEO suppliers that went down there directly. Were you part of that group?

Ken Trammell

We have not met with Treasury. Now, we are members of OESA, so we are certainly aware of the process and talking to them about what the impact would be, especially the Quick Pay program.

Unidentified Analyst

Okay. And the $10 million to $30 million that you are talking about, are those that have not qualified or been disqualified for that receivable program. Is that related to GM or Chrysler or any of the [D3]?

Ken Trammell

The sponsors are changing the parameters of the program primarily because of the credit quality of GM, Chrysler and Ford.

Unidentified Analyst

Okay. Now, I guess, I have heard of other companies getting government funding and your [other] suppliers getting – starting to get government funding directly in terms of tax credits and social cost credits in Europe. Are you in discussions with those governments regarding those type of direct credits?

Gregg Sherrill

We are staying abreast of all developments in Europe. I am not familiar with any specific suppliers you may be with. I am not saying they are not out there. I know there has been some talk in the press of particularly the French government with a couple of the big French suppliers but –

Unidentified Analyst

That is the one.

Gregg Sherrill

Yes, we are staying very abreast of it and anything that would make sense for us, we want to be aware of it and participate as required. But, again, it is all pretty preliminary. All these governments are moving. It is – they are just moving pieces all over the place right now and how they are supporting various industries et cetera. And so we have got our European people staying abreast of those organizations that are in touch with the governments in Europe and of course through OESA, that we are a member of, as Ken just mentioned, we are staying abreast of everything going on here in the United States.

Unidentified Analyst

Okay. And I guess the last question is on this three or four day work week that you are seeing more broadly implemented in Europe. Are you – are all of them going to three or do you have the flexibility to go to three and you are at four, right now; I mean can you frame that? Is there additional flexibility to go down lower than where you are right now?

Gregg Sherrill

The additional flexibility is just continuing the negotiations. We are not in place across all of Europe and I did say that earlier, but you have mentioned you might have got in on late. So, I am not sure if you heard that part or not. We are progressing through Europe, we have had a lot of success with the unions on short work weeks bringing our – I don't want to talk about four day or three day.

But bringing our plans inline with the production requirement because it is different plant by plant depending on who is running and who is not over there. Right? And so we have had considerable success so far and we are working our way through and anticipating further success. There is a lot that hass already been accomplished. We did not quantify it, I am not quite ready to do that this morning and there is some more to go. So there is some more opportunity as well.

Unidentified Analyst

Okay. Last question on liquidity; what was your availability on your revolver debt agreement in terms of additional debt capacity at year-end?

Ken Trammell

I do not have the number on the top of my head. We had borrowings against the revolver in the $330 million range and letters of credit of about $47 million and total size of the facility is $680 million. It is [flat] with $340 million or so available.

Unidentified Analyst

Okay, very good. Thank you.

Gregg Sherrill

Okay.

Operator

Thank you. Our final question is from Himanshu Patel. You may ask your question and please state your company name.

Himanshu Patel - JPMorgan

Hi, just a follow-up question. Any rough estimate you can give us for where backlog numbers would stand for 2009?

Ken Trammell

Himanshu, we specifically said that we just could not give any OE revenue guidance for 2009 because of the uncertainty around production.

Gregg Sherrill

And that is the whole thing, Himanshu. We are comfortable on the content part. We just do not know the volume multiplier right now.

Himanshu Patel - JPMorgan

Yes and I get that, but I mean if you just sort of took current production estimates out there for whether it is CSM or JD Powers, who ever you use, is there any ballpark you could provide as using those as sort of boundaries?

Ken Trammell

No, I mean Himanshu, we could do that, but because of the uncertainty we decided we were not going to do that this year.

Himanshu Patel - JPMorgan

Okay.

Gregg Sherrill

Because they are changing their numbers fairly rapidly as well.

Ken Trammell

Yes. If you picked their number today, it would likely be different in the next 30 days.

Himanshu Patel - JPMorgan

Okay. Very good. Thank you.

Gregg Sherrill

Okay. Thank you.

Operator

And I am showing no further questions at this time.

James Spangler

Okay and then this will conclude our call. An audio replay of it will be available on our website. Again the address is www.tenneco.com. You may also access recording over the telephone. If you are located in North America, you may reach the playback at 866-419-2879. For those outside North America, the dial-in number is 203-369-0761. The playback will be available about one hour from now. And the call-in information I just gave you is found in our news release.

If you are an analyst or an investor with additional questions, please follow up with Jane Ostrander, our Executive Director of Global Communications. Today you can reach her at 847-612-3595. Financial reporters may contact me with additional questions at 847-224-4813.

We want to thank you again for taking part in our conference call and have a nice day.

Operator

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.

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