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Tenneco (TEN)

Q2 2012 Earnings Call

July 26, 2012 9:00 am ET


Linae Golla

Gregg M. Sherrill - Executive Chairman and Chief Executive Officer

Hari N. Nair - Chief Operating Officer and Director

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


Brian Arthur Johnson - Barclays Capital, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Michael Tuteral

John Murphy - BofA Merrill Lynch, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Patrick Nolan - Deutsche Bank AG, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Graham Mattison - Lazard Capital Markets LLC, Research Division

David H. Lim - Wells Fargo Securities, LLC, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Adam Brooks - Sidoti & Company, LLC



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Good morning, and welcome to Tenneco's Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

Linae Golla

Good morning. Earlier this morning, we issued our earnings release and related financial information. In just a bit, I will turn the call over to Gregg Sherrill, Tenneco's Chairman and CEO; Hari Nair, our Chief Operating Officer; and Ken Trammell, our Chief Financial Officer.

They will spend the first half of the call taking you through a detailed explanation of our second quarter performance. Slides related to our prepared comments are available on the Investors section of our website at We will then open up the call for questions. The conference operator will explain the process for asking a question at that time.

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

In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements.

With that, I will turn the call over to Gregg.

Gregg M. Sherrill

Thank you, Linae, and good morning, everyone. As you've already seen in our earnings release, we delivered strong results this quarter including revenue growth, improved profitability and good cash flow performance. Our adjusted EBIT margin improved in every segment of our business, which is especially significant given the economic challenges in some of our markets around the world.

Taking a look at the financial highlights on Slide 3, we reported record second quarter performance in a number of key metrics, including revenue, EBIT, net income, earnings per share and our leverage ratio, all of which reflects strong execution on our growth initiatives and good operational performance in all regions. We also benefited this quarter from our geographic balance. With the slowly strengthening economy in the United States and continued growth in China, our operations in these regions help offset industrial -- industry volume declines in both Europe and in South America.

Turning first to revenue on Slide 4. Total revenue was $1.9 billion, which after adjusting for substrate sales and currency was a 9% increase over a year ago.

On the OE side of our business, we did an excellent job of leveraging strong production volumes in North America and China. We also increased Europe OE revenue, excluding currency, despite economic headwinds throughout the region. The increase was largely driven by the strong platform mix we have in the emission control business.

Continuing around the world, we saw lower-than-expected light and commercial vehicle volumes in South America, which impacted revenue, but conversely strong volumes drove an increase in India, mostly on new platforms as we continue to expand in this fast-growing market.

Now turning to Slide 5, and an update on our growing commercial vehicle business. Although still very early in a secure growth period, our OE commercial vehicle revenue was $226 million, a 36% increase over a year ago and representing 12% of our total revenue.

In our commercial vehicle business this quarter, we did see macroeconomic conditions negatively impacting customer schedules across North America, Europe and South America. Despite the economic uncertainty, we still expect very strong commercial vehicle revenue growth this year, although revenues will likely be closer to the first half run rate that are our forecast at the beginning of the year.

Having said that, I'm still very pleased with our program content and overall launch execution in all regions, and I believe this is positively reflected in our results this quarter.

Equally important is that our Advanced Technology solutions and global engineering and manufacturing capability continue to result in new business awards. We have an impressive list of customers as you can see on Slide 6. And today, I'm pleased to announce new off-road business in Europe with MAN and one other unnamed customer. And in addition, we've added Tata Motors in India for on-road business.

Now turning to earnings on Slide 7. EBIT increased by $24 million or 21% year-over-year. These very strong results were driven by our strong operational performance on higher light vehicle volumes and the benefit from incremental commercial vehicle revenue. As I said upfront, we're pleased with our EBIT margin performance. With contributions from all 3 segments, adjusted EBIT as a percent of value-added revenue increased 1.4 percentage points to 9.3%.

And finally, I want to acknowledge our employees for their hard work and staying focused on our customers, which ultimately drives all our results. Our teams around the world are executing well on a number of fronts: launching new platforms, continuing to win new business, expanding in new segments and regions and managing through challenging industry conditions in certain markets.

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