Tenneco Automotive Q2 2009 Earnings Transcript

Jul.30.09 | About: Tenneco Inc. (TEN)

Tenneco Automotive, Inc. (NYSE:TEN)

Q2 2009 Earnings Call

July 30, 2009 10:30 AM ET

Executives

James K. Spangler - Vice President, Global Communications

Gregg Sherrill - Chairman and Chief Executive Officer

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

Analysts

David Leiker - Robert W. Baird

Eric Selle - JPMorgan Credit

Christopher Ceraso - Credit Suisse

Richard Kwas - Wells Fargo

Patrick Archambault - Goldman Sachs

Brett Hoselton - KeyBanc Capital Markets

Himanshu Patel - JPMorgan

David Manger - Morningstar

Operator

Good morning, and welcome to Tenneco Second Quarter 2009 Earnings Release Conference Call. All lines have been placed on a listen-only mode, until the question-and-answer portion of today's conference call. (Operator Instructions). Today's call is being recorded. If anyone has any objection, you may disconnect at this time.

Now I would like to turn the call over to Mr. Jim Spangler, Vice President, Global Communications. Thank you sir, you may begin.

James K. Spangler

Good morning, and welcome to Tenneco second quarter 2009 financial results conference call. Earlier this morning, we issued our press release and associated financial information. And in a minute, I'll 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 today, taking you through a detailed explanation of our second quarter performance.

Slides related to their prepared comments are available on the financial section of our website at www.tenneco.com. The two of them will then take your questions during the second half of our call. And we'll do everything possible to address all your questions. Now please note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers that are shown in our press release attachment. The press release and the attachments are also posted in our website. Also, in addition to reviewing our second quarter financial result, 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'll turn the call over to Gregg.

Gregg Sherrill

Thank you, Jim and good morning, everyone. And thank you for joining us. Let me start by reiterating the key message from our news release. Our cost reduction, restructuring and cash generation actions are continuing to take hold globally, and are delivering the results we need in order to manage through this ongoing challenging production environment, while continuing our investments in future growth.

As you know, global industry conditions in the second quarter remained very challenging. The good news was, the conditions were not quite as bad as they were in the first quarter. Additionally, General Motors and Chrysler entered and exited bankruptcy, so the uncertainty and concern about that potential disruptive impact has been eliminated and those events especially behind us.

In the second quarter, North America production was down 49% year-over-year as OEMs continued curtailing output to bring inventories more inline with sales rates. Sequentially however, North America production volumes climbed to a modest 5% compared to the first quarter. Similarly, light vehicle production volumes in Europe declined about 27% year-over-year, but increased 27% over the first quarter, primarily due to a number of government sales incentive programs, most notably in Germany.

Our revenue and profitability continued to be negatively impacted by the global industry downturn. Revenue excluding currency declined 24% year-over-year. Lower OE production volumes and related manufacturing fixed cost absorption produced a negative $89 million on EBIT.

However, we were able to offset a significant portion through manufacturing efficiency improvements. Lower SGA&E spending, restructuring and other cost reductions. This is shown on slide five.

We also benefited this quarter from a stronger mix between OE and aftermarket revenues. The aftermarket revenues typically carry higher margins and represented 26% of our total revenue this quarter up from 20% in the second quarter of 2008.

We were pleased with our strong gross margin and cash flow performance this quarter shown on slide six.

Our gross margin was 17.5% which was our best quarterly performance in nearly three years. Cash flow and liquidity remain our top priority. On slide seven, the headline here is that our strong cash flow performance in the quarter improved liquidity and reduced net debt by $65 million over the first quarter of this year. We generated a 112 million in cash from operations. Our strong quarter operating cash flow performance companies 10 years history. And this was in a quarter when EBITDA was down $60 million year-over-year.

Once again our working capital improvements drove this performance. We were very effective at reducing inventories and managing accounts receivable. Cash flow from accounts receivable improved 58 million year-over-year even though the company sale of receivables generated $21 million less in cash, compared with a year ago.

Our relentless focus on reducing inventories generated 33 million in cash versus the cash usage of $4 million in the second quarter of 2008. All in all, we are pleased with the progress we're making and the results from our cost reduction and cash initiatives.

Not only have we worked through a difficult first six months of the year but we've also positioned Tenneco to take full advantage of an industry recovery.

Now before turning the call over to Ken, I just want to say that we are great deal effects for this performance to our 21,000 employees worldwide. They are the ones day in and day out executing our cost management actions and long-term growth strategies. We've asked a lot from them during this crisis and they have delivered. Their continued commitment to Tenneco's success in spite of the sacrifices we've asked them to make is truly remarkable.

And with that, I'll turn it over to Ken.

Kenneth R. Trammell

Thanks Gregg. Slide eight shows our financial results for the second quarter. As Gregg mentioned; we were dealing with a negative production environment in just about every region where we operate. As a result, revenue was down 17% year-over-year after adjusting for unfavorable currency and substrate sales.

On the EBIT line, the volume declined manufacturing fixed cost, if you can associate with those declines had an $89 million negative impact. Now before I get into the specific geographic segment, I want to mention the adjustments for second quarter 2009 and 2008 which affect year-over-year comparisons that are on slide nine.

We took non-cash charges of $18 million or $0.39 per share, primarily to the impact of recording evaluation allowance against our deferred tax benefit -- against our tax benefit for losses in the U.S. and certain foreign jurisdictions.

Let me take a minute to explain the $5 million environmental charge we recorded. We bought our Elastomers business Clevitte Elastomers in 1996 which was the last remaining business at The Pullman Company and that acquisition included The Pullman corporate structure.

Prior to our acquisition, Mark IV Industries that acquired certain Pullman assets and assumed liabilities, including environmental remediation responsibilities at some locations. Tenneco never operated the locations and question.

However, Mark IV Industries declared bankruptcy during the second quarter. It currently appears that some environmental liabilities will fall back to Pullman or REIT subsidiaries. So we recorded the reserve to recognize this.

Our $3 million in restructuring charges this quarter are part of the global restructuring initiative we announced last October. As we've previously indicated, we anticipate our restructuring expense related to that initiative will be about $7 million for 2009. We're on-track to realize about $50 million in savings for 2009 as a result of the program, and as a reminder, once fully implemented, we estimate it will generate annual savings of about $58 million.

Finally, I also want to mention the impact of currency, which negatively impacted revenue by $148 million and EBIT by $9 million. Now, if you look at our North American results on slide 10, OE revenue was $318 million that's down 38% year-over-year from $516 million. Excluding substrate sales and the impact of currency, revenue was $212 million down 5% from the prior year. The decline result of the lower production volumes. Pick ups and SUVs made up 52% of our North American OE revenue compared to 58% a year ago and 61% in the first quarter of this year.

Aftermarket sales in North America held up well given the economy consumer spending incentives. Second quarter North America aftermarket revenues were $150 million or 153 million excluding the currency impact, inline with 158 million last year.

On slide 11, EBIT for North American operations were $6 million compared with $17 million in second quarter 2008. Adjusted EBIT was $12 million versus $25 million a year ago. Unfavorable currency also had an impact on EBIT lowering it by $1 million.

The biggest factor impacting our results, OE production volume decline related manufacturing and fixed cost absorption. The good news was that by reducing cost, executing our restructuring plans, and improving manufacturing efficiency, we were able to offset about three quarters of a negative impact from volume and absorption.

Now in slide 12, we'll take a look at our Europe, South America and India segment. Europe OE revenue was $329 million down from $578 million a year ago. When you adjust for negative currency in substrate sales, revenue was down 19%, to $342 million. Volume declines in both our ride and emission control businesses drove down. Industry light vehicle production was down 27% year-over-year.

Our Europe aftermarket revenue was $101 million compared with $129 million a year ago. However when you adjust for negative currency, revenue was down 8% at $119 million. The decrease was driven by overall market declines affecting emission control products across the region and ride control products mostly in Eastern Europe and in the heavy duty side

Now on slide 13, revenue from our South America and India operations was $90 million versus $108 million a year ago. However after adjusting for substrate sales in negative currency, revenue rose 5% to $94 million despite industry year-over-year production declined to 9% in South America. The revenue increase includes the benefit from new platform watches in Brazil as well as higher production volumes in India.

Now on slide 14, total EBIT for Europe., South America and India was $6 million compared with $48 million in the second quarter 2008. After adjusting for restructuring in each quarter, EBIT was $8 million versus $51 million a year ago driven by lower OE volumes in the related manufacturing fixed cost absorption.

Currency also negatively impacted EBIT by $6 million in the quarter. We encouraged by the gross margin improvement over first quarter as we see our cost reduction initiatives gaining traction in Europe.

Now taking a look at our results in Asia which are on slide 15, we generated revenue of $88 million, down from a $105 million in second quarter 2008. But relatively even after adjusting for substrate sales. The biggest driver was the decline of substrate revenue in China mostly driven by lower precious metal prices.

Now finally on slide 16, you'll see that revenue from our Australian operations was $30 million down from $57 million a year ago. When you exclude substrate sales and the impact of currency revenue was $39 million down 26% compared to second quarter 2008.

Our results reflected poor production environment in Australia where industry production was down 48% year-over-year. On slide 17, EBIT for our Asia-Pacific operations was $5 million compared with $10 million year ago or $12 million adjusted for restructuring. Unfavorable currency had a 2 million negative impact.

Beyond currency, the EBIT decline was primarily due to the volume decline and manufacture and fixed cost absorption in Australia which worked against our cost reductions and our efficiency improvement in both our China and our Australia operations.

Now turning to some of our other financial results on slide 18. As we've said our result for this quarter benefited from cost reduction actions and restructuring which lowered SGA&E cost to $112 million from $136 million a year ago. The lower year-over-year revenues in SGA&E as a percent of sales was 10.1%compared to 8.2%.

On slide 19, you'll see the depreciation and amortization was $55 million for the quarter compared with $57 million in second quarter 2008. The decline was primarily related to currency.

Second quarter 2009 D&A also includes $1 million in restructuring expense. Interest expense in the second quarter was $35 million compared with $33 million of last year. Lower LIBOR rates mostly offset the impact of our higher borrowing expense under our amended -- that's on slide 20.

And on slide 21, we recorded non-cash tax charges in the quarter of $18 million which I mentioned earlier. Cash taxes for the quarter were $8 million, compared with $12 million in the prior year.

We now expect cash taxes range of 35 to $40 million this year, down from our previous estimate of 40 to $45 million. Gregg gave you the headlines on our cash performance. So now let me give you a little more detail on our cash and debt position.

First, on the chart on slide 22, you'll see our debt position at the end of the quarter. While our debt balances were higher on a year-over-year comparison, we made progress in reducing debt since the end of the first quarter of this year, driven by our strong cash performance.

Total debt was down $67 million and net debt was down $65 million. We completed the quarter with $333 million of unused borrowing capacity under our revolving credit facility, improved from $270 million at the end of March. We clearly outperformed our debt covenant ratios this quarter.

On slide 23, you'll see the two financial covenant ratios that last meet each quarter, revised ratio under our amended credit facility. At June 30th, our leverage ratio was 5.77 below the maximum level of 7.35. Our interest coverage ratio was 2.21 well above the allowed minimal 1.85.

As Gregg pointed out earlier, we did an excellent job of generating and preserving cash in this quarter despite what continues to be a very negative production environment, not only was it our best ever second quarter for operating cash flow, but also our best ever second quarter for generating cash from working capital.

Despite the significant volatility in production rates impacting our working capital based calculations, our results was can be panel side 21 reflect an intense focus on managing working capital and cash flow. As we've already pointed, out cash flow from receivables improved $58 million versus a year ago despite $21 million in cash from receivables sales.

Our day sales outstanding includes securitization of 61 days improved from 65 days on June 30, 2008. Inventory cash flow improved $37 million versus last year in the quarter with inventory balances traditionally peaked due to the seasonality of our business.

Our days of inventory on end were 40 days compared with 42 days last year. These metric represents strong performance by our employees in the face of a very difficult production environment and some time short notice on customer shutdowns.

Accounts payable cash flow also showed a year-over-year improvement of $11 million. Our days payable outstanding declined to 62 days at the end of the quarter versus 72 days a year ago. This metric is impacted by the timing of plant shutdowns particularly in North America.

Our share comment here on our supply base, we are closely monitoring the financial position of our supply’s. Our supply same team has a bench marketable process to monitor and proactively manage part of risk. That's clearly we haven't had any supply disruptions however, we have had a resource production from the pen suppliers and distress. And we have provide some financial assistance to the handful instructions.

Now on slide 25, you'll see there are worldwide factored receivables were $172 million as of June 30th compared with $216 million a year ago. And up from a $148 million at March 31st of this year.

Factored receivables had a cash flow impact of $24 million this quarter. We can securitize up to $250 million in receivables under our credit facility, which gives us another source of liquidity, as the production environment improves and our level of receivables increases. We have collected substantially all of our free bankruptcy petition receivables from Chrysler and General Motors.

Although we took the customers out of our securitization program in April, Chrysler has now been added back to the program after its emergence from bankruptcy and we're finalizing the documentation for GM. General Motors will be back in the program, the securitization program in a matter of days.

On slide 26, you will see that our capital spending in the quarter was $24 million down 58% from a year ago. Earlier this year, we forecasted that our capital spending in 2009 would be about $160 million. Based on our performance year-to-date, we're revising that guidance down to $140 million of capital spending for the year. That's 37% lower than the $221 million we spent in 2008. I want to emphasize that we are not short changing any needed investments in technology or to support our growth going-forward

What we have done is to prioritize spending using existing capacity, delaying expansion projects, canceling discretionary projects and reexamining make versus buy decisions in light of available supplier capacity.

Now, I'll turn the call back to Gregg.

Gregg Sherrill

Thanks, Jim. We are cautiously optimistic that the worst of the global automotive downturn is behind us. Make no mistake, industry conditions remain weak in most regions of the world and economic conditions are fragile making it difficult to predict when we'll see the beginning of a sustainable recovery.

Furthermore, the fact that sales levels in many key markets have been bullied by government stimulus programs adds to challenge of predicting a recovery given the uncertainty as to when many of these programs will end and their impact in fact on future sales.

While we don't expect the significant industry sales recovery for the remainder of the year, it is positive that the majority of the inventory corrections were accomplished in the first half. For this reason we expect to see strengthening and OE production volumes in the second half, as production begins to track more closely with sales.

Given all this, we continue to plan conservatively for the remainder of the year and are not letting up on our cost reduction in cash generation initiatives. These strategies have proven effective in helping us manage through the first six months. At the same time we continue to make progress on achieving our long-term growth strategies.

One of the biggest opportunity for Tenneco is in the commercial vehicle segment where tighter diesel emission regulation take effect in North America and China for on-road vehicles starting in 2010, and in North America for off road vehicles in 2011. All together we are working with more than 30 commercial vehicle customers worldwide, including Caterpillar, the world's leading manufacturer of construction and mining equipments in diesel engine. It wad just a year ago today announced that Tenneco had as ( inaudible) emissions control, system integration supplier.

The locomotive market also offers new emission control opportunities with tighter diesel emissions taking effect in North America beginning in 2013. We've already won new business in this market and we recently shifted our first locomotive diesel after three month prototype.

We also made progress this last quarter on expanding our business in the growing BRICK plus TA economies, another strategic growth incurred. In June, we announced our six joint venture in China which gives us an emission control manufacturing presence in Beijing and new business with Hyundai. This is our first business with Korea's largest OEM. We also announced attention to establish emission control manufacturing in Juan Jo, China by the end of this year.

In addition to supporting their new business, having a manufacturing presence in the South of China significantly around china footprint and we'll strengthen our position to win new business with other OEMs operating in the region.

In India, we 're in the process of building a new manufacturing plant in Chennai and expanding two other plants in that country. We are also finalizing a new emission control plant in Thailand. In summary, I am as confident as ever in Tenneco's growth. We haven't deviated from our growth strategies during this industry crisis. And I want to make it very clear that we continue to invest in the advanced technology and capabilities we need for capturing new opportunities.

We remain focused on extending in the commercial vehicle market with our advanced diesel after treatment technology. Winning new business in faster growing regions such as China and India, and of course maintaining our leading market positions in more material automotive markets which make up our core business.

Finally, what really drives Tenneco success is our dedication to serving our customers globally with manufacturing and engineering resources wherever they need them. Leading technology and products and by working collaboratively to provide solutions for their emission control and ride control need. Satisfying our customers drives everything we do and we work everyday to build and strengthen these relationships.

So with that, let's open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from David Leiker with Robert W. Baird. You may ask your question.

David Leiker - Robert W. Baird

Good morning, Gregg and Ken.

Gregg Sherrill

Good morning, David.

David Leiker - Robert W. Baird

Three quick questions here, on the after market business, U.S and Europe, are you still seeing obviously, on that side of it if you can push things out and ride control you can push things out. Are you still seeing consumers defer repair replacements of those components?

Gregg Sherrill

I think we're still certainly seeing some of that. I mean there is -- right now, if you look at North America, the aftermarket -- I call it essentially flat. I think the total revenues within $5 million of last years, so.

David Leiker - Robert W. Baird

Great.

Gregg Sherrill

So, that's to be honest with you sitting here, anything is flat right now, looks pretty good. And so, we still view North America is being relatively strong, Europe on the other hand is a little bit of a mix bag. Western Europe aftermarket sales are hanging in there. They've done fairly well but Eastern Europe in particular has been down and I think there we know that there are certainly a lot of discretionary spending, cutbacks that have certainly hurt aftermarket sales in that particular region.

David Leiker - Robert W. Baird

Is destocking still an issue?

Gregg Sherrill

I don't see that as much of an issue right now.

David Leiker - Robert W. Baird

Okay. And then in North America and Europe, you did a great job in the revenue line, revenues didn't fall as much of the end market. There are a couple of key things that you can highlight for us there?

Gregg Sherrill

We really are -- all we had relatively favorable platform mix, David. And so as we sort of look at just the overall mix of platforms continue to be on the ones that have that continue to do well. There is not a particular platform that stands out. So it's really just a mix.

David Leiker - Robert W. Baird

And then the last thing that just started trickling into the last day or two are volumes have picked up in North America. There seems to be some kinks in the supply chain where people are having difficult getting raw materials or components or things like that. Are you seeing any of that or are you realizing that? I mean have you heard that from other folks?

Gregg Sherrill

We've not seen that at this point and nor am I aware of it from anything that we've heard right now.

David Leiker - Robert W. Baird

Okay, great. Thank you very much.

Gregg Sherrill

Okay.

Operator

Eric Selle, your line is open. Please state your company name.

Eric Selle - JPMorgan Credit

Good morning. JPMorgan Credit.

Gregg Sherrill

Good morning Eric.

Eric Selle - JPMorgan Credit

Good morning. Looking at the restructuring program I guess there's about 50 million in total savings in 2009. How much did you guys realize in the first half?

Kenneth Trammell

Eric, that ramped up fairly quickly. I don't -- but as we have focused on cost reduction on an overall basis, I don't really have a number to tell you specifically what was restructuring, which was other cost reduction items.

If you obviously to get to 50 million for the full year, it ramped up pretty quickly. If you look at the SG&A in particular, a lot of savings are shown up there.

Eric Selle - JPMorgan Credit

So a lot of it showed up in the first half. And then I guess that means there is like probably like 8 million left for '09 on an incremental basis. I mean buying any other programs?

Kenneth Trammell

Yeah Eric, once you get to the end of the year, there's about 8 million left. So we've got a good bit of a savings, sort of in place and it's ramped up very quickly than there will be some more discussions of plant related savings that sort of flow in beyond '09. So help us...

Eric Selle - JPMorgan Credit

And then you're looking at; what limits your ability to borrow on AR facility and reduce revolver borrowings to comply with covenants. Because it looks like that's an obvious liquidity source not a lot of people look at but is there anything in your bank covenants that limit that let's say 80 million left on that, you could draw on that to pay down your revolver to compile the covenants?

Kenneth Trammell

Eric -- other than the amount of receivables that we have available to end the securitization program. So, as production ramps up and we generate more receivables, we will use more of that capacity. And if you look at last year, second quarter I think there was $216 million, but we had used up the 250. So revenues receivable increased

Gregg Sherrill

And as Ken pointed out in his remarks, we've had GM and Chrysler out of the program, Chrysler's now back in and GM will be back in a matter of days.

Eric Selle - JPMorgan Credit

And so what -- as of June what was -- it was 172 did you guys borrow to the limit or was there some excess capacity there?

Gregg Sherrill

The amount -- it's a global number, so it's not just one program, it's one program in the North American market, but its several programs overseas. And so the number that we can use for securitization depends on the calculation of in each of those programs, the over securitization is required. So I would say that probably revise it there might have been a little bit of additional capacity at the end of June, but the biggest driver is going to be an increase in revenues, particularly North America, as GM and Chrysler come back on.

Eric Selle - JPMorgan Credit

And then adding in I mean sales and those two come back online?

Gregg Sherrill

Yeah, exactly.

Eric Selle - JPMorgan Credit

Okay, great. Appreciate it.

Gregg Sherrill

Thank you.

Operator

Derek, your line is open. Please state your company name.

Unidentified Analyst

Yes just quickly, do you have a deprecation and amortization estimate for the year as well as CapEx.

Kenneth Trammell

We gave a D&A estimate at the beginning of the year, and I think we said in the neighborhood of $200 million that's been drawn that out of my memory.

Unidentified Analyst

And that would still hold.

Kenneth Trammell

Yeah. There is obviously currency impact that are up or down but I think its probably still in that range.

Unidentified Analyst

Great. Thanks.

Operator

Chris Ceraso, your line is open. Please state your company name.

Christopher Ceraso - Credit Suisse

Thanks. Credit Suisse.

Gregg Sherrill

Good morning Chris.

Kenneth Trammell

Good morning Chris.

Christopher Ceraso - Credit Suisse

A couple of first, what's the timing on launches for the commercials here in North America that will start with your SCR programs and what's the expected revenue opportunities there over the next 12 months?

Gregg Sherrill

Yeah I'm going to start, just like generically the launch is the CBS programs, here in North America begin -- I think the on-road begins early in 2010 and we have them running pretty much throughout the year and I don't have the revenue breakdown quarter-by-quarter or anything like that. We do have a CBS program starting later this year in China, I know that wasn't a part of our question but really the initial launch is in China and beginning in sort of the middle towards the end 2010, we'll begin launching off road commercial vehicle programs.

Christopher Ceraso - Credit Suisse

Okay, how much of the working capital progress that you made here in the quarter is a function of the real collapse in volume and then alternatively once we start to ramp up in Q3 and Q4, how much of that working capital progress do you think will unwind?

Kenneth Trammell

Chris the working capital certainly is benefited by the one of the production. The hard part is managing the inventory, and managing the receivables as that comes down. If you look at our working capital metrics, year-over-year, and the fact that we've been able to keep those metrics pretty much in line because where we see the strong benefit from the focus on working capital management.

So what we've learned a lot about especially in inventory will help us as it goes back, as production goes back out. We don't expect inventory days to get a little bit rapidly as production does. A lot of our production should continue to move in part so, it should answer your question, you take a look at the metrics and assume Brad (ph) will say at least that efficient on as production ramps up. I think that's probably a good way to look at.

Gregg Sherrill

So we are saying there is definitely an efficiency element in there that we will do everything we can obviously to hold on to just a ramp back up.

Kenneth Trammell

Yeah, I mean just take inventory as an example, if you look at inventory at the end of 2008 of the amount that we had in inventory about four days worth was really materials and supplies. So obviously our ability to pull days of inventory action down on a quarter-to-quarter basis and in spite of that, that materials supplied obviously is not really variable. And I think it reflects the efficiency that remain in October at the end of the prescribe work?

Christopher Ceraso - Credit Suisse

On receivables and payables, if you hold the days steady but volumes and revenues are ramping up, that will use cash right?

Kenneth Trammell

Well the receivables, the payables will actually produce cash.

Christopher Ceraso - Credit Suisse

Right but then the net effect is negative?

Kenneth Trammell

Yeah, well don't forget the factor in this accounts receivables securitization as well. But remember when the days calculations I gave you earlier are based on excluding the securitizations or in other words counting those receivables.

Christopher Ceraso - Credit Suisse

Okay, I have one kind of technical question that I have been thinking about. Can you quantify the content premium for the mission system on a direct injected gas turbo engine versus say a normally aspirated lower compression gas engine and then how does that compare to diesel engine of comparable displacement because it seems like global car companies everywhere are going to dialing up output of those direct injected gas engines. I'm trying to quantify what's the step up in content is for emission versus the regular gas engine?

Gregg Sherrill

I don't have a quantification for you this morning because it's obviously going to depend on the engines themselves, the size of those engines which you are comparing to, but we've said this before and this will hold true that there is more content available in the direct inject gasoline engine versus the standard gasoline engines and it is less than that of a diesel engine.

So it does fall in between the two. But its more than gasoline which is fundamentally more than what's it's replacing for the most part and is less than the diesel.

Christopher Ceraso - Credit Suisse

Okay.

Gregg Sherrill

I don't think we really have a quantification of that.

Kenneth Trammell

Like Rick said its going to depend on the engine but it's also going to depend on a large extent on the manufacturer's choice of how to handle emissions because even the manifold on gas direct injection, it's more efficient if you use a fabricated manifold which we make versus cast manifold which would dump.

So if the manufacturer chooses to use the fabricated manifold to weight savings, its also much more thermally efficient and that will be benefit to us and if they don't, it's down stream for the manifold.

Gregg Sherrill

We're a major player in fabricated manifolds. So that's available content increase (inaudible)..

Christopher Ceraso - Credit Suisse

Okay, last question. How much of the improvement in your gross margin is a function of declining substrate sales, whether it's a function of mix or precious metal prices. And do you think the gross margin is sustainable up here at 17%?

Gregg Sherrill

If you look at just take the gross margin's percent of ad revenues as well, you see that there is significant improvement. So it is really attributable to the manufacturing efficiency improvements we’ve been able to get into the appliance. Is it sustainable, I mean, yes. Obviously what we've learned and the cost reductions actions that we've taken and the restructuring actions to been put in place are not going to go away from us.

Christopher Ceraso - Credit Suisse

Okay. Thanks a lot guys.

Operator

Thank you. The next question comes from Rich Kwas. You may state your company name.

Richard Kwas - Wells Fargo

Yeah. Hi, Wells Fargo.

Kenneth Trammell

Good morning Rich.

Gregg Sherrill

Hi Rich.

Richard Kwas - Wells Fargo

Hi Ken, hi Gregg. Just a follow up on the truck emissions next year in North and America and versus China. Greg what's the balance front as we think about 2010 in North America and China. Are you going to be more disproportionately weighted in China versus North America or vise versa?

Gregg Sherrill

Good question. I believe the answer to that because it all moves around as we go out in the years. But followed by the end of 2010, I suspect it was still heavier in North America than china, but I'd probably want to look that up and give you that relative thing. Because its a point time question, China by the end of this year, because this is the one that's launching and going into next year, we'll be slightly higher, but I do think North America catches up, let us check that for you though, okay.

Kenneth Trammell

It's going to be a function of the volume production in each region, as well which is still obviously better than here.

Richard Kwas - Wells Fargo

Right, of course. And then, how do we think about CapEx, I know you've given guidance for the remainder of this year and for the full year. How do we think about how this impact 2010, with the growing of commercial business coming on?

Gregg Sherrill

I'm sorry I kind of missed the question, you broke up just a little bit there.

Richard Kwas - Wells Fargo

Yeah I was calling about CapEx as we think about 2010. You've given guidance for this year is down a lot, year-over-year, but how do we think about it with the cadence of the commercial business really ramping up over the next few years?

Kenneth Trammell

You know Rich, if you take a look at us historically, CapEx as a percent of sales has been in that 3-3.5% range. So, taking out the actions that we've done this year, as we move forward, I think it will move back a little bit towards that, however, a lot of the things that we've learned in terms of how to be more efficient on CapEx, are going to help us continue to help us on a CapEx so, we would certainly be towards the lower end, if not below it,, if we're able to hold on to a lot of the efficiency that we've seen.

Richard Kwas - Wells Fargo

Okay. So, as we're thinking about this little longer term, when we look at 2011 and 2012 that's probably when you get back to that range of 3-3.5% sales?

Gregg Sherrill

Yeah, I think it's going to depend on how the volume ramp goes on an overall recovery basis, that is very much dependent on your assumption of how quickly there is a overall economic recovery and there is a recovery particularly in the light vehicle market. Our big thrust here has been a tremendous redeployment of assets, coupled with a lot of deferrals of expansions in various regions of the world et cetera.

But, the other pieces of the pie is that every year we continue to drive productivity improvements in our plans to freeze up capacity. So the longer you defer it really the less you need, because of more productive you are out there. And so I don't see any huge spikes coming in our CapEx. Yes we're constraining it very tightly this year, obviously that's the prudent thing to do and there will be some thing back of that in the out years but, still keeping it within those percentages, that Ken described earlier.

Richard Kwas - Wells Fargo

Okay, great. That's helpful. And then last point, in terms of Europe made a great sequentially in terms of the margin, most of the heavy lifting there done in terms of restructuring and how do we think about the sustainability of European EBIT margins there and the potential for more improvement.

Gregg Sherrill

Again the piece of all of this that we're calling sort of structural, its part of our restructuring actions et cetera. That is sustainable, that we will keep. And those improvements were real. As we said in the first quarter, even though we launched our restructuring actions pretty much consistently late last fall, across the world, just due to the way you have to implement at certain countries, it took us a little bit longer in Europe, I think -- anybody because that just a different situation over there.

Those are really beginning to take hold as we had indicated I think in the first quarter, they shouldand they have. For a good part of that there will be structural. There is a piece of our cost savings as everyone knows that we announced that was relative to some star reductions and things like that. Those were absolutely considered temporary. As the economy improves, we will reinstate those at some point in the future, but the basic structural benefits of our structuring actions, those should bake into our improved margins and stay with us.

Richard Kwas - Wells Fargo

Okay. And then in Europe do you still have any lag in terms of labor cost there that would still in the second quarter that's going to improve in the third, fourth quarter or are you pretty much sized there in the labor front for what you're seeing?

Gregg Sherrill

There maybe some more marginal improvements we can achieve in Europe. I think a good piece of it is in, and now we're watching very closely obviously to see what production does and if it maintains overall what we seeing in the forecast right now. You know we should be okay there. But there'll be obviously the continual improvement; you know that that we always try to achieve.

Richard Kwas - Wells Fargo

Right. Okay, thank you.

Operator

(Operator Instructions). The next question comes from Patrick Archambault. Your line is open. Please state your company name.

Patrick Archambault - Goldman Sachs

Hi. Goldman Sachs.

Kenneth Trammell

Good morning.

Gregg Sherrill

Good morning.

Patrick Archambault - Goldman Sachs

Good morning. I wanted to ask a question just on your content per vehicle. It looks, you know given the revenue breakdown that you guys provide that you've had a very substantial increase in content per vehicle. A percentage year-on-year basis in ride control? And this goes back several quarters, I mean it’s mostly visible in North America but I guess it would be the same in Europe as well.

And I was just trying to understand that better just in terms of being able to model the company going forward because it just intuitively I thought that the emission space was what would be growing fastest. But in terms of content growth it actually seems to be ride control rate now even though I guess may be emissions has the better outlook.

Gregg Sherrill

I'm not real sure about the content growth in North America or what you're looking at and we may want to take that outline with you and try to understand it. We would have certainly had some improvements in ride control volume against the normal production levels out there because the acquisition we made last year of catering.

But I'm not sure how that would really have impacted content for vehicle. It would have just added more volume into us.

In Europe, we are being successful with our CES, the computerized electronic shock systems and I haven't broken that down, but there maybe some improvement there year-over-year, that we would have isolate out again from all the production chips between last year's and this year's, that's kind of a complicated equation too. So, might want to take you off-line there and try to understand exactly what you're looking at and you better make sure we all understand it the same way.

Kenneth Trammell

I don't know how you get to CPV numbers but, I think Gregg probably hit the key item that you may not be factoring into your calculation of that's the (inaudible) of business, that came online beginning the first of last year.

Patrick Archambault - Goldman Sachs

What's the, yeah that could very well be it. What's the size of that? Can you remind me just in dollar terms?

Kenneth Trammell

In this quarter, certainly it was low because the GM production is down, but I want to say in the third or fourth quarter of last year sort of incremental part, the incremental revenues that we gave you were in the 30 to 40...

Patrick Archambault - Goldman Sachs

Got it okay, yes. So that would me material. I just wanted to I guess press you a little bit more on the opportunity, just on the commercial side. I mean is there anyway you can give us a little bit more color because obviously that's just so critical to try to understand your revenue outlook.

Anyway we could sort of dimension that, either in terms of kind of a revenue range, what it could be on a fully rent basis or may be even just in terms of potential, what you think your market share in SCR might be once those contracts are ramped up.

Gregg Sherrill

May be the best way to put it is to remember that we have in past obviously given revenue guidance both over the short term for the next two years and then long term growth strategies. Although we've had to pull that backward because the uncertainly around the volumes. Remember that we did say that that we expected by the 2012 time frame you know 20122, 2013 that commercial vehicle would be in the 25 to 30% range of our total revenues.

So you know and that's up from 2007 with a 6% range. I this it was 8% in 2008. So significant growth opportunities but that's the about as close right now as we've got to guidance that we are giving.

And again the you know we're going to maintain a certain level of conservancy on when we reinstitute some of the revenue guidance. That's all still based on speed of recoveries and how faster volume's going to comeback.

We have all the confidence in the world as I said in my remarks and the content that's going into these vehicles, the business wins that we've had, the number of customers we're working with. So the success there is very solid, we haven't backed up on that one Iota. Its just purely still, even at this point I think the uncertainty over how to forecast volumes in those years.

Patrick Archambault - Goldman Sachs

Okay, got you. And then, I guess lastly, I just wanted to better understand, I think you might have gone through some of this, but better understand the context of cost saves. Right obviously your that one program that was 58 million and that was categorized as seemingly permanent, permanent to restructuring benefits and then, there was a piece which you mentioned was temporary, things like travel and stuff like that which might reverse out. Was that, how much was that temporary piece, was it additive to the 58 and yeah I just kind of wanted a little bit more color on that?

Gregg Sherrill

Yeah the temporary piece I was talking about was added to the restructuring number. Ken may have an estimate of what the temporary piece is. It’s on top of, in other words, the savings we’ve been talking about are in restructuring are permanent.

Kenneth Trammell

And when we talk about the April first salary reduction we implemented on a global basis, we said that was about $7 million a quarter, obviously like Gregg said as the production environment improves, that will go back at some point and we had also said we eliminated a 401(NYSE:K) match this year which is probably 1.5 to $2 million a quarter, and that will come back at some point as well.

Patrick Archambault - Goldman Sachs

Okay, terrific. Thank you very much.

Operator

Next question comes from Brett Hoselton. Your line is open. Please state your company name.

Brett Hoselton - KeyBanc Capital Markets

KeyBanc. Great, Ken. Good morning.

Gregg Sherrill

Good morning Brett.

Kenneth Trammell

Good morning.

Brett Hoselton - KeyBanc Capital Markets

Do you have a price, back in accounts receivable program of revenue, it’s hard to guess but can if you kind of think about where production might be going versus where it's been. How much cash might this make available to. What kind of liquidity would this make this available to as we move forward?

Kenneth Trammell

That's a very difficult question and answer. Because like you said, it’s going to depend entirely on production. But maybe the best way to look at is, I am go back to the 2007 time frame when between GM, Ford and Chrysler, we had receivables in the $150 to $200 million range and about a third of those in the program. And so as it ramps, obviously it will go up. But it's not just GM, Chrysler, also Ford production goes up in the quarter as we generate receivables with Ford, that will be a cash benefit for us as well.

Brett Hoselton - KeyBanc Capital Markets

And then as we think about earnings as we move sequentially from the second quarter of '09 to the third quarter of '09, what kind of OE contribution margins do you think might be reasonable to expect..

Kenneth Trammell

I don't know if we have ever given contribution margin numbers, so I think it will be difficult to say. But, if you look at the trend over the course of the last few quarters, you would have seen some improvements because of the restructuring and cost saving actions that we have done. And if you just assume, even on a conservative basis that we're able to pull it through the same rate in the third quarter, that should give us a correction...

Brett Hoselton - KeyBanc Capital Markets

And then as we think about the restructuring, just how till I understand it, it sounds like the bulk of the restructuring savings is already baked into the second quarter and so sequentially as you move into the third quarter, there maybe some improvement, but that improvement will probably be fairly diminimous.

Kenneth Trammell

And it's relates to the restructuring program we announced in October In order to get the 50 million getting pretty close to run rate by the end of June. There is still some more opportunities and we also continually focused on other cost savings. The plants are working incredibly hard to make sure that they offset as much as they overhead absorption issue.

Gregg Sherrill

Right. Keep in mind that restructuring was just that. And it does not replace all of our normal ongoing cost reduction efforts Six Sigma Lean. I mean that is a continuous process with even a heightened focus obvious through this period in all of our operations worldwide.

Brett Hoselton - KeyBanc Capital Markets

And then the environmental charge 5 million, one-time, correct?

Gregg Sherrill

Yes.

Brett Hoselton - KeyBanc Capital Markets

Okay. And as far as, I'll go ahead I apologize.

(Multiple Speakers)

Brett Hoselton - KeyBanc Capital Markets

Okay. And then commodities, I think in the past basically you said that you don't really see any sort of a tailwind as a result of low cost one or those lines. Is that still your expectation as you move from the third quarter, excuse me the second quarter to the third quarter that commodities cost particularly steel is going to become roughly as the same and I'm thinking steel obviously got alloy, nicke,l all that stuff baked in?

Gregg Sherrill

If you remember alloys, the nickel alloys in Europe and frankly some of the alloys in North America. We have sort of passed our surcharge recovery mechanisms which go to build up and down. So I'm going to take those out and say basically we see steel as no significant change.

Brett Hoselton - KeyBanc Capital Markets

Okay very good. Great quarter. Gentlemen, thank you very much

Gregg Sherrill

Thank you.

Operator

Next question comes from Himanshu Patel. Your line is open. State your company name.

Himanshu Patel - JPMorgan

Hi. JPMorgan.

Gregg Sherrill

Hi.

Himanshu Patel - JPMorgan

Two question guys. You filled a mixed shelf offering I think a couple of months ago. We haven't seen any sort of follow up news on that. I'm just wondering, first of all, would you consider an equity raise as part of your capital structure plan in medium term.

And number two, what would be the reason for that? Would that be to just be conservative and have more cash on the balance sheet or could that be used to pay down debt and avoid any covenant issues that you may be pursuing?

Gregg Sherrill

I think there is probably a couple of different ways to answer your questions. So let address the shelf registration and just put that in in corporate governance.

When we exited 2008, we no longer met the market capital requirements for well know seasoned issuers to be able to issue without having a registration statement. So it was just prudent for us to get that up there.

The other answer to your question I think is very consistent with what we said for really for number of years. Our overall goal is to get this company to something that all can deserve an investment grate rating from the credit rating agencies which we think if we get our debt to around two times then the mid cycle EBITDA is the way to go.

Again, we've said for years that we're firmly on the fence in terms of using equity is the way to get there. That position hasn't changed. And we'll continue to evaluate it based on what makes them more essential to company and our shareholders over the long term.

But no we don't see the need to issue equity in order to meet covenant requirements or to generate (inaudible).

Himanshu Patel - JPMorgan

Okay. And then can the two times on leverage, was that gross debt to annualized EBITDA or net debt?

Gregg Sherrill

It was Net Debt.

Okay. And then I'm sorry if I missed, did you or could you provide some commentary on second half working capital outlook?

Gregg Sherrill

We did not provide any other than to say obviously that for working capital a lot of things have been learned and implemented to be more efficient in the first half will continue and we have plenty of capacity under our securitization program to finance some of the receivable increase as production starts to lift back up.

Himanshu Patel - JPMorgan

Okay. Very good, thank you.

Gregg Sherrill

Thank you, Himanshu.

Operator

Next question comes from Barry , you're line is open. Please state your company name.

Unidentified Analyst

Brownstone. So a quick question on the European production program, I guess to the program , is that largely complete now or is it still more kind of going on there?

Gregg Sherrill

Well, I'm not aware anymore adding any currently. I mean I think the UK was the last one to put one in. Germany's is really the big one. It's been a little bit of a driver for the overall European production in the first half. And I want to say, that's sort of a dollar amount, I don't think is based on a time, I think it is based on amount of dollars they allocated to it. And as the current sort of run rate, that should be done pretty close to the end of the year in Germany. And I can't tell you country-by-country exactly when those things expire right now.

Unidentified Analyst

Right, that's sounds like there is still some more room left in terms of dollar amount in the Germany program?

Gregg Sherrill

Yes, and one thing too that is worth mentioning on those programs, they have primarily driven the lower segment vehicle sales. A and B type segment sales. They've had much less of an effect on the bigger luxury vehicle sales and that's another thing we're kind of looking at because we obviously have content on all those vehicles but probably our mix is towards the luxury end a little bit more. And so the good news there is they haven't really had any artificial influence going on. So as a recovery occurs in that segment, the bigger segment. You know we should see more of a natural uplift and not some downward effect of the incentives coming off. And then the natural uplift of market recovery, which that's the piece of could be complicated in other sectors.

Unidentified Analyst

And you're saying you really haven't benefited a lot from the programs?

Gregg Sherrill

I won't say we have not benefited because I think it has afforded certain production levels. And we do have content across all the segments and you're up. I would just say our mix is probably skewed more towards the luxury segment and the larger segment. Is not that we don't have any in the lower ones. So yes there has been a benefit. What I'm trying to say though too is that you're looking at vehicle incentive programs coming off is going to have a disproportionate effect on the smaller cars coming off just like it did going in as opposed to luxery cars.

Unidentified Analyst

And then on the commercial vehicle side, have you seen in terms of the stuff you're looking at the volume's pretty similar to the first quarter in terms of the… Are down at all or are they are kind of sequentially the same?

Gregg Sherrill

They're still riding at very low level. And if they're change in sequentially, its almost around the difference.

Unidentified Analyst

Okay. Thank you.

Gregg Sherrill

Yeah. Thank you.

Operator

Thank you. And our last question comes from David Manger. Your line is open. Please say your company name.

David Manger - Morningstar

Morningstar. Most of my questions already been answered. But just real quickly, what was the total employee count at the end of the quarter?

Kenneth Trammell

David it's hard for us to get everybody to hold still long enough to count noses on a quarterly basis. We only do it annually. So the last count was the 21,000...

David Manger - Morningstar

Okay. Great. That's it and thanks.

Kenneth Trammell

Thanks David.

Gregg Sherrill

Thank you.

James Spangler

Thanks David. Great, this concludes the call. An audio replay, of it will be available on our website again the address www.tenneco.com and you may also access recording over the telephone. If you're located in North America, you may reach the playback at 866-489-2844. Those of you outside North America the dial-in is 203-369-1658. The playback will be available about one hour from now and the call-in information I just gave you is in our press release.

If you're an analyst or an investor with additional questions. Please follow up with Jane Ostrander, our Executive Director of Global Communication at 847-482-5607, financial reporters may contact me with additional questions at 847-482-5810.

Thank you again for taking part in our call and have a good day.

Operator

Thank you. This does conclude the conference call. You may disconnect at this time.

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