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Tenneco, Inc. (NYSE:TEN)

Q1 2008 Earnings Call

April 24, 2008 10:30 am ET

Executives

James K. Spangler - Vice President, Global Communications

Gregg Sherrill - Chairman and Chief Executive Officer

Kenneth Trammell - Executive Vice President and Chief Financial Officer

Analysts

Chris Ceraso - Credit Suisse

Brian Johnson - Lehman Brothers

Peter Nesvold - Bear Stearns

Patrick Archambault - Goldman Sachs

Brett Hoselton - Keybanc Capital Markets

David Leiker - Robert W. Baird & Co., Inc.

Richard Kwas - Wachovia Capital Markets, Llc

Gregory Macosko - Lord Abbett

Operator

Welcome to Tenneco’s first quarter 2008 earnings release conference call. All parties have been placed on a listen-only mode until the question-and-answer session. (Operator Instructions) Now I’d like to turn the call over to Mr. James Spangler, Vice President of Global Communications. Sir, you may begin.

James Spangler

Good morning and welcome to our 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 spent about 30 minutes taking you through a detailed explanation of our first quarter performance.

Slides related to their prepared comments are available on the financials section of Tenneco’s website at www.tenneco.com. The two of them will then take your questions during the second half of our call. The conference call operator will explain the process for asking a question at that time and we will do everything possible to address all of your questions and please note that our discussion today will include information on non-GAAP financial measures all of which are reconciled with GAAP numbers, as shown in our press release attachments. The press release and the attachments are also posted on our website.

Also in addition to reviewing our first quarter 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 will turn the call over to Gregg Sherrill.

Gregg Sherrill

Good morning everyone and thanks for joining us. I want to say right upfront that this was a tough first quarter and for several reasons even more challenging than anyone predicted back in January and yet, in the face of this, Tenneco’s employees were focused on the right things; reducing costs, improving processes and capitalizing on growth customers and growth regions and I want to thank them for their outstanding effort.

On slide four in first quarter we gained European operating efficiencies as manufacturing productivity improved and net raw material costs were less for the headwind. Our European segment delivered a 78% EBIT increase as a result. We also benefited from our well established presence in China, where we delivered 29% higher revenue driven by stronger sales to General Motors and Volkswagens, SAIC joint ventures.

The growth fundamentals in South America where automotive sales are surging helped secure a 39% increase in revenue there. All of this indicates continued progress in our geographic balance. Additionally, we benefited from our long relationships with Japanese customers in North America as last years launch of Toyota's Tundra and Matrix reflected benefits in the first quarter. Our higher revenue from these models flowed through the profits in the first quarter as did the revenue from many of the new North American emission control platforms that launched early last year.

Last, I want to point out that we benefited from our financial strategy to carry a significant portion of our debt with variable rates and in fact interest rates fell in the quarter, helping to offset some of the profits we lost on lower revenue in North America. I am pretty sure that it goes without saying that we are in the midst to one of the toughest periods in recent history in North America. On a marco level, on slide five, consumer components is at a five year low due to concerns of amounting job losses, tightening credit standards, the housing crisis and increasing energy prices.

Auto sales of course are tied to consumer sentiment and credit availability. This is reflected in the North American light vehicle production decline of 7%, in the latest three months. In fact, the 2008 first quarter, was the lowest production level of any first quarter in the last 15 years. A big piece of the decline was driven by the American Axle Strike. Managing the challenges of oil industry volumes is tough enough, but adding to that, the shutdown during the quarter of nearly all production on two of our top ten platforms for five weeks is something else.

On slide 6, overall the Axle Strike impacted four of our important GM platforms. The GMT900 and 360-370, two of our highest revenue generating platforms as well as the Hummer H2 and GM’s full-sized vans. We estimate these four platforms alone represented $50 million of lost revenue for us in the quarter. Additionally, the North American Class 5 rate production declined 15% from last year’s already depressed levels. This further impacted our shock in the (inaudible) business while our strong and profitable commercial vehicle presences mixed up about a quarter of our North American OE ride control revenue.

On top of that softness in the aftermarket continued which many attributed to the higher cost of fuel. In the phase of the revenue decline related to the strike, we flexed our labor cost very quickly and shut off all inbound material on the effected GM platforms. Approximately 1000 direct and indirect hourly workers were affected across nine of our facilities. That to strike this rapid response, the Premium platforms shut down by the Axle Strike combined with the low revenue from overall decreased light and commercial vehicle production and the sluggish after market environment weighed heavily on North American operating income.

We out firmed to our engineering and development plans last quarter, including investments for emission control programs being introduced in 2010 and 2011 to meet stricter regulations for commercial and off-road vehicles respectively. These are important new markets for us because they expand the mix of our revenue base while offering more content and higher margins. These types of investments reflect our commitment to capturing the opportunities we have to grow this Company over the long term.

Total engineering expenses worldwide increased $9 million over the last year; $4 million of this came from North America and $3 million was related to currency translations. With that let’s get into some of the financial details of the quarter.

On slide 9, you will see that for the quarter North America represented 44% of total revenue and 23% of the EBIT. The European segment accounted for 47% of revenue and 63% of the EBIT and the Asia Pacific region reflected 9% of revenue and 14% of total EBIT. Turning to gross margin on slide 11 our consolidated margin in the first quarter was 15% compared with 15.8% one year ago. Our European segment margin improved significantly however 23% of higher global substrate sales and manufacturing inefficiencies in North America and a mix shift resulting from the lower industry production levels as well as the American Axel Strike more than offset the strong contribution overseas.

The continued revenue mix shift between OE and aftermarket also impacted gross margin. Our OE operations made up 83% of total global revenue in the latest three months versus 82% of last year, with a higher margin aftermarket responsible for 17% last quarter compared with 18% a year ago. We also incurred higher raw material costs in the quarter, specifically higher gross steel cost increased in the quarter, presented a headwind of $10 million globally. We lock in many of our steel contracts by December 31 and spend the first two quarters of the New Year negotiating the cost recovery with our OEM customers around the world. In that regard we have made good progress to date and expect to have substantially all of the agreements wrapped up by the end of the second quarter.

As in the past we expect to fully offset the gross steel increase through cost reductions, after-marker price increases and owing customer recoveries. Moving on to SGA&E on slide 12 we have reported SGA&E at 9% of revenue compared with 8.7% of revenue for the same period last year. During the quarter we continued with our planned higher investments and engineering for the next-generation ride and emissions control technologies. The increase in the SGA&E percent resulted from lower than planned revenue growth.

Partially offsetting the higher engineering cost was an OEM payment of $2 million for our previous engineering expense. You will recall that in the 2007 fourth quarter we had $5 million and higher net engineering spending due to customer recovery timing. As it relates to this particular agreement we expect to book the remaining $3 million later this year.

Now I want to take a couple of minutes to discuss some commercial highlights on slide 13. We launched 40 vehicles models, in the first quarter that were either new, refreshed or had expanded content. Some of the most notable there was the Volkswagen Passat in Western Europe for ride control. The Suzuki YV1 in Eastern Europe also for ride control and the Chevy Impala in North America for emission control. We were also awarded 10 vehicle platforms in the quarter, launching primarily in 2009. The newly awarded business includes commercial vehicle platforms in China and South America, one for emission control and three for ride control, as well as Ford passenger car business for a hot-end emission control in North America.

In addition, to this you probably saw our mid March press release, highlighting new business awards that include contracts with five Japanese OEMs for vehicles launching between 2008 and 2010. These awards confirm our continued focus on going with the Japan based OEMs and equally important diversifying within that market, in terms of geographic locations and vehicle segments. Approximately 20% of this new Japanese business is in the fast growing BRIC economies and 16% is for smaller A/B segment passenger cars. We have also won business in India in the growing small car segment.

In 2008 third quarter we will launch shock absorber production for Tata’s Nano vehicle, which is expected to be introduced to local consumers in India in October of this year. Exports to Africa, Latin America and Southeast Asia are expected within three years and finally we are very pleased with our success in expanding in commercial vehicle markets for emission control after treatment. As I have talked about it before, we have won several platforms for the 2010 regulation change for on-road vehicles in North America and China and we have begun to capture after treatment business for off-road applications beginning in 2011 which reflects our ability to transfer our hot-end emission control capabilities into market segments.

All of these awards are indicative of the significant amount of organic growth we are planning over the next five years and with that I will turn the call over to Ken.

Kenneth Trammell

Thanks Greg. Before I go on to the business segment analysis, I will review some of the items that affect comparability between the first quarters of 2007 and 2008 on slide 14. First quarter of 2007 adjustments included restructuring-related expenses of $2 million pretax or $0.02 per diluted share and charges of $5 million pretax or $0.07 per diluted share associated with refinancing the senior credit facility. Our first quarter 2008 adjustments also included two items, restructuring-related expenses of $4 million pretax or $0.06 per diluted share and a non-cash tax adjustment of a $1 million or $0.01 per diluted share, mostly for changes in our estimates for tax matters that are subject to audit.

Now, turning to the North American OE results on slide 15, our revenue for the first quarter of 2008 was $530 million and that’s up 8% from the first quarter last year. However, excluding substrate sales in currency revenue was down 4%. Comparatively, North American light vehicle market production was down 7%. Our North American OE revenue benefited from last year’s emission control platform launches with higher content as well as 5% higher revenue from Japanese customers. This was more than offset by the loss revenue from overall lower vehicle production including four GM platforms affected by the Axle Strike.

Ride control revenue was down 16% compared with the prior year. Due to the shutdown in the GMT900 where we have content on the SUVs as well as the half ton and three-quarter ton pick ups. Also, content on higher margin commercial vehicle platform significantly impacted our ride control performance in the first quarter. According to ACT, the market's class five through eight commercial vehicle production was down 15%. Our ride control sales ended that segment sale by 13%.

North American OE emission control revenue increased by 15%. Substrate sales, net of currency were $51 million higher than the prior year. When you exclude substrate sales in currency, North American OE emission control revenues rose 4% in the 2008 first quarter. Our emissions control sales benefited from higher year-over-year volumes on several early 2007 launches. As Gregg mentioned, we saw that flow-through from these revenues to EBIT in the quarter. Also benefiting revenues for GM's Epsilon and the Lambda platforms, as well as Volkswagen's PQ35 platform and Chrysler’s launch of the JC49 platform, which is the Dodge Crew crossover. The benefit of the stronger platforms was offset by the Axle Strike and lower volumes on the Ford Expedition and Navigator, GM’s Colorado in the Canyon and Chrysler's-Daimler in Dakota.

North American aftermarket revenue for the first quarter 2008 was a $133 million down 1% from the year earlier period. If we exclude currency, revenues were down 3%. By control aftermarket revenue was essentially flat at the first quarter and emission control revenue fell by 2%.

Now on Slide 16, first quarter EBIT for total North America operations was $9 million versus $30 million in last year’s first quarter. First quarter 2008 and first quarter 2007 both included $1 million of restructuring costs. In the press release we’ve bridged the EBIT decline for you, so let me run through it again. Earnings on new emission control platforms launched last year were more than offset by volume declines and mix on other emission control platforms resulting in a $2 million decrease in EBIT.

Investments to grow the business also impacted EBIT including $4 million and higher engineering expenses to prepare for a future emission and ride control platform launches and we had a $3 million increase in depreciation expenses related to the capital we put in place to support the sizeable 2007 emission control platform launches and finally EBIT was negatively impacted by $11 million related to OE ride control volume declines and a mix shift on light vehicle platforms, the continued reduction and higher margin in commercial vehicle production and the earnings impact of the lower aftermarket sales.

Now moving on to Europe on Slide 17, we reported first quarter 2008, revenue of $555 million, up 12% compared to the $494 million reported a year ago. Currency exchange rates favorably impacted total European OE revenue by $72 million in the latest three months. Substrate sales net of currency effects were down 3% over the last year. Excluding substrate sales and currency, our total European OE revenue was down 2%. Now, last year, our top-line benefited from alloy surcharge recovery. Since then, the price of nickel has come down considerably and so we require less recovery from our European customers.

I’ll illustrate the impact of this; if we exclude the benefits of the alloy surcharge in each year we would have reported an increase and total European OE revenue in the 2008 first quarter. Global Insight's April 16, estimate reported flat vehicle production in total in Europe, compared with last year. European OE ride control revenues, excluding currency increased by 4% in the 2008 first quarter. The stable volumes on the on the Volkswagen Golf, Caddie and Audi A3 platform, the new Suzuki Splash, the Dacia Logan and the Mercedes C-Class with their electronic technology, offsetting lower volumes on the Audi A4, the Audi A6 in Ford’s Mazda suit.

Our European OE emission control unit continued to benefit from its growing position on the higher end of emission control platforms. Volume increases came primarily from new platforms launched in 2007 that continue to ramp up including BMW’s new 1- & 3-Series and mini, the new Daimler's Sprinter and Smart models the Ford Modeo, the Jaguar XF and the Volvo V70. The strong volumes were more than offset by the lower revenues needed for nickel surcharge recovery. As a result taking out substrates sales and currency revenue was down 5%.

First quarter European aftermarket revenue was $87 million up 9% from the $80 million recorded a year ago; this is on slide 18. When adjusted for currency aftermarket revenue was down $4 million. Excluding currency ride control aftermarket revenue was up 5% compared with the first quarter of 2007 on higher volumes on the European emission control aftermarket sales excluding currency were down 14% on lower unit sales. Revenue from our South America and India operations on slide 19 was $94 million during the first quarter of 2008 compared with $70 million reported in the earlier quarter due to higher OE revenue and an increase in South American aftermarket revenue.

Currency had $11 million favorable impacts on revenue and substrate sales net of currency were $53% on our year-over-year in South America and India combined. For the 2008 first quarter, total EBIT for our Europe, South America and India segment was $25 million compared with $13 million in the first quarter of 2007; this is on slide 20. Adjusted for restructuring in each quarter EBIT was $28 million in the latest quarter compared with $14 million in the first quarter of 2007.

The strong EBIT increase was driven by manufacturing efficiency improvements across all regions as well as lower alloy surcharges. While the appreciation of the euro had a positive impact on revenues, the Eastern European currencies where we do business appreciated even more, resulting in a translation benefit of the strong euro offset by the other currency movements, so, Europe had no net currency impact on EBIT in the quarter.

On the next slide, first quarter revenue for our Australian operations was $51 million compared with $43 million in the 2007 quarter. Excluding currency, our substrate sales revenue was flat at $38 million. Finally, our Asian operations reported revenue of $90 million during the first quarter of 2008 that’s up 28% from the year earlier period. This is driven by 29% higher sales in China primarily related to higher volumes on existing platforms and also new platform launches.

EBIT for Asia Pacific was $5 million versus $6 million last year. EBIT benefited from volume increases in China and $1 million of favorable currency. More than offsetting this was a combination of a $1 million charge related to the bankruptcy of a major aftermarket customer in Australia, as well as manufacturing inefficiencies in that country due to a challenging production environment. On slide 22 for the company in total, currently favorable impacted year-over-year first quarter revenue comparisons by $114 million that translated into a $2 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 and to the stronger euro. 2008 we expect depreciation and amortization to still be likely in the range of $220 million to $225 million.

Moving on to slide 23, interest expense in the 2008 first quarter was $25 million. That includes a $5 million benefit related to marking the interest rates swaps to market. Last years interest expense of $40 million had a $1 million mark-to-market benefit from the swaps and a $5 million charge related to the renewal of our senior credit facility. The net decrease in interest expense came from lower rates on both the variable portion of our debt and a portion of our fixed rate debt that we refinanced last year.

For 2008, we’ve lowered our projected interest expense to roughly $120 million and that excludes any further mark-to-market impact. On slide 24, we’ve recorded a $5 million tax expense in the latest three months of 2008, which includes the $1 million non-cash charge for changes in our estimates for tax matters that are subject to audit. In the 2007 comparable quarter, we’ve recorded $2 million in tax expense. We still expect our overall effective tax rate to about 33% for 2008.

Cash taxes for latest quarter were $12 million compared with $8 million in the prior year. We still expect our cash taxes will be in the range of $45 million to $50 million for 2008. Now let’s talk about cash and debt on slide 25. On an overall basis we completed the quarter with $216 million in borrowings and $42 million in letters of credit outstanding against our $680 million in revolving credit facilities. Accordingly we had $378 million of unused borrowing capacity available at March 31st. Our consolidated debt level was $1,463 billion at quarter end and our cash balance was a $161 million brining debt net of cash balances to $1,302 million.

Net debt to adjusted last twelve months EBITDA at March 31 was 2.7 times improved from 3.2 times on March 31 of last year. Our goal for 2008 is to achieve a net debt to adjusted EBITDA ratio 2.2 times. Now to turn to the next slides, we will review our cash flow performance. During the first quarter of 2008, we used $8 million less in cash from working capital than we did in the 2007 period. This was the catalyst to a $26 million improvement in cash flow used for operations.

Day sales outstanding excluding factoring improved to 58 day versus 60 days one year ago. Inventory days on hand were 40 days. Now that’s 6 days less than last year and benefits from a 2 day decline substrate inventory that we are carrying for the North American components source from South Africa. Days payable outstanding was 70 days in the 2008 first quarter compared with 83 days a year ago when were launching a significant number of new platforms.

Now, to slide 27; you'll see that our worldwide factored receivables were higher at $171 million as of March 31 2008, compared with $145 million one year ago. Of the amount outstanding in the latest quarter, $99 million was from the US accounts receivables securitization program with the balance of the factor receivables coming from programs with regional institutions in Europe. Capital spending was $52 million for the first quarter compared with $39 million a year ago. You’ll recall that we increased our CapEx targets to prepare for a new business that’s been awarded for 2010 and 2011 and to support our growth in the BRIC economies.

For 2008, we still expect our capital spending will be between $200 million and $220 million. On slide 28, at March 31, our debt compliance leverage ratio was 2.79, it will be no more than 4.0. The interest coverage ratio was 4.06 and we needed to maintain this ratio above 2.1 times. The equation we built against our tightest covenants for EBITDA is $144 million and for debt it’s $576 million.

In terms of restructuring and related expenses, we recorded $4 million of expense in the first quarter and that is mostly for the last year’s plant closure in France. For this year, we expect restructuring cost to be about $25 million and that’s consist with our spending levels of last several years.

Now, I will turn the call back to Gregg.

Gregg Sherrill

Thank you Ken, I am confident that as we progress thorough the year, favorable performance in our Asia’s, South American and European operations will continue to afford us a balance against ongoing weakness in North America. In terms of auto production in Europe, from everything we see now, Europe is holding up. The latest Global Insight projections says total Europe production will increase 2% overall for 2008, reflecting higher production volumes in the Eastern and Central regions.

Uncertainty about the North American economic outlook for 2008 has increased and we were not expecting to see an improvement in general market conditions in North America at all this year. In the Auto sector, that outlook has been compounded by labor contract disputes and there is no question that at some points these strikes will be resolved and we will benefit going forward as two of our leading platforms will once again be contributing to operations. To further addressed market conditions, we are stepping up cost reduction initiatives in all areas globally.

We have plans already underway that targets, further cost savings and manufacturing efficiencies, including specific reductions and discretionary spending and deferrals of advertising and promotional campaigns in the aftermarket. We're also raising the bar on lean manufacturing and Six Sigma programs worldwide to ensure productions processes and costs to better correspond to modified revenue levels and we are preceding this plan with our global restructuring actions.

Tenneco is a strong and disciplined company. Our financial structure is sound and our demonstrated ability to generate cash flow combined with our liquidity position puts us in a good financial standing to weather the North American market downturn.

Despite the current environment we’re committed to our strategy of developing and leading the edge technology. Our customers look to us for solutions for increasing fuel efficiency reducing harmful emissions and improving vehicles stability. Over the next five years, increased contempt per vehicle will come from tightening emissions standards, advance technologies and safety enhancements. After this the growing number of vehicles produced globally and opportunities in adjacent markets and you will see that our growth trajectory is promising. Moreover we continue to win new business contracts that are driving market share expansion. All of these factors combined support our projected annualized global OE revenue growth of 11% to 13% through 2012 and with that we can open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Chris Ceraso you may ask your question and please state your company name.

Chris Ceraso - Credit Suisse

Alright. Thanks good morning, Credit Suisse.

Gregg Sherrill

Good morning.

Chris Ceraso - Credit Suisse

Sorry, I got on a little bit late, so you may have answered some of these, but do you still expect $40 million in total steel for the year, in terms of the headwind versus last year.

Gregg Sherrill

Yeah, that’s where we are seeing it come out right now Chris, overall $40 million and like we said before, we should fully offset that with our normal cost reductions, low cost country sourcing which we did a pretty good job of as well as the aftermarket price increases that we pushed through and finally the OE customer negotiations

Chris Ceraso - Credit Suisse

Okay. Now, I know that precious metals are a pass-through for you, but do you feel pressure from the OE’s because the price of that stuff is up so much, do they try to comeback and take it out our hide elsewhere?

Gregg Sherrill

Well, first off we feel pressure from the OE’s pretty continuously; it's hard to attribute any one thing. I haven’t seen any -- the pressure was always there. I mean we are obligated to take as much cost out of our businesses we can and support of our customers and I think we do that pretty diligently and do a good job of it. So, I can’t attribute any pressure to one thing or another really to be honest with you.

Kenneth Trammell

Yeah, but like you said, Chris, since it’s a pass through, that pressure really flows back to the guys that I think probably who are a little bit lower in the tiers; the tier twos and tier threes who that's more directly attributable to.

Chris Ceraso - Credit Suisse

Alright.

Kenneth Trammell

The only pressure we really have is in the aftermarket, because we do have some converters that we sell in the aftermarket with precious metal loading, but we are able to adjust the pricing on that to recover the precious metals costs.

Chris Ceraso - Credit Suisse

Okay and what did you say Ken about the increase R&D and engineering expense? Does it stay at this level or was it particularly high in the first quarter. What’s the outlook for the year on that?

Kenneth Trammell

The investments that we have made in the quarter where we will to continue for the remainder of the year on the engineering side. It’s important for us because we’re facing some significant changes in the environmental regulations and we have got some launches to helps service that in 2010 and 2011, and you heard Gregg talk about some opportunities that we’re pretty excited about in the commercial vehicle both on and off road segment that we will continue to spend on. So we’re going to continue to be very focused on cutting cost but we’re not going sacrifice those opportunities just because of the near-term pressures in North America.

Gregg Sherrill

Yeah I think Chris we said a number of times in the past that we’re highly focused on controlling the totality of SGA&E and we will continue to do that, but that we were investing on the E side of that equation, in support of those programs because we’re absolutely not going to back off our customers support and the technology development relative to the -- all of that future growth.

Chris Ceraso - Credit Suisse

Okay and then the last one, I know it’s just been maybe a week or so, but have you started to feel yet the work stoppage at Delta Township as in terms of the Lambda vehicles?

Gregg Sherrill

Yeah. I mean, certainly we felt it pretty quickly and again we had to flex down there primarily affected on emission control facility for us and so yeah, of course, that is going to have some effect as well.

Kenneth Trammell

We sensed the -- you did the same thing that we did as soon as the GMT900 strike was done. We cut off all the inland materials and we informed all the folks there involved in making that platform. So.

Chris Ceraso - Credit Suisse

Okay. Thank you very much.

Gregg Sherrill

Thank you.

Operator

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

Brian Johnson – Lehman Brothers

Brian Johnson, Lehman Brothers.

Gregg Sherrill

Good morning.

Brian Johnson – Lehman Brothers

What’s your sense or what happened in 1Q apart from the Axle Strike around heavy duty pick up production? And where do you see those schedules going through the second-half of the year?

Gregg Sherrill

Well generally speaking the overall volume is certainly down in that segment and we -- our anticipation right now is that they are going to pretty much stay at low levels for the balance of the year, the last five through eights, that level of truck, I think is what you are talking about.

Brian Johnson – Lehman Brothers

Yeah, three quarter tone truck pick ups with diesel engines?

Gregg Sherrill

I think we are seeing -- there will be a bit of a suppression on those volumes certainly as well, though they’re down the first quarter obviously overall and what we’ve seen compounding the first quarter was the Axle Strike rather surgically taking a few of it -- well certainly the GM trucks down altogether virtually. So that’s certainly compounded things. Now that we expect to get better obviously, but as the strike has resolved, but the overall volume, in North America I think everyone is pretty well facing the fact that it’s going to stay at relatively low levels throughout the year.

Brian Johnson – Lehman Brothers

Okay and as you think about North American OE emissions, do you think that net reflects top-line pressure for the year that will flow through or do you see offsets in some of the gas programs in OE emissions offsetting that in North America?

Kenneth Trammell

I mean I think it’s kind of a little bit early to say for sure Brian. I know that there has been some movement toward gasoline with the fact that diesel has been a bit higher, so to the extend that the build exchange they may move a bit toward gasoline, but I guess it's probably too early yet to say exactly what that mix will look like as it moves through the year.

Gregg Sherrill

Yeah, if that’s referring to your question I agree with Ken completely, I think is the way to early to really say where that is. I mean you got all the fuels up, certainly diesels up as well but a little bit too early to say how it would effect mix in that segment where diesel affords so many other advantages.

Brian Johnson – Lehman Brothers

But overall this is threading the North American OE emissions revenue numbers for the year versus what you might have thought are back at the Auto Show?

Gregg Sherrill

I’d still say its too early to predict. We give our revenue guidance, once a year in January that was back at the Auto Show time; there is lots of puts and takes. Right now clearly there is volume softness in North America, however there is strength in other regions and there is currency, positive headwinds from the revenue point of view in other regions. So from an overall point of view I -- we we’re not ready to make any changes to full year in a revenue, only revenue projections globally. There will be puts and takes there, but that’s kind of where we see it.

Brian Johnson – Lehman Brothers

Okay thanks.

Gregg Sherrill

All right

Operator

Thank you. Our next question is from Peter Nesvold. You may ask your question and please stat you company name.

Peter Nesvold - Bear Stearns

Well, it's still called Bear Stearns for now

Gregg Sherrill

Good morning Peter.

Kenneth Trammell

Good morning Peter.

Peter Nesvold - Bear Stearns

Just so you can get the model right going forward what would be the monthly revenue impact from the ongoing Axle Strike?

Ken Trammell

I think what we said on the -- as we kind of talk through the period that was down, which was right around the end of February, I think it was a 26 of February on and we think that was probably about a lost revenue number for us, the $50 million in the quarter.

Peter Nesvold – Bear Stearns

Well, 50 million in the quarter I am just trying to understand, on a going forward basis, so -- I mean just divide that into the number of months that have already been down or whether the delayed impact and so the impact could actually be greater in 2Q versus 1Q?

Ken Trammell

If there was -- we stopped production almost immediately at the time that actually went on strike. I mean, there was probably just two or three days, but our production was down very quickly. So, if you look at those five weeks, that’s..

Gregg Sherrill

Yeah, it’s pretty much a four, five weeks. There’s no delayed effect.

Kenneth Trammell

And we also -- remember we said that if you look at those two big platform, the 900 and 360, 370, those were about 10% of our 2007 revenue base and that still should be I think back around the same $50 million a month or give or take.

Peter Nesvold – Bear Stearns

Okay and given that industry mix continues to deteriorate, is it fair to assume that we won’t get that revenue back that this effect that we are working down GM inventories and so there isn’t a refilling of a channel once the strike ceases?

Gregg Sherrill

Well, I mean that’s probably more a question you look at the GM. I mean I think the way we see it clearly -- I mean we can all read the inventories in the sales in that segment and this was an adjustment -- or helped them adjust, I mean sort of one of the planned adjustment in this way, but -- so there is clearly an adjustment of inventories going on meaning that there is not going to be full recovery of that volume for sure, not one going forward I will think.

Kenneth Trammell

And part of it obviously depends on whatever planning gets resolved too so?

Peter Nesvold – Bear Stearns

In this platform, I am just wondering about that -- but again, I want to understand, is there a typical inventory carry that GM might have of your parts so that once this strike actually does go away that you have to refill that channel. Yeah if we carry a week’s worth of inventory they carry a months worth of inventory, how does that typically work?

Gregg Sherrill

That inventory is much, much tighter down, because production pretty much runs with their production. So, it’s much closer to a just-in-time. Not all those parts are provided on a just-in-time basis, but many of them are and so as soon as they come up we will come back up and there won’t be any lag there either.

Kenneth Trammell

I am halfway guessing here but I believe that our minimum deliveries in both GM facilities are one per day and some facilities are more than that.

Peter Nesvold – Bear Stearns

Got you. That makes sense. Thank you.

Gregg Sherrill

All right, thank you.

Operator

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

Patrick Archambault - Goldman Sachs

Hi, yes I’m from Goldman Sachs.

Gregg Sherrill

Good morning.

Kenneth Trammell

Good morning.

Patrick Archambault - Goldman Sachs

Good morning. Can you just give us an update on the platinum situation? In terms of being able to access enough supply. There was clearly that electricity shortage in South Africa that tightened it up quite a bit, can you just give us an update on where that is?

Kenneth Trammell

Patrick, we really haven’t seen any direct impact from that. I know that our customers and the Tier II and Tier III’s that have had most direct impact have been working very hard to be sure that that’s not a problem. I guess a sort of good news from the strike is certainly GM’s not buying as much platinum out of South Africa, so that probably also helped to relieve a bit of the pressure that you were talking about earlier in the quarter.

Patrick Archambault - Goldman Sachs

Okay. Gotcha and I guess just one other quick one, sorry if I missed it; your previous SGA&E guidance was about 8% of sales for ’08, has that changed as a result of some of these engineering investments that you guys are preplanning to make?

Gregg Sherrill

I mean, we planned those investments at the same time we made that forecast if you will. So it was in the forecast. Clearly when you’re talk in about the structure it does depend on the revenues and when do those come out and I mean, the entire impact really in the first quarter was due to the drop in revenue on the ratio, if you will. It wasn’t due to higher or had been planned engineering and we certainly weren’t going to try to flex engineering before in our programs, so one quarter the volume decline due to our strike. So, we will hang on to those. We are still anticipating to be right on our plan to spending there. It is being offset in many other areas by very aggressive cost control and cost reduction actions that we have going, but where -- and it’s very targeted that engineering, its supporting those programs that are high priority, part of our overall growth for the future.

Patrick Archambault - Goldman Sachs

Okay it makes sense and I guess lastly on steel, I think you guys had made it pretty clear that most of the stainless steel buyers is locked in for the year, but can you give us just a little bit of better sense of, how your carbon steel by-works -- are those locked in pretty much as well or are the contracts subject to surcharges that maybe a more frequent rate of update?

Kenneth Trammell

Patrick, carbon steel varies depending on the -- geographically and depending on the vendor and the long -- the period they’re willing to negotiate for and things like that. Some of our contracts were longer term and those are locked in just like last year where we got some benefits as steel prices fell through the year and we have got some that we will still negotiate through the rest of this year.

Patrick Archambault - Goldman Sachs

Okay, so there is some amount of variability?

Gregg Sherrill

Absolutely.

Kenneth Trammell

Yes.

Patrick Archambault - Goldman Sachs

Yeah, okay. All right. Thanks a lot guys.

Operator

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

Brett Hoselton – Keybanc Capital Markets

All right, Keybanc Capital Markets. Good morning, gentlemen.

Gregg Sherrill

Good morning.

Kenneth Trammell

Good morning.

Brett Hoselton – Keybanc Capital Markets

Two thought’s here. First of all the GMT900 strike, I know you give us a rough estimate of the revenue impact $50 million. Can you kind of if dollar that down to many in earnings impact on EBITDA impact? Do you have any sense of that?

Gregg Sherrill

No, we really don’t break things down, to the platform level and clearly and it was more than GMT900. I mean there was a number of platforms affected, certainly that’s a large one, no question about it. It’s our number one platform, we’ve made no secret of that. The 360, 370 is our number ten platform, so we’ve really don’t break it down on a earnings level by platform…

Brett Hoselton – Keybanc Capital Markets

Is there any way to possibly provide just kind of a rough estimate of what the contribution margin might be on a business like that just in general for the company?

Kenneth Trammell

Probably we have always been very careful about the platform’s specific information. There are always a lot of puts and takes and we are not interested in renegotiating one or the other with our customer on specifics.

Brett Hoselton – Keybanc Capital Markets

Okay.

Kenneth Trammell

But, what we did give you and what we trying to do was sort of break it out so you can understand on an overall basis the volume impact and the fact that a substantial piece of the volume impact from combinations of the strike and the commercial vehicles being down as well as obviously the aftermarket as a contributor as well was on the ride control side of our business.

Brett Hoselton – Keybanc Capital Markets

Okay and then in terms of a more general question, did you think about the exhaust business going forward. Can you talk about any changes in the competitive landscape -- I mean what’s going in the competitive landscape at this point in time given, Arvin Meritor's divesture of the business a while ago and Delphi this Jan and so far…

Gregg Sherrill

Well, I can speak to that. We have always said that we still maintain, that it is a competitive business. I mean even though there was that divestiture, EMCON is out there competing a quite directly with us and we respect all those competitors and our only response to that is -- because I haven't seen a real change in landscape. Even though there has been some change in ownership, that didn’t really change the competitive nature of where we were. So, that the simple answer to your question relevant to change is that I really haven’t seen that much change. It is competitive, that’s why we are actually focused on our core strategies. It is our -- one of our two core businesses, we are highly focused on it, we are investing in it, w are going to stay with leading technologies, leading edge technologies we believe was there and we are going to continue to be there as we go down through the future and I think that’s going to be reflected in that growth trajectory that we have talked about and market share gains that we are enjoying.

Kenneth Trammell

And we have always been focused on the businesses that we do, and you saw in 2007 that we were in two areas where we were number one -- I mean, we were number two and move to number one, that’s the OE emission control business in North America, and the OE ride control business.

Brett Hoselton – Keybanc Capital Markets

Well. Thank you, gentlemen.

Gregg Sherrill

Sure.

Operator

Thank you. Our next question is from David Leiker. You may ask your question and please statement your company name.

David Leiker - Robert W. Baird & Co., Inc.

David Leiker, of Robert Baird. Good morning.

Gregg Sherrill

Good morning Dave.

Kenneth Trammell

Good morning.

David Leiker - Robert W. Baird & Co., Inc.

I have a handful of questions here. If you look at -- I think you made a comment at ex-currency in Europe, it’s substrates are down 3%, is that correct?

Kenneth Trammell

That’s right.

David Leiker - Robert W. Baird & Co., Inc.

This compound, the alloy, is that where that’s flowing to?

Kenneth Trammell

I know, that the alloys don’t flow through the substrates. That actually, if you remember, I think at some point in the first quarter of last year, a couple of our customers agreed to go to consignment on substrates and that really reflects that change.

David Leiker - Robert W. Baird & Co., Inc.

Yeah, reflect that, okay, great and then I understand that the SGA&E line of the engineering piece of that’s going up. You’re R&D number, you took a pretty big jump year-over-year and sequentially. I am just want to know if we could dig through that a little bit, because I don't think we really addressed that.

Kenneth Trammell

Are you talking about the engineering research and develop line on the income statement there?

David Leiker - Robert W. Baird & Co., Inc.

Yeah, not the engineering line but those R&D line, the $36 million number

Kenneth Trammell

Yeah, we've -- the 36 million, that’s got the engineering and the research and the developments, so that’s really…

David Leiker - Robert W. Baird & Co., Inc.

Got all of it in there. Okay, that’s the engineering piece of it. Okay

Kenneth Trammell

And so, that’s -- about 3.5 was currency translations and then the rest was the increase in investments, four of which were in North America.

David Leiker - Robert W. Baird & Co., Inc.

Okay. Thank you and your AR securitization, are you finding any difficulty in the market of selling those receivables either in terms of demand or price there? Have you seen any changes there?

Kenneth Trammell

Demand really, no. I mean, we’ve got no issues with finding folks willing to buy. We have -- our paying is slightly largest for us this year than we did last year. I am talking about on the order of 10 or 12 bases points, not that significant.

David Leiker - Robert W. Baird & Co., Inc.

Okay and then two -- couple of lasts things. If we look at the 2010 programs you’re talking about on the commercial vehicle side, if I remember correctly in the past that was primarily with one customer, had that broadened out now?

Gregg Sherrill

Yeah it has. Yes we’ve -- there are several contracts for 20 tones on road and now also for beginning in 2011 off-road. Obviously we can’t name customers at this point, we are not at liberty to do so, but there are certainly -- there are several contracts involved there. We are quite please with that progress.

David Leiker - Robert W. Baird & Co., Inc.

Okay, and then this, the 11% to 13% revenue growth, is there a way you can put that in the buckets all in terms of what it is ex substrates and how much of it’s commercial and how much is light vehicle?

Gregg Sherrill

We did say the 11% to 13% was the overall revenue, the total revenue.

David Leiker - Robert W. Baird & Co., Inc.

Right.

Gregg Sherrill

And that, if you pull substrates out it’ll probably be about a point less than that on a compounded annual growth rate.

David Leiker - Robert W. Baird & Co., Inc.

Okay. Thanks. What about commercial light vehicle?

Kenneth Trammell

We really haven’t broken it out in that way David commercial versus light vehicle.

David Leiker - Robert W. Baird & Co., Inc.

Any of those?

Gregg Sherrill

Yeah, it’s certainly. Obviously it’s a combination of both and in some cases in the 2011 and 2012, we are quite comfortable with our growth trajectory we’ve given you, but content still being established particularly in our prototype vehicles and so, it will be premature for us even try to give you on exact, accurate breakdown of that at this point.

David Leiker - Robert W. Baird & Co., Inc.

What about emission versus ride control?

Gregg Sherrill

It’s primarily emission. I mean and again that types to the 2010 regulations we are on road in the U.S. and in China, we shouldn’t forget that and 2011 is when the off road regulations begin to take back.

David Leiker - Robert W. Baird & Co., Inc.

One more shot at it, what about diesel versus gas?

Gregg Sherrill

Well all of that is diesel virtually. I mean you’re in a segment where it is diesel.

Kenneth Trammell

On the off road and as well as most commercial…

David Leiker - Robert W. Baird & Co., Inc.

Got that. 11% to 13% growth, are you saying almost all of that is diesel?

Gregg Sherrill

No, I was talking about the commercial vehicle. I apologize, I got a little bit off.

Kenneth Trammell

No it’s both. If you recall in our investor presentation. If you even break it down into components -- I mean we have got growth going and oxidation catalogue is still out as far as we can see diesel particular filters as well as the Nox and oxidation catalogue supplied to the gasoline engines, just as well as the diesel engines. Well, it will be -- it’s a combination of all of that, but we are just not prepared to give this morning -- to give you a split.

David Leiker - Robert W. Baird & Co., Inc.

Okay, and then one lastly here on that GM truck number, you’re talking $50 million in lost revenues. I think GM saying they lost about a 100,000 units. It works out about 500 bucks of content per vehicle, that number sounds low giving that the pickup truck and the diesel content that’s on those trucks.

Kenneth Trammell

Again it depends on the mix and remember that there is also some ride control…

David Leiker - Robert W. Baird & Co., Inc.

Ride control, there as well.

Kenneth Trammell

And that’s works on that as well.

David Leiker - Robert W. Baird & Co., Inc.

Okay, right. Thank you. All right thank.

Gregg Sherrill

Okay. Thank you.

Operator

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

Richard Kwas - Wachovia Capital Markets, Llc

Hi, good morning. Wachovia.

Gregg Sherrill

Good morning Rick.

Richard Kwas - Wachovia Capital Markets, Llc

Gregg or Ken, on the substrate sales, you had a pretty significant increase year-over-year and that effected gross margin. Is it fair to say that as you proceed through the rest of this year, the comparisons get easier for you in that growth in substrate sale should ease?

Ken Trammell

That the substrate increase that you saw first quarter this year compared to last year in North America was because of the ramp up of those platform the ones that weren't subject to the strike. The ramp up of those platforms that we started in the first quarter of last year

Gregg Sherrill

And the last year that huge increase in business was primarily diesel in the U.S. which drove a lot of substrate sales.

Ken Trammell

And that was first quarter, end of the first part of the second quarter, but yeah you're right. The percentage change really sort of evened out but time to get -- it’s certainly with the latter half of the year

Richard Kwas - Wachovia Securities

Okay, so theoretically it should have less impact on your gross margin going forward. Is that the way to think about it?

Ken Trammell

Right.

Richard Kwas - Wachovia Securities

And then in terms of the new business, some of the items you cited here and I know that's factored into your 11% to 13 % growth rate, but is there anything that you are working on that you hadn’t contemplated before in that growth rate, is there anything that we should be thinking about that would be additive to that?

Kenneth Trammell

It really -- Rich everything that we’ve been working on is included in the 11% or 13%.

Richard Kwas - Wachovia Capital Markets, Llc

Okay. So, it includes pretty much everything that you are aware right now?

Gregg Sherrill

Yeah. Remember we started out talking to you last year about, establishing that five year vision and a strategy to support it and did a pretty good job of contemplating all that and it’s really -- the outcome of all that work and then obviously all the development work we are doing with customers around the world that led us to the 11% to 13%. But, it was a very comprehensive vision and strategy that we worked on last year -- continue to work on, we l continue to update it and continue to give you a five year outlook as we go forward. It’s not static, it will be a lower five year or so.

Richard Kwas - Wachovia Capital Markets, Llc

Okay, okay. And then Ken, on the interest rates here in the swaps is it fair to say if LIBOR comes down further -- I know, it’s risen in the last few weeks, but if it comes down that you get some benefit on the mark-to-market further benefit that’s not contemplated in your official forecast.

Kenneth Trammell

If LIBOR comes down, yeah then there would some benefit. Its still tough to predict mark-to-market, I’m not trying not to, but certainly if LIBOR comes down we also -- remember we’ll get a benefit on the variable rate portion of our debt, about 40% our debt is a, variable. So…

Richard Kwas - Wachovia Capital Markets, Llc

Great, and then just on tier 2 and tier 3 suppliers, any issues here with your suppliers whether the liquidity issues or?

Gregg Sherrill

Yeah, we are watching that very, very closely Rich, and we are not seeing any significant issues at this point time with our supply base.

Richard Kwas - Wachovia Capital Markets, Llc

Okay, Great. Thank you.

Gregg Sherrill

Thank you.

Operator

Thank you. Our next question is from Greg Macosko, you may ask your question and please state your company name.

Gregory Macosko – Lord Abbett

Lord Abbett. Thank you. Yes, just quickly with regard to the weakness in the aftermarket both overseas and particularly, I guess that minus 16% or 14% in the European emissions. Just could you give us a little color on those areas?

Gregg Sherrill

Well the emissions continue to be in general market condition. It’s just continues to decline, and we have been talking about that for sometime. The market itself is still in decline because of the advent of stainless steel etcetera, over the last 10 to 15 years and, and it will continue to decline. We are not forecasting that really to comeback, it may start leveling out somewhat in the next couple of years, but, ride control, is a little bit more positive story. Certainly it’s just going around 1% to 2% and that’s where a great deal of our efforts, we are focused, we are certainly paying attention to the emission control business and we will continue to do every thing we can to match our programs to that declining volume, but it is the market condition Greg, totally on the emission control side. We continue to gain market share in regions, but the market itself on emission control is declined.

Gregory Macosko - Lord Abbett

Thank you

Operator

Thank you and at this time I am sure there are no further questions.

James Spangler

Okay, this will conclude our call. 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 over the telephone. If you are located in North America you could reach the playback at 888-662-6640, for those outside North America the dial-in number is 402-220-6411.

The playback will be available about one hour from now and the call in information that I just gave you can be found in our news 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 conference call and have a good day.

Operator

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

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Source: Tenneco Incorporation Q1 2008 Earnings Quarterly Conference Call
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