Tenneco Q4 2007 Earnings Call Transcript

Jan.30.08 | About: Tenneco Inc. (TEN)

Tenneco, Inc. (NYSE:TEN)

Q4 2007 Earnings Call

January 24, 2008 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

Brian Johnson – Lehman Brothers

Chris Ceraso - Credit Suisse

Peter Nesvold – Bear Stearns

Rich Kwas – Wachovia Securities

Operator

Welcome to Tenneco’s fourth quarter and full year earnings release conference call. (Operator Instructions) Now I’d like to turn the call over to Mr. James Spangler, Vice President, Global Communications.

James K. Spangler

Thanks. Good morning, and welcome to Tenneco’s fourth quarter and full year 2007 financial results conference call.

Earlier this morning, we issued our press release and associated financial information. 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 about 30 minutes 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. We’ll do everything possible to address all of 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, as shown in our press release attachment. 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.

With that, I’ll turn the call over to Gregg.

Gregg Sherrill

Okay, good morning, everyone, and thanks for joining us. Ken Trammell and I will share duties on this call as we normally do and once we have concluded our remarks, we’ll be happy to answer any questions that you may have.

Let me start by saying that I was very pleased with our strong operating and cash flow performance in the fourth quarter. The favorable results were driven by 29% total revenue growth, which is a 16% improvement if you exclude currency benefits and substrate sales. You’ll see this outlined on slide 4.

Our nearly 35% higher OE revenue coupled with improved manufacturing efficiencies drove adjusted EBIT up 53% over the prior year’s level. Adjusted EBIT as a percent of fourth quarter value-added sales rose 24% to 5.4% in 2007 versus 4.4% in the similar 2006 quarter. So we are making good headway in converting the stronger sales mix.

Cash flow from operations in the latest three months was $200 million, benefiting from higher earnings, strong execution in turning receivables and inventories, and favorable seasonal trends. The solid performance included an increase of $45 million of cash generated from working capital.

For the full year, on slide 6, global light vehicle production rose 5%. Tenneco’s total revenue increased 32% during 2007 benefiting from our strong position in the robust BRIC economies; early adoption by European OEMs of emission regulations along with greater penetration of the electronic-shock market in Europe; and major new emission control launches in North America, including the strong selling Toyota Tundra, which helped deliver 45% higher revenue from our Japanese customers in North America.

Total company EBIT adjusted for certain items rose 25% for all of 2007, as a result of higher margin new business around the world, greater manufacturing efficiencies, particularly in our international business units, and our company-wide focus on operational excellence reflecting stringent cost management, strategically targeted spending, a flexible cost structure, and the successful continuation of lean manufacturing and Six Sigma.

For 2007, we improved adjusted EBIT by 7% in North America, 36% in our European segment, and 85% in the Asia-Pacific region. Each of our business units has contributed significantly to our compelling earnings performance.

On slide 7, you will see that for the full year, North America represented 47% of total revenue and 48% of EBIT. The European segment accounted for 44% of revenue and 39% of EBIT and the Asia-Pacific region reflected 9% of revenue and 13% of total EBIT.

I am also pleased with our continued reduction in leverage, which you can see on slide 9. As you know, this is a key objective for Tenneco. We completed 2007 with net debt-to-adjusted EBITDA at 2.4 times; beating our goal of 2.7 times as we boosted operating profits and improved working capital. As we strive to further reduce our cost of capital, we remain committed to achieving an investment grade rating.

Further to this point on slide 10, I’d like to emphasize that overall in 2007, we were able to keep our debt balance flat and improve our leverage ratio while:

Generating a record $1.5 billion of higher revenue;

Opening our second manufacturing facility in Russia and our first engineering center in China;

Using $16 million in cash to acquire an injection and dosing technology that sets us apart as the only full system emission control supplier with this capability;

Increasing our planned capital spending by $28 million year-over-year, a substantial portion of which was to capture a late awarded 2008 business opportunity;

Spending $34 million to fund a substrate-inventory pipeline from South Africa;

Allocating $8 million in cash for restructuring actions to further develop our low cost country manufacturing strategy and improve overall efficiency;

And paying $26 million in transaction costs to advance our financial strategy. And all of this was funded with internally generated cash which is quite an achievement.

Now let’s get into some of the details of the latest three months performance. Turning to gross margin on slide 11, our consolidated margin in the fourth quarter was 14.3% compared with 15.7% one year ago. A 48% increase in substrate sales, driven by the new diesel launches in North America and Europe diluted our gross margin as you would expect. I think it doesn’t hurt to continually remind everyone that substrates are an important piece of the overall emission control system.

For a Tier-1 supplier like Tenneco, they are primarily a directed buy from the OEM and as a result typically carry only about a 1 to 3% margin. However the substrate revenue increase is a clear indication of more hot-end, high technology business for us and that translates into higher value added margins on the parts that we supply.

Year-over-year, fourth quarter gross margin was unchanged when you exclude the expanded substrate sales and increased restructuring charges. In fact the combination of operating efficiencies from lean and Six Sigma and higher margin OE emission control sales, fully offset our revenue mix shift between OE and aftermarket, lower commercial vehicle production, and higher raw material costs.

Our OE operations made up 83% of total global revenue in the latest three months versus 80% last year, with the higher margin aftermarket responsible for 17% last quarter compared with 20% a year ago.

The commercial vehicle industry reported a 43% decline in production and higher raw material costs included $17 million of higher gross steel cost in the quarter. For 2008, we expect the impact of gross steel cost increases to be about $40 million. We anticipate fully offsetting the increase through continued cost reduction initiatives, material substitutions, and low cost country sourcing, in addition to aftermarket price increases and OE customer cost recoveries.

Moving on to SGA&E on slide 12, we reported SGA&E at 8.1% of revenue compared with 8.7% of revenue for the same period last year. We were successful at leveraging our higher revenue despite higher investments in engineering for next generation ride in emission control technologies. For all of 2007, SGA&E as a percent of sales was 8.3% compared with 9.8% a year earlier. For 2008, we’re targeting SGA&E at about 8% of sales.

I want to take a couple of minutes to discuss some commercial highlights on slides 13 and 14. We are launching roughly 70 new replacement or expanded vehicle platforms this year that support our net OE revenue projection of $5.5 billion for 2008, of which nearly 70% is value-added.

We are expecting a 9% increase in value-added OE revenues over 2007, driven by the anniversary of new business that was just ramping up last year, as well as the 2008 launch of significant platforms for emission control like the Ford Falcon in Australia, the Chevy Impala and Toyota RAV4 in North America, and the Volkswagen Gol in South America.

We are also launching several important ride control platforms this year, including the Suzuki YV1 in Eastern Europe and the Volkswagen Passat and Audi A6 with electronic shocks in Western Europe.

Before turning the call over to Ken, I want to acknowledge that our success in 2007 was a true testament to the discipline and focus of our employees and I want to express my appreciation and thank them for all of their dedication and efforts.

As we all know, there is a lot of noise in the automotive marketplace today, especially in North America and such an environment a laser-like focus on execution and operating performance is extremely important, and I am confident that we have the capability and discipline to stay focused regardless of market conditions.

Similarly, we won’t let anything distract us from the mission ahead. We are planning for a significant amount of organic growth over the next five years and are going to stay focused on our strategy making sure we’re prepared to capitalize on each and every opportunity in front of us.

We accomplished a lot in 2007 but it’s only the beginning of what we see as a greater future growth. And with that I will turn it over to Ken.

Kenneth R. Trammell

Thanks, Gregg. Before I go into the business segment analysis, I will review some of the items that affect comparability between fourth quarters of 2006 and 2007 on slide 15. Fourth quarter 2006 results included four items:

Restructuring and restructuring-related expenses of $6 million pre-tax or $0.08 per diluted share;

A reserve of $3 million pre-tax or $0.04 per diluted share for receivables from a former affiliate;

A benefit of $7 million of pre-tax or $0.10 per diluted share from replacing the defined benefit pension plans in the United States with an enhanced defined contribution plan;

And tax benefits of $13 million or $0.28 per diluted share related to an investment tax credit in the Czech Republic and final adjustments related to prior year income tax returns.

Fourth quarter 2007 results included three items: restructuring and restructuring-related expenses of $18 million pre-tax or $0.26 per diluted share, mostly related to the previously announced facility closure; a charge of $21 million pre-tax or $0.31 per diluted share for our November refinancing of a portion of our 10.25% debt; net tax expenses of $62 million or $1.34 per share, including $66 million in previously announced non-cash expenses to realign the European ownership structure and a net benefit of $4 million that’s primarily related to adjustments for prior year income tax returns.

Now turning to the North American OE results on slide 16, our revenue for the fourth quarter of 2007 was $592 million, up 63% from the fourth quarter last year. Excluding substrate sales in currency, revenue was up 26%. Comparatively, North American light vehicle market production was about flat.

Our North American OE revenue benefited from the major new emission control platforms, higher ride control content on the GMT900 platform, as well as 47% higher revenue from Japanese customers driven by the launch of the Toyota Tundra.

Ride control revenue was up 10% compared with the prior year due to expanded light vehicle ride control content on the GMT900, the launch of the GMT360 and strong sales of Chrysler’s Jeep Wrangler, as well as Ford Ranger and Super Duty trucks. This was partially offset by lower ride control commercial vehicle sales. According to ACT, the markets class 5 through 8, commercial vehicle production was down 43%. Our ride control sales into that segment fell by a similar amount.

North American OE emission control revenue increased by 87%. Substrate sales were $156 million higher than the prior year. When you exclude substrate sales and currency, North American OE emission control revenue rose 37% in the 2007 fourth quarter.

Our emission control sales significantly benefited from seven recent launches; GM’s Lambda cross-over platform, the Ford Super Duty gas and diesel pickup trucks, GM’s light duty trucks and vans with the Duramax diesel engines, Toyota’s Tundra gasoline pickup truck, the International Truck and Engine medium-duty diesel platform, GM’s three-quarter ton Sierra and Silverado gas-engine trucks, and the Dodge Ram three-quarter ton diesel pickup.

The benefit of these launches were somewhat offset by lower volumes on the Ford Expedition and F-150, GM’s Chevy Equinox, Colorado, and Canyon, and its Epsilon platform that supports the Chevy Malibu, Pontiac G6 and Saturn AURA models.

Now, North American aftermarket revenue for the fourth quarter of 2007 was $122 million, up 5% from the year earlier period. Ride control aftermarket revenues rose 4% in the fourth quarter, while emission control aftermarket revenue increased 6%. While pricing was up year-over-year, it was to offset higher steel costs.

Now, on slide 17, fourth quarter EBIT for total North American operations was $16 million versus $18 million in last year’s fourth quarter. In the fourth quarter of 2007, we recorded a $2 million restructuring expense, comparably the fourth quarter 2006 included $3 million of restructuring related charges, a $7 million pension benefit and $3 million reserve for receivables from a former affiliate. Therefore adjusted North American EBIT was $18 million in the 2007 fourth quarter compared with $17 million in the fourth quarter of 2006.

We continue to see good margins on our recently launched emission control business. In the fourth quarter, these positive margins were mostly offset by several factors. Commercial-vehicle ride control volumes were down significantly due to the production decline we discussed.

We had $5 million in higher net engineering spending due to customer recovery timing, and we recorded a $2 million charge for inventory shrinkage on substrates at one of our Mexican facilities. In addition to standard plant physical controls, separate substrate physical controls have now been implemented across all of our emission control facilities to make certain we maintain an accurate count of these higher value parts.

We also had $3 million in accelerated depreciation on OE service part equipment at a U.S. emission control facility. We completed our OE service obligation to our customer early in order to free up floor space for a portion of the new business we discussed in our third quarter call. Of these factors, we expect a $5 million in engineering recovery during 2008 and the inventory shrink and accelerated depreciation are behind us.

Moving on to Europe on slide 18, we reported fourth quarter 2007 OE revenue of $511 million, up 13% compared with the $452 million reported a year ago. Currency exchange rates favorably impacted total European OE revenue by $50 million in the latest three months.

Substrate sales net of currency effects were down 26% over last year, which reflects a change in terms of substrate ownership with two of our European OEMs who have agreed to allow us to take the substrates on consignment rather than as a directed buy.

Excluding substrate sales and currency, our total European OE revenue was up 18%. European light vehicle market reported a 7% production increase in the fourth quarter according to Global Insight.

European OE ride control revenues excluding currency increased by 4% in the 2007 fourth quarter with favorable volumes on the Dacia Logan, Volkswagen Transporter, the new Mazda 2, and the Mercedes C-Class with our electronic shock technology, offsetting lower volumes on the Audi A4, as well as the localization of some production for the Audi A6 from Europe to our Chinese operations.

Our European OE emission control unit continued to benefit from its growing position on the hot-end of emission control platforms. The hot-end encompasses everything from the manifold to the catalytic converter or diesel particulate filter.

Excluding substrate sales and currency, revenue was up 26%. The main drivers of the increase for 2007 launches of BMW’s 1 and 3 Series, Daimler’s Sprinter, C-Class and Smart models, Volvo’s V70 and V50 refresh models, PSA’s newly designed Picasso and the Ford Mondeo.

Fourth quarter European aftermarket revenue was $96 million, up 7% from the $90 million recorded a year ago, this is on slide 19. When adjusted for currency, aftermarket revenue was down $3 million as lower volumes more than offset price increases.

Excluding currency, ride control aftermarket revenue was up 10% compared with the fourth quarter of 2006. European emission control aftermarket sales excluding currency were down 15% on lower volumes, which more than offset the improved pricing.

Revenue from our South America and India operations on slide 20 was $96 million during the fourth quarter 2007 compared with $71 million reported in the year earlier quarter, both due to higher OE and aftermarket revenue. Currency had an $11 million favorable impact on revenue and substrate sales net of currency were 39% higher year-over-year in South America and India combined.

For the 2007 fourth quarter, total EBIT for our Europe, South America and India segment was $19 million compared with $16 million in the fourth quarter of 2006. This is on slide 21. Currency had a $2 million favorable impact on European segment EBIT in the latest 2007 period.

EBIT included $16 million of restructuring cost in the fourth quarter of 2007, mostly for the completion of the plant closure in France that we announced last quarter. Restructuring charges in the same period a year ago were $3 million, leaving adjusted EBIT up 84% year-over-year.

On the next slide, fourth quarter revenue for our Australian operations was $50 million compared with $45 million in the 2006 quarter. Excluding currency and higher substrate sales, revenue was down $3 million in Australia.

Finally, our Asian operations reported revenue of $98 million during the fourth quarter of 2007, up 35% from the year earlier period. This was driven by 40% higher sales in China, primarily related to higher volumes on existing platforms and also new platform launches.

EBIT was $8 million versus $5 million last year in our Asia Pacific region. The EBIT benefited from volume increases in China, as well as $1 million of favorable currency.

On slide 23, for the company in total, currency favorably impacted year-over-year fourth quarter revenue comparisons by $89 million and that translated into a $3 million benefit to total company EBIT.

Depreciation and amortization was $55 million for the quarter compared with $48 million in the prior year. The change is primarily related to the investments we made in equipment and machinery for the new launches; the accelerated depreciation of OE service equipment in North America; and the stronger euro.

For the full year, depreciation and amortization was $205 million compared with $184 million in 2006. For 2008, we expect depreciation and amortization will likely be in a range of $220 to $225 million.

Now moving on to slide 24, interest expense in the 2007 fourth quarter was $35 million, excluding a $4 million benefit related to marking the interest rates swaps to market and a $21 million charge relating to the November debt refinancing.

Last year’s restated interest expense of $34 million had no mark-to-market impact from the swaps. The net increase in interest expense came from higher average borrowing levels, as well as higher rates on the variable portion of our debt.

For the full year, these same factors resulted in interest expense of $144 million, excluding a $5 million charge for the March 2007 senior debt refinancing; a $21 million charge for our November refinancing; and a $6 million benefit for marking the swaps to market.

Interest expense for 2006 is $135 million and excludes the $1 million expense for marking the swaps to market. For 2008, we expect interest expense to be roughly $130 million based on an assumed LIBOR rate of 4%.

Now on slide 25, we recorded a $61 million tax expense in the latest three months of 2007, which includes a net benefit of $4 million primarily related to adjustments for prior year income tax returns, as well as the $66 million non-cash charge for the European ownership realignment that we previously discussed.

The European ownership structure positions us to issue euro denominated debt when market conditions are attractive to realign our interest expense geographically and accelerate usage of our U.S. NOL. As we continue this realignment, it will also allow us to bring cash back to the U.S. more efficiently from other regions. In the 2006 comparable quarter, we recorded a $12 million tax benefit.

We expect our overall operational effective tax rate will be about 35% for 2008. Cash taxes for the latest quarter were at $15 million outflow compared with an $8 million outflow in the prior year.

For the full year 2007, cash taxes were $60 million versus $26 million for 2006, as we made payments to resolve audits related to prior year’s operations and for our separation from the old Tenneco Packaging company. With these items now behind us, we expect our cash taxes will be in the range of $45 to $50 million for 2008.

Now let’s talk about cash and debt on slide 26. On an overall basis, we completed the year with $169 million of borrowings and $31 million in letters of credit outstanding against our $680 million in revolving credit facilities.

Accordingly, we had $480 million of unused borrowing capacity available to us at December 31. Our consolidated debt level was $1.374 billion at year-end and our cash balance was $188 million, bringing debt net of cash balances to $1.186 billion at December 31, 2007.

As Gregg mentioned, net debt to adjusted EBITDA for 2007 was 2.4 times, improved from 2.9 times last year. Our goal for 2008 is to achieve a net debt-to-adjusted EBITDA ratio of 2.2 times.

If you will turn to the next slide, we will review our cash flow performance. During the fourth quarter of 2007, we generated $45 million more in cash from working capital than we did in the 2006 period. This was the catalyst to a $62 million increase in cash flow from operations.

Days sales outstanding excluding factoring improved to 53 days versus 56 days one year ago. Inventory days on hand were 37 days. That’s 4 days less than last year despite the substrate inventory recurring for the North American component source from South Africa, which accounted for an increase of approximately 2 days of inventory in 2007.

The value of the South African inventory is down to $51 million from $71 million at the end of the 2007 third quarter. Days payable outstanding was 68 days in the 2007 fourth quarter and as compared to 73 days a year ago.

Now on slide 28, you will see that our worldwide factored receivables were higher at a $157 million as of December 31, 2007 compared with $133 million at the end of 2006. Of the amount outstanding in the latest quarter, $100 million was from the US accounts receivables securitization program with the balance of the factored receivables coming from programs with regional institutions in Europe.

Capital spending was $77 million for the fourth quarter compared with $40 million a year earlier. You will recall that we increased our CapEx target to prepare for new business for 2008 that was awarded earlier this year.

For all of 2007, capital spending was $198 million or about 3.2% of sales compared with $170 million for 2006. In terms of other investing activities, we spent $16 million last fall to acquire the ELIM-NOx urea injection technology. For 2008, we expect capital spending will be about $200 to $220 million.

On slide 29, at December 31, our debt compliance leverage ratio was 2.51; it could be no more than 4.25. The interest coverage ratio was 3.61 and we needed to maintain this ratio above 2.1 times.

The cushion we felt against our tightest covenant for EBITDA is $195 million and for debt it’s $830 million. In terms of restructuring, we recorded $18 million of expense in the fourth quarter mostly for the plant closure in France that we announced in the third quarter.

For the full year, restructuring spending totaled $25 million versus $27 million in 2006. For this year, we expect restructuring costs will be about $25 million consistent with our spending levels over the last several years.

Now I will turn the call back to Gregg Sherrill.

Gregg Sherrill

Thank you, Ken. With 2007 behind us we are fully focused on strong execution in 2008 while continuing to look ahead at ways to capitalize on all of the opportunities developing for Tenneco into the next decade.

On slide 30, you will see the global OE production is expected to exceed 73 million units this year, up 4% over 2007. As I mentioned earlier we recently updated our own OE revenue projection for 2008, which estimates a 9% increase in value-added sales.

Moving to the next slide, this growth reflects a combination of market share expansion; additional high-tech content to meet emission regulations; new platforms for electronic shocks in Europe; and new customers and vehicle-fleet growth in emerging markets.

Let me emphasis this point, our growth opportunities are very significant. When you are a global market share leader with one of the most comprehensive and innovative product portfolios focused on a segment of the market, in this case emission control aftertreatment, that is forecasting average annual growth of at least 7% over the next 15 years, there is a lot to be optimistic about.

In fact as a result of our new five-year strategic plan, we are forecasting an 11% to 13% average annual OE revenue growth through 2012. Of course that doesn’t mean it’s going to be easy. North American production is expected to decline about 3% this year. Commodity costs continue to rise, as oil prices remain volatile and steel is in demand for infrastructure in developing economies. Recession periods are widespread and consumers are becoming cautious.

The automotive market has long been a cyclical one. As a tenured supplier, we’ve always been very good at managing what’s within our control while finding productive and creative ways to deal with industry challenges. This is on slide 32.

As we address the North American environment, we will benefit from our platform diversity, flexible cost structure, new platform launches and continued growth from existing platforms that launched in the first half of 2007.

We will also have increasing contributions from stronger regions where we operate, such as China and India, where production is expected to rise 15% and 20% respectively this year; Brazil where the build rate should expand by 14%; and Eastern Europe where Global Insight projects a 11% higher production, including a 9% increase in Russia for 2008.

Global concerns over greenhouse gases are driving even tighter fuel economy requirements, which set the stage for increased production of more fuel-efficient diesel vehicles, which in turn plays to our technology strengths while increasing content for vehicle.

And infrastructure development in emerging markets like China and India means more commercial and off-road vehicles are going to be needed, more local workers will become financially able to purchase their first cars and more roads will be constructed to handle the growing number of drivers, another set of evolving opportunity for Tenneco’s future growth.

Today the automotive OEMs, commercial vehicle engine makers, and off-road equipment manufacturers around the world are in the process of awarding platforms to suppliers for 2010. I am more than pleased with Tenneco’s share of the available platforms that have already been awarded across all three of our product lines.

Among those, we’ve won production or development contracts on 13 emission control platforms for SCR NOx abatement systems, including one in China that we will be launching next year. And in our ride control business, as reported last week, we have recently been awarded another electronic shock program for a new European OE customer.

It’s evident that Tenneco’s global operations, diversified customer profile, and ability to effectively flex with volume will serve us well in turbulent times. Moreover, our well-earned customer relationships, global footprint, and industry leading technologies position us for growth.

These advantages led by our intimate knowledge of global emission regulations coupled with our ability to anticipate appropriate technological solutions will be the catalyst to achieving our projected five-year growth plan.

We’re committed, we’re disciplined and we’re focused. In the end it will be about execution, which I believe is clearly a core competency for Tenneco.

And with that, let’s open the call for questions.

Question-and-Answer Session

Operator

Our first question is from Brian Johnson – Lehman Brothers.

Brian Johnson – Lehman Brothers

On the OE growth, that excludes substrate I assume the 11% and above target?

Gregg Sherrill

No, the 11% to 13% represents total OE revenue growth. Substrate, we will factor in; that was hard to predict but maybe a point less than that, but still substantial. Rather the value added piece, a point, may be less than that.

Brian Johnson – Lehman Brothers

Okay. So we could think value added 10% to 12%.

Secondly, in the ‘09 backlog, and I know you can’t potentially disclose programs, but does that include space for half ton US pickup truck programs? Or if you actually win any, is it incremental to that?

Gregg Sherrill

We’re certainly anticipating, our share there.

Brian Johnson – Lehman Brothers

Okay, so that’s built into that number.

Gregg Sherrill

Whatever we anticipate having is, yes.

Brian Johnson – Lehman Brothers

Okay and then thirdly, when do you expect ride control, the electronic adoption to move to the US, and is that built into that ‘09 OE number or is that a longer term trend we should be thinking about?

Gregg Sherrill

I would suggest that was probably a longer-term trend than the ‘09. We certainly are anticipating that move. I think probably the US has got to sort itself out right now from an overall economic position before that moves across. But certainly we see this as an opportunity like out beyond that ‘09 timeframe.

Brian Johnson – Lehman Brothers

Okay. Thanks.

Operator

Our next question is from Chris Ceraso – Credit Suisse.

Chris Ceraso - Credit Suisse

From your experience with the aftermarket business when we go into a downturn, say for example, in the US do you see an acceleration in revenue there in that business unit because folks hold on to their cars longer, replace more stuff, is that something that you’ve seen in your business?

Gregg Sherrill

Yes, the only thing I can really say there is clearly aftermarket sales are positively influenced by the aging of a fleet. And right now, you will see a little bit of that with sales being down, the fleet will automatically age a little bit as opposed to being replaced at a higher rate. So that does have a positive impact.

It’s tough to predict exactly when you see that. And you can’t necessarily say it’s in the next quarter or the next quarter, but you know that’s a positive influence, in and amongst all the other things that are going into the aftermarket, like seasonal issues, et cetera.

Chris Ceraso - Credit Suisse

Okay. Second question, maybe you can help me sort through the math here. I am trying to gauge the profit contribution on your North American OE business. So what would be the increase in EBIT year-to-year if I ex out all of those items on slide 17 versus the ex-substrate, ex-foreign exchange increase in revenue for that region in the OE business?

Kenneth R. Trammell

Chris, I am a bookkeeper, so I’d probably never tell you we can exclude anything. But the reason that we pointed out those particular items is they clearly had an influence on seeing the EBIT margin pull through. So let me give you a little bit more background on each of them.

The net engineering spending increase really relates to timing of customer recoveries. We would expect to recover that in 2008. We had hoped that that would be in 2007, but it would be during 2008. So that had an impact on what you see just in terms of the net flow through. You will see that we obviously increased engineering spending during the fourth quarter.

The inventory shrinkage is truly something that has occurred but it’s not going to recur again. So that was unfortunately something we had to record in the quarter. The shrinkage occurred really over the course of the first three quarters of the year and we caught up with it in the fourth quarter when we did our physical count on the plant.

And the third item again is something that happened just in the quarter, we wouldn’t anticipate doing but it was the right decision to make in terms of preparing our plant for some of the launches that happened for the 2009 model year.

I hesitate to call them one-time because we record, for example, depreciation every year. But it’s certainly something that’s unusual and wanted to point out to help you understand a little bit better about the flow through would have been had we not made the decisions and done what we did in the quarter.

Gregg Sherrill

I would just elaborate just a little bit on that. And the only one that Ken really didn’t talk about is obviously the commercial vehicle ride control volumes were down substantially. We all know that commercial vehicle sales themselves were down substantially. And those do come with respectable margins.

But the engineering spending, we are clearly increasing our engineering spend but at the same time maintaining tight control on our total SGA&E cost structure. In other words, as a percent of sales, I think you saw that. And we were more than willing to accept the delayed customer recovery timing to keep all those programs moving forward. That takes care of the $5 million.

And likewise on the accelerated depreciation, that was just the right decision to go ahead and make a one-time, lifetime run with that customer, take the depreciation and free up the floor space which is just an efficient way of bringing home some of the new model programs that we’ve got going.

Chris Ceraso - Credit Suisse

Okay, and then lastly, I just wanted to get a little bit more granularity on the ‘08 and ‘09 backlog. How much of it in ‘08 is new programs that are coming on versus the annualizing effect of stuff that launched in ‘07?

Kenneth R. Trammell

Chris, we give a total OE revenue projection and I don’t even know that I could answer that question for you specifically. The total OE revenue projection takes all of that into account but it also takes into account any platforms that are ending, volume changes on particular platforms and certainly things like contractual customer pricing.

So what we try and do is give you the net number so that you can see what our projection for OE revenues will be next year, assuming our assumptions that are behind it such as build rates, currency exchange rates, and so on turn out to be accurate.

Gregg Sherrill

It’s clearly made up of a number of factors that does make that complicated but I mean certainly in there is the benefit of a full year of the new platforms that we launched last year, but there is also new ‘08 launches as you alluded to, it would be tough to give that breakdown offset by the lower volumes we’re going to see in North America as well.

All that gets in there, and it is tough to actually break all that out but both the items you mentioned are in there, the flow through of the programs we launched this year, but also a number of new programs for ‘08.

Chris Ceraso - Credit Suisse

Can you tell us roughly how much of it breaks down into each region, North America, Europe and other?

Kenneth R. Trammell

Again we don’t break it down anything below the total number obviously but I can tell you that obviously there is not a significant shift that you should see in 2008 compared to 2007.

Gregg Sherrill

Geographic shift, right.

Kenneth R. Trammell

Right.

Chris Ceraso - Credit Suisse

Thanks a lot.

Operator

Your next question comes from Peter Nesvold – Bear Stearns.

Peter Nesvold – Bear Stearns

One quick point of clarification first, the OE revenue growth of 11% to 13% from ‘08 to 2013, that’s off the ‘07 base of 5.1 right?

Kenneth R. Trammell

Right.

Gregg Sherrill

That’s correct.

Kenneth R. Trammell

Yes, I think that the 5 years it’ll be 2012.

Peter Nesvold – Bear Stearns

Got you, okay.

And then looking at the delta in the value-add revenue from ‘07 to ’08, it was unchanged from the prior slides at about $300 million. You had the $25 million of extra CapEx in 4Q as expected to prepare for those two new customers. I would have expected to see that bump up a little bit more in ‘08. Is it just that they are smaller programs; do they phase in a little bit longer or is it a little bit more concentrated in ‘09?

Kenneth R. Trammell

It’s probably a combination of those things actually, Peter. We’ve got certainly the new platforms that we want. And those are launching later in 2008, so I think in probably August or September.

We’ve also got changes in our production assumptions at the beginning of 2007 compared to the beginning of 2008 for North America. We were assuming, I think it was a $15.5 million build rate in January of ‘07 and obviously it significantly lower than that assumption today at about $14.5 million, basically the one-time fees for ‘08. It’s really a combination of all those things that factor into that net change that you are looking at on the $300 million.

Peter Nesvold – Bear Stearns

Okay, and then last quick question, the step-up in CapEx in ‘08 to $200 to $220, any more color on what’s primarily driving that?

Gregg Sherrill

You would be looking at spending targeting ‘09 and ‘10 launches now this year, depending on whether in the first half or the back half of the year.

Peter Nesvold – Bear Stearns

Got you, and fair to say it’s probably more on the emission side than the ride control side?

Kenneth R. Trammell

In terms of the increase? Yes.

Gregg Sherrill

Yes. That’s fair to say.

Peter Nesvold – Bear Stearns

Got you. Okay, thank you.

Operator

Your next question comes from Rich Kwas – Wachovia Securities.

Rich Kwas – Wachovia Securities

Gregg, when we look at the growth rates for 2012, you are going to get a higher growth rate, it looks like 10 to 12 at least on an annual basis. And I just want to get a sense for what you are thinking in terms of market share on the Class 5 to 8 market on a global basis? What’s built into that?

Gregg Sherrill

I don’t know that I could give you an exact market share. We keep talking about our fair share and I know that probably frustrates some of you a little bit. But if you look at the MICA projections of 7% aftertreatment growth, literally out for the next 15 years, but certainly in this five-year period we are talking about.

And don’t forget that MICA does not take into account the construction or agricultural off-road stuff that is also beginning to come in this timeframe. It’s a growth across all the market segments: light vehicle, certainly commercial vehicle with improving market share positions in the commercial vehicle, and the advent of the off-road vehicle manufacturers beginning to source aftertreatment as well, it all gets in there, in all regions and it’s multi-regional and multi-market, if you will.

Rich Kwas – Wachovia Securities

So off-road though would probably have more impact in 2011-2012, is that fair?

Gregg Sherrill

Further out, I am not sure I could tell you exactly; some of it.

Kenneth R. Trammell

Yes, some of it’s likely to come out because of the 2011 model year Rich; some is likely to come in late.

Gregg Sherrill

Late 2010.

Kenneth R. Trammell

You’ll see it start ramping up in late 2010 on through, like you said, actually through 2014 when the final regulation kicks in.

Gregg Sherrill

Commercial vehicle will come in ‘11 and ‘12 as well. We have talked about that. Some of these guys are using credits to get through 2010. The 2010 regulations will ramp in 2010, ‘11 and ’12; they’re pretty much all be in by ‘12 because by then credits would have been used up.

Rich Kwas – Wachovia Securities

Right. So the growth rates does assume that credits are used at least initially in the first year say and then they revert back to starting to use SCR.

Gregg Sherrill

Yes, in the sense that if you also recall on the Investor Presentation last week, those unit volume growth charts that we showed? This is also based on where we’re out with customers in development programs, which takes into account when they are launching stuff, be it 2010, ‘11 or, ‘12.

Rich Kwas – Wachovia Securities

So, the growth rate through ‘12 that basically says we’ve got development programs in place and we’re fairly certain we’ve got this locked up. That’s what baked into the growth.

Gregg Sherrill

We’re confident in those growth rates.

Rich Kwas – Wachovia Securities

Okay. And, then finally on margins, in the past you’ve talked about European OEM margins going higher and some opportunity there, and you don’t break that out formally, but just want to get a sense here on an overall basis, European margins were up nicely year-over-year. What are your expectations for ‘08 going into ‘09?

Gregg Sherrill

Overall we don’t break the guidance down into regions, but my expectation is there still room for improvements flowing through in Europe and going out for the next several years, as well as all of our regions, but I certainly think we are going to continue to see it in Europe.

We just had, just an example, because it’s announced and completed now, the restructuring action that basically took one of our French plants down, a lot of that production moves East. We opened a plant in Russia. That will be ramping up in volume.

So, there is still particularly in the operations side, still a lot of cost opportunity to go and again I would stress in all regions, but we’re talking about Europe right now. And, likewise as we continue to go forward capturing more of the hot-end business on emission control, we’re quite pleased with the margins we’re getting there. And the other thing in Europe that I think is very positive on the margin side is the continuing trend of the electronic shock absorbers.

Rich Kwas – Wachovia Securities

Okay, so it sounds like you got several catalysts in place?

Gregg Sherrill

Yes.

Rich Kwas – Wachovia Securities

Okay, great. All right, thanks so much for your help.

Operator

Your next question comes from Patrick Archambault – Goldman Sachs.

Patrick Archambault – Goldman Sachs

I just wanted to piggyback on that last question, just in terms of thinking about margins for ‘08 across all regions for the firm as a whole. Is that something that you think we can hold or continue to improve given some of the volume headwinds on North America, which one would think might have a mix impact there that could be negative?

Kenneth R. Trammell

Yes, Patrick, there is no question that volumes in North America, assuming those are down, certainly can have a headwind. Now our goal year-on-year is obviously to make improvements in our margins. I would remind you in North America, we do have a lot of flexibility.

We can flex our labor and our materials costs down fairly quickly and those together are probably 75% of our cost of sales. And so we will obviously be working very hard to offset the headwinds from volume in North America and hopefully continue to show some margin improvement on an overall basis.

Gregg Sherrill

And don’t forget our market share for ‘08 in North America is substantially higher because of the tremendous amount of business we’ve launched and ramped up through this year.

Patrick Archambault – Goldman Sachs

Okay, and just on the cost side in terms of the gross steel headwind of $40 million. I think last year it tended to be very back-end loaded with the cost upfront and the recovery at the tail end. Is that something we should be thinking about as well for 2008?

Kenneth R. Trammell

Yes, I think the way the trend worked last year that probably would have be as good of an assumption, as anything else at this point.

Patrick Archambault – Goldman Sachs

Okay, and then lastly, can you give us a little bit of a sense for maybe the aftermarket growth that we should be thinking about just in terms of walking your OE revenue guidance, the total revenue expectations and maybe a breakdown with a little bit of regional color would be helpful? Just given you seem to be doing pretty well in aftermarket in North America but still seeing headwinds in Europe?

Gregg Sherrill

Overall, I think we are probably expecting the aftermarket to be pretty much flat this year over last year. Again, the aftermarket is a bit of a difficult one to forecast in any short-term timeframe. We continue to penetrate the market on the ride control business.

We know the emission control market itself is dropping where the ride control market is at least relatively stable. And within what we call our ride control products, the Monroe brand, if you will, we are really trying to take advantage of that brand and pushing new products.

We talk a lot about the Premium Brakes that we have launched and we’ve got some aggressive sales plans going forward on those. And they have been successful but they’re premium, they are not gigantic revenue numbers but definitely helping along with the additional customer wins that we have had even in the last year on the ride control side.

But overall, I would expect our revenue numbers to be relatively flat. They could be up or down a little bit. Again, what’s difficult to predict is the emission control side, the old Muffler side, if you will, because that market is as we all know is still declining.

Patrick Archambault – Goldman Sachs

And just for a longer term out-year assumption is that a business you’d expect to be growing somewhere like low single digits something like that?

Kenneth R. Trammell

I think MEMA actually has done a projection for the parts that we provide and their numbers say shocks probably grow in the 1-2% range year-on-year and emission control is still flat to down probably over the long term just based on how the replacement rates go. Just a slow growth business but a great business to be in because the margins really have (incomprehensible).

James K. Spangler

Okay, this concludes our call then. An audio replay of this will be available on our website and again the address is www.tenneco.com. You may also access the recording of this call over the telephone. If you are located in North America, you may reach the playback at 866-365-2445; those of you outside North America, the dial-in number is 203-369-0215. And that playback will be available about one hour from now.

The call in information that I just gave you can also be found in our press release. If you are an analyst or an investor with additional questions, please follow up with Leslie Hunziker, our Executive Director of Investor Relations at 847-482-5042. Financial reporters may contact Jane Ostrander, our Executive Director of Communications at 847-482-5607.

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

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