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Edited Transcript of TEN earnings conference call or presentation 9-May-19 1:30pm GMT

Q1 2019 Tenneco Inc Earnings Call

LAKE FOREST May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Tenneco Inc earnings conference call or presentation Thursday, May 9, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Kesseler

Tenneco Inc. - Co-CEO & Director

* Jason M. Hollar

Tenneco Inc. - CFO & Executive VP

* Linae Golla

Tenneco Inc. - VP of IR

* Roger J. Wood

Tenneco Inc. - Co-CEO & Director

* Ronald T. Hundzinski

Tenneco Inc. - EVP of Finance

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gene Vladimirov

UBS Investment Bank, Research Division - Associate Director & Equity Research Associate of Autos

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Tenneco Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Linae Golla, Vice President, Investor Relations. Please go ahead.

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Linae Golla, Tenneco Inc. - VP of IR [2]

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Thank you. This morning, we released our first quarter 2019 earnings result and related financial information. On today's call to discuss the results are Brian Kesseler and Roger Wood, co-Chief Executive Officers; Jason Hollar, Chief Financial Officer; and Ron Hundzinski, EVP Finance.

I'd also like to welcome to the call today Rich Kwas, who was recently named as Vice President of Investor Relations for the New Tenneco division. A presentation corresponding to our prepared remarks is available on the Investors section of our website. After our comments this morning, we will open the line for questions.

Before we begin, please be aware that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachments.

Also note that all pro forma comparisons are measured at 2018 constant currency rates and include the Federal-Mogul acquisition in prior periods. The earnings release and attachments are available on our website.

Additionally, some of our comments 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.

Also note, this quarter we have revised our segment reporting into 4 segments and have recast historical pro forma results to match the new segmentation, which will help investors make the appropriate comparisons.

Now I will turn it over to Roger Wood, co-CEO.

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [3]

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Thank you, Linae, and good morning, all. I'm pleased to be joined by my co-CEO, Brian Kesseler. I will start off with the highlights from the quarter. Ron and Jason will cover the reporting segments and the company's financial position, and Brian will conclude with details and thoughts on our updated outlook.

You know, it was just over a year ago, April 10, in fact, that we announced the strategic acquisition designed to transform Tenneco into 2 purpose-built industry-leading independent businesses. Today, we're just as excited as we were a year ago and just as committed to the creation of the 2 new companies, both for the opportunity that it will bring to employees and the benefits that will be generated for our shareholders.

You've seen in the press release that we've adjusted the timing on our expectations for the spin timing. We've made this adjustment to allow our businesses to set up processes, further improve margins, generate cash flow and strengthen our balance sheet. We're looking forward to spinning mid-2020 or as soon as favorable conditions occur.

Looking at the first quarter. We had some challenges, most of which we anticipated, a few which we did not. Even as global light-vehicle production declined, our organic growth continued to outpace industry production as we benefited from our diverse business profile, while aftermarket volumes were softer than we anticipated in the quarter, particularly in North America.

Turning now to Q1 highlights on Page 4. In Q1, Tenneco generated $4.5 billion in revenue. On a pro forma basis, this performance represented 1% organic growth year-over-year. New Tenneco grew revenues 3% organically year-over-year, and DRiV revenues declined 3%. As you can see on this slide, light-vehicle revenues increased 1% year-over-year and outperformed global light-vehicle production by 800 bps. CTOH increased 7% and aftermarket declined 8% on an organic basis. Currency was a 5% headwind.

EBITDA margin was 8.7%, down 150 basis points year-over-year. We anticipated much of the China volume decline, but aftermarket volumes in North America were impacted by overall market softness, more than we expected. In addition, we also experienced some operating inefficiencies and unanticipated nonrecurring costs. Jason and Ron will discuss the margin results and action plans in more detail later in the presentation.

Adjusted EPS was $0.52 versus $1.62 last year. Please note, that the $1.62 represents legacy Tenneco and is not a pro forma comparison. The decline was influenced by higher depreciation and amortization, interest expense and share count, all related to the acquisition of Federal-Mogul, which was completed on October 1, 2018.

During the quarter, we continued to demonstrate a strong focus on technology, innovation and improving our business for the future. First, let me congratulate the teams from New Tenneco who received 2 PACE awards for innovative, new products recently launched into serial production. We also continue to look for the right opportunities to strengthen the portfolio for both divisions as we did for DRiV this quarter when we closed the Öhlins acquisition and sold the wiper business. As mentioned on prior calls with investors, we are operating as 2 stand-alone businesses. As such, we want to offer as much transparency to investors as we work towards the separation. The following slides will discuss each division's performance in relevant segments.

So please turn to Page 5. In Q1, New Tenneco posted nearly $2.3 billion of revenue, flat year-over-year on a constant currency and a pro forma basis. New Tenneco outperformed global light-vehicle production and experienced good growth in the CTOH business. On the lower left, you can see FX caused most of the year-over-year decline in the division's revenues. EBITDA declined 17% year-over-year to $236 million and margin was 10.5%, down from 12.1% in the year ago period. On the lower right, weaker operating performance caused most of the year-over-year decline. Also, we incurred incremental corporate costs as we build the infrastructure to run the business as a stand-alone public company.

I'll turn it over to Ron for a discussion of New Tenneco and its segments. Ron?

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Ronald T. Hundzinski, Tenneco Inc. - EVP of Finance [4]

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Thank you, Roger, and good morning, everyone. Roger has just gone over the total New Tenneco. Now I'll provide more details on performance in our Clean Air and Powertrain segments.

On Page 6, we show Clean Air's performance. The OEM revenues increased 2% year-over-year on a constant currency basis. We saw good outperformance in light vehicle and strong CTOH growth. On the lower left, we see segment revenues benefit from positive volume mix and price, while -- which was more than offset by FX. Adjusted EBITDA was $140 million, down 13% year-over-year. Adjusted EBITDA margin was 13.1% compared to 14.5% in the prior year period. When you boil it down to performance in Q1, we were $14 million lower in adjusted EBITDA on an $18 million increase in sales. This does exclude impact of currency. Normally, we'd expect positive adjusted EBITDA contribution year-over-year on higher sales. The adjusted EBITDA underperformance was impacted by a $5 million supplier bankruptcy and $3 million related to engineering timing recovery. These 2 items should not repeat in Q2. Additional performance headwinds included labor inefficiencies in Europe, steel costs and lower sales in China, which have higher margins.

Now on Page 7, we show Powertrain segment performance. Value-add revenues were $1.18 billion representing a negative 2% decrease year-over-year. Light-vehicle revenue slightly outperformed the global market, and its CTOH revenue growth was healthy. Adjusted EBITDA was $116 million, down 17% year-over-year. Adjusted EBITDA margin was 9.9%, down approximately 120 basis points from the 11.1% rate in the year ago period. Excluding the impact of currency, we experienced a decrease in adjusted EBITDA of $16 million on a decrease in sales of $27 million. About $6 million of the EBITDA drop was related to unfavorable mix from diesel pistons to gasoline. Our diesel pistons business is more profitable than our petrol business and the shift away from light-vehicle diesels in Europe weighed on our margins. We expect this dynamic to continue for the next couple of quarters at a moderating pace. Another $6 million was caused by the year-over-year decline in China sales, which carry higher margins relative to other geographic areas we serve. We've commenced incremental restructuring actions in the quarter to reduce overhead infrastructure costs and anticipate these benefits to be realized in the second half of the year.

Now for a look at the DRiV business and its Ride Performance and Motorparts segment results, I'll turn the call over to Jason.

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [5]

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Thanks, Ron.

On Page 8, you'll find the combined overview of revenue and adjusted EBITDA for DRiV's 2 reporting segments. Total revenue for DRiV was down 3% in the quarter and adjusted EBITDA was also lower versus last year, mainly due to lower aftermarket sales in North America and lower year-over-year light-vehicle production volumes in China. Our fundamental growth drivers remain strong, and we remain focused on satisfying our customers' needs.

Some of the highlights in the quarter include: we recaptured business with 2 North America aftermarket buying groups, previously lost due to perceived channel conflict. The Motorparts team was recognized as Vendor of the Year by Parts Warehouse. For the third time in the past 4 years, our Clevite NVH performance materials group was named the Supplier of the Year by General Motors. And the OE Ride Performance team won 2 new incremental business awards for our CVSA2 kinetic and band suspension technology in Europe, one on a new electric vehicle and another on a luxury sports coupe.

Turning to Page 9 for a closer look at the Motorparts segment. Year-over-year revenue and adjusted EBITDA are both lower versus last year. The charts on the right side show a walk from Q1 2018 pro forma to Q1 2019 actuals, and you can see volume and mix are the main drivers of both the revenue and earnings results. Overall market weakness with lower out-the-door sales in North America impacted results. And in Europe, some key customers continued to adjust inventory following recent acquisitions. The Asia Pacific region delivered a good quarter with growth in both China and India. These volume and mix headwinds were partially offset by synergies and other operating performance improvements.

Ride Performance segment results are on Page 10. Revenue in the first quarter was up 2% with growth in light vehicle as well as commercial truck applications. Revenue in North America was up year-over-year mainly on higher NVH performance materials content of commercial trucks, light vehicle and the growing number of battery-electric vehicle platforms. In addition, revenues from our recently completed acquisition of Öhlins have been included, partially offset by the wiper business that was sold on March 1.

Ride Performance adjusted EBITDA was $31 million, and value-added adjusted EBITDA margin was 4.2%. Margin performance was primarily impacted by operational inefficiencies related to our manufacturing footprint actions underway in North America and China. The remaining manufacturing processes for the China relocation will be completed in the second quarter with efficiencies ramping up through the third quarter.

An update of our Q1 debt and cash position is on Page 11. The table on the left side of the page shows our net debt position and pro forma net leverage ratio at the end of the first quarter compared to year-end 2018. During the first quarter, interest expense was $81 million, and that includes the discount on factored receivables, which is now classified as interest expense in this and prior periods. In terms of our debt profile, there are no significant near-term maturities. Except for a scheduled amortization of term loans under the senior credit facility, our long-term debt principal payments are not payable until 2022 and later. The leverage ratio is partially impacted by the normal seasonality of cash flow, and at the end of the first quarter, the company had $1.7 billion of liquidity available.

It is not on the slide, but I would like to point out that the first quarter adjusted effective tax rate of 32% was impacted by our geographic mix of income in the quarter. However, our full year tax rate guidance remains at 28% to 30%.

With that, I'll turn the call over to Brian.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [6]

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Thank you, Jason.

Before I go through the outlook, let me take a minute to thank the Tenneco team members around the world for all they do every day to take care of our customers and make our company successful. Across Tenneco, we have a heightened focus on lowering our fixed-cost base and continuing to simplify each of our businesses by eliminating waste and non-value-added complexity. Most of all, in everything we do, we do things the right way with no shortcuts. And, again, my thanks to the team.

The updated enterprise outlook is on Page 12. Starting with the second quarter, we expect revenue in the range of $4.45 billion to $4.55 billion with pro forma revenue about flat on a sequential basis at the midpoint of that range. In the second quarter, we expect DRiV revenues to be up 4% to 5% sequentially with aftermarket revenues returning to expected levels. We anticipate New Tenneco business to be down 1% to 2% sequentially, driven mainly by lower light-vehicle production in Europe.

In the second quarter, we expect improved profitability in both businesses with adjusted EBITDA in a range of $375 million to $395 million, which is nearly a 20% improvement sequentially with aftermarket revenues returning to expected levels and the ramping of synergies and other initiatives.

For the full year, we're revising our revenue outlook slightly, which we now expect to be in a range of $17.7 billion to $18.1 billion or growth of 3% year-over-year, in part due to lower European light-vehicle production and the inclusion of a modest decline in commercial vehicle markets year-over-year. We expect to outpace industry light-vehicle production by 6%.

We expect value-add adjusted EBITDA for the full year to be in the range of $1.5 billion to $1.62 billion or between 10% and 10.6%.

The outlook specifically for DRiV is on Page 13. For the second quarter, we expect sequential revenue growth of 4% to 5% on the better aftermarket performance. We also expect sequential margin improvement of approximately 200 basis points, higher than last year's Q1 to Q2 improvement of 110 basis points. Margin growth will come from higher revenues, the benefit of synergy actions and other manufacturing improvements in the second quarter.

For the full year, we anticipate revenues to be about flat year-over-year. Our OE Ride Performance business is expected to be about flat, continuing to outpace light-vehicle industry production. And we expect the Motorparts business to be up slightly year-over-year as we begin to lap the lost business in the second half of last year.

We anticipate full year adjusted EBITDA margin to be about flat versus last year with a runway for further improvement in 2020. By Q4 2019, we're confident that we will achieve a 75% run rate for earning synergies related to the transaction and expect actions to be phased in throughout the year. As Jason mentioned, the China Ride Performance production relocation will be finalized in Q2, and volumes are expected to stabilize and ramp-up in Q3. We expect CapEx to be in the range of $250 million and $275 million for the year. This is heavier than normal, driven by the investment in Ride Performance as we implement the North America footprint consolidation, expand our capacity in Eastern Europe and finalize the plant relocation in China.

Now I'll turn it back to Roger for the New Tenneco outlook.

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [7]

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Thank you, Brian. Please turn to Page 14.

For Q2, we estimate New Tenneco's value-added revenue will decline 1% to 2% versus Q1, largely due to incremental pressure on light-vehicle production in Europe relative to the start of the year and more subdued growth in our CTOH revenues related to market adjustments. We believe Clean Air growth will exceed Powertrain.

We estimate New Tenneco segment margin will increase approximately 100 basis points sequentially at the midpoint from the Q1 to Q2 to around 11.5%. The impact from the supplier bankruptcy should dissipate and commercial activities are expected to gain momentum. Incremental productivity actions and synergy contribution also should yield benefits, sequentially speaking. For the full year, we've reduced our constant currency value-added revenue growth estimate to 3% to 4% from 6% to 7%. On a dollar basis, we estimate total revenues to be $11.43 billion to $11.73 billion. Lower European light-vehicle production and a modest negative adjustment to our global commercial vehicle production forecast are the primary changes versus our initial revenue growth guidance.

On the margin front, we expect a 30 to 50 basis point year-over-year decrease in value-added adjusted EBITDA margin, relative to our newly recasted 2018 figures. Our range is 11.7% to 12.2%. We expect CapEx for the year in the range of $480 million to $495 million.

Please turn to Page 15. We anticipate our year-end 2019 leverage ratio to be approximately 3.3x using the midpoint of our new EBITDA guidance. Our prior guidance was 3.0x. EBITDA reduction is the primary reason for the change in the outlook. We are working diligently to improve margin and cash flow over the balance of the year. We have decided to shift our anticipated spin timing to mid-2020. We believe the extra time will allow us to further improve margins, cash flow conversions, strengthen our balance sheet and complete the spin as soon as favorable conditions emerge.

Brian, did you have any thoughts before we open the call up to questions?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [8]

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Yes. Thanks, Roger. As you mentioned in the beginning, it was just over a year ago we announced this combination. And like you, I'm just as enthusiastic now as I was then. Since we've closed the deal and began working on combining these great businesses, we've seen a number of challenges we didn't expect, everything from lower light-vehicle volumes in China, a temporary drop over the last couple of quarters in aftermarket revenue and the trade and tariff issues that the entire industry has been wrestling with. With a couple of tough quarters behind us, we've worked through some challenges and from an operational standpoint, we have our arms around the business. For the first time, we have both leadership teams in place and operating as independent businesses as we will after the separation. The teams are highly engaged in driving the results, and we expect continued quarter-after-quarter margin improvements. We're seeing the benefits of synergies starting to ramp and other operational improvements focused on growing our top line and increasing our profitability. We're continuing to optimize our portfolio with strategic acquisitions and divestitures that will help set each business up for success and the New Tenneco is uniquely positioned as a full system partner to the OEMs with fuel economy and emission solutions from the cylinder to the tailpipe. And for DRiV being the industry leader in advanced OE suspension technology with the largest global multi-line, multi-brand, aftermarket products in the world.

You know there were some growing pains combining these 2 businesses but like the last couple of quarters are behind us, and we are moving forward with confidence and speed. We believe both new companies have an exciting future, and we look forward to sharing our progress with you next quarter.

Thank you for your continued interest in Tenneco and for joining us this morning. With that, we can open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Colin Langan with UBS.

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Gene Vladimirov, UBS Investment Bank, Research Division - Associate Director & Equity Research Associate of Autos [2]

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This is Gene Vladimirov on for Colin this morning. With the lower fiscal year margin guide, just wondering if you could walk through how we should be thinking about the margin cadence throughout the year? The Q2 guide appears to be about the low end of guide so suggests pretty meaningful improvement in 2H. Just wondering what the big drivers would be there?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [3]

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Yes. Probably the best way to think about that is as the synergy start to ramp in, you can see good improvement in Q1 to Q2, the second half of the year then -- and the balance out to that overall flat level of outlook. You should expect to see meaningful improvement to be able to reach that in that -- in each of the 2 quarters of the back half of the year.

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Gene Vladimirov, UBS Investment Bank, Research Division - Associate Director & Equity Research Associate of Autos [4]

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Okay. And then could you give us some color on the cash burn for the quarter? Is it implemented about where you guys had expected? And how should we be thinking about that going forward as well?

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [5]

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Yes. What I'd say about that is, when you look at both businesses, the legacy both businesses, both have a relatively similar type of seasonality element. So similar to a lot of our other peers, the first quarter tends to be a lower cash quarter than the other quarters. And so within that, it's fairly consistent with what you'd expect on a historical basis.

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Operator [6]

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The next question comes from Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [7]

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Just wanted to understand, when we received the guidance for 2019, it was the middle of March, presumably, there was visibility on what the first quarter was looking like. So what -- why are we getting this now versus last quarter?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [8]

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Yes. The one thing that changed a bit stronger than we thought or a bit weaker than we thought was North America aftermarket. If you looked at the overall market and you looked at the out-the-door sales, January was about where we expected it to be. The back end of February started to see some slip from a year-over-year basis. And if you listen to most of our customers, March was a tough month. And so as we were talking near the middle of the quarter, it was really aftermarket. And if you look at the bridges, you can see the impact that has on our overall earnings. And light-vehicle industry did move down a little bit further than we expected. There was some downtime taken that we didn't anticipate and so catching us a little bit short with that dramatic move or those bigger moves. Our ability to flex out really wasn't there. We've made those flexes. We've aligned to that level of capacity. And ideally as these revenues come back, we'll chase them up.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [9]

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Okay. And I was surprised to hear the growing pains combining the businesses. It seemed like a pretty, sort of, straightforward combination where the Federal-Mogul pieces of the business complemented yours pretty well. And outside of the hiccups with how to -- how and what to expense that delayed the 10-K, what growing pains are you referring to?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [10]

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Well, a little bit -- where most of the change happened was more on the DRiV side as we, kind of, realigned the OE businesses together and realigned the aftermarkets business together. From an operational perspective, the ability to run the operations really wasn't that impacted. It was more around getting the systems setup and aligned so that we could see the business in a common way. I wouldn't chalk up a lot of that to the operational performance, but it did have some influence, but the revenue drop was really the bigger issue -- the biggest issue in what we had to react to.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [11]

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Okay. And then what drove you to push out the spin timing?

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [12]

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Well, I think the -- as we said in the call that it gives us a little bit of an opportunity, as Brian had mentioned, to make sure that we are grounded in where we're going forward, get in the sequence that we've got outlined for the rest of the year and we have confidence in the go-forward. As Brian said, the last couple of quarters haven't been real good, but we have a lot of confidence now that we got our arms around it. That's behind us and we're moving forward in a positive way. And we just think it gives us a better opportunity to straighten up the balance sheet a little bit, get our operating efficiencies in line, get some performance behind us and do it in a fashion that gives us the confidence at the spin date that things are where we need them to be.

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Operator [13]

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The next question comes from James Picariello with KeyBanc.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [14]

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Just focusing on the Ride Performance, the new Ride Performance segment, can we, kind of, parse out how the legacy Tenneco Ride Performance business performed and relative to the OE portion for Motorparts?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [15]

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Yes. So I think most of the pressure we saw on the year-over-year related to the legacy Ride Performance. Both businesses -- both product lines, both the braking and the ride control were influenced by the China volumes, for sure, on a year-over-year basis. A lot of that wasn't a surprise. But -- and we also knew that we were going to have some inefficiencies in the year for the footprint moves we have going on in North America and the relocation of China. So as we look at, what surprised us, if anything, on the Ride Performance side? Not much. I mean we knew these inefficiencies were going to be there. You can also see that in our guidance. We've stayed on our guidance for margins. And so moving through that, we'll lap some of this aftermarket North America stuff. We are starting to see good out-the-door comps here in April and the first part of May. Quarter-over-quarter, that's given us the confidence in our Q2 outlook.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [16]

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Okay. And did you -- have you quantified the China inefficiencies regarding the plant move?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [17]

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No, we haven't. It's -- there was a mix in there with the volume down and then the plant move, so it's to be -- kind of hard to split those out. They're all through one location into the supply chain. So it's really a combination of both of those.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [18]

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Got it. And just to go back to the question on delaying the spin here, is it -- was it or is it an issue tied to getting the financing completed for both businesses and just wondering if that played any role? And then, you just broadly -- what do you want to see over the next 12 months to get you more comfortable with the DRiV spin actually happening then? I mean is it Ride Performance's margin stabilizing, waiting for a better macro environment? Maybe several things there, just curious, your overall decision.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [19]

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Yes. I'll kind of echo what Roger was saying. We want to get the market -- show that the margins are getting to where we expect them to be, make sure that we lock those in and stabilize those and give our stakeholders a confidence that we're on the upward trajectory that we expect to be, gives us a little bit more time to make sure the systems are combined and separated. So from an operational perspective, that definitely would derisk there. And that's about the balance sheet, let's get the balance sheet where we expect it to be and then have the right financing in place. And again, the macro environment has got to be right, to your point. I mean we're not going to spin just to spin, but when all the conditions are where we expect them to be and both businesses are in the place to be successful coming out of the separation, that's when we'll pull the trigger.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [20]

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So did you -- I mean I assume you tested the financing market, was that something that you didn't -- the reception was not as healthy enough to move forward, was that -- did that play in?

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [21]

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No, not at all. I would say that we had really great reception with of all the prospective channels for financing that we'd looked at. And it's a good environment still for that. And it's entirely based upon what Brian and Roger laid out.

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Operator [22]

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The next question comes from David Tamberrino with Goldman Sachs.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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I just want to understand the aftermarket side a little bit better and, kind of, the weakness that you've seen or were seeing in February into March. One, has that continued into April and early May, are you seeing signs of some positivity? And then, just what's driven the weak demand? Is there any pull-forward of stocking? Has there been inventory de-stocking in the channel? Is that over? If not, how much longer do you think it could really last? Just trying to get a better sense of what you're seeing and what's transpired because there's a lot of noise in the market right now from a couple of different companies.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [24]

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Yes. Let me -- I'll give you maybe 2 parts to that answer, David. The overall market, I mean, every customer that we see out the door and every customer in the traditional channel and all the retail channels in Q1, especially in the back half of Q1, saw high single-digit out-the-door comps go down pretty dramatically on our categories. There were a couple of categories that in cold snaps sell better than others, but those aren't ours. We have seen, in April, low single-digit comps come back positive. We see that continuing into May in out-the-door. So I do think there was a bit of a lag in there. I was raised in the aftermarket never to talk about weather, but seemingly, there seems -- there is some effect there. So that would be from a macro perspective the impact. And like I said, in the back half of Q1, April and the early returns in May, we're seeing across the board, market lifts in the low single digits increase and that's why we're confident in the outlook that we've given you.

As you've -- anybody who's following the aftermarket, there is -- one of our largest customers that is going through an inventory realignment to be more favorably comped to their peer group. And so as we work through that with our customer, there's going to be some puts and takes to that, probably through the balance of the year, but that's anticipated in the outlook that we've giving.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Okay. And then, I understand the top line confidence in what you're seeing, at least, in the near-term trends, but from a margin standpoint, I mean, what is your confidence level or interval as to how much of a handle you have on the issues that have transpired and you've been facing and that you've correctly identified them and can address them in due course?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [26]

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Yes, I'll speak for the DRiV side and then hand it over to Roger. From a margin perspective, as we were wrestling through last year and a little bit the year before, the margin hits that we had on steel economics, we've wrestled those to the ground, got the right agreements in place and dialogue going on with our customers. And operationally, we're coming to the end of the China relocation, finally, at the end of this quarter. We're beginning to then -- early next year, we'll start to see the benefits of our North America footprint. But from an overall perspective, within the guidance that -- and outlook that we're giving, I'm confident with where we're at.

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [27]

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Yes. And from the Powertrain side of the business, I equally am confident here, David. The issues that we've experienced in both the sides of the business that are part of our portfolio over here, we have a good handle on those. One of them is behind us, we believe, the supplier bankruptcy that took a bit of time and a lot of money to get us through it without interruptions to our customer base. That was a first-quarter issue. And that's behind us now and over. We do have some performance areas of the business that we know we've got to improve upon. Europe is one of them, that kind of sticks out for us, and we know what actions they're taking over in Europe to accomplish that, but we've got to continue to focus on that. We know -- we know what's got to be done and we know the actions that we have in place to do that. As Brian said, material economics as well is something that we continue to work on with our customers. Tariffs and material economics are an issue that, quite frankly, everybody in the value chain is going to have to pay a little bit of on all of it. It can't be resting in any one place in the supply chain. So we'll continue to work on those with our customers, have good receptivity actually with our customers on that front to make sure that we're all sharing in what we have to share in there. And so, again, all the actions are in place. We're confident in it and we got a sequential improvement -- significant sequential improvement coming off of the first quarter into the second quarter and through the rest of the year. And subject to market fluctuations that while we can't control the top line, we can focus and make sure that we're holding the bottom line. If it's a decline in the top line, we'll hold the bottom line on a decremental basis and if we are fortunate enough to see a sales increase to make sure that we gain the income on the upside.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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Okay. And just the last one for me, as I think about where you're going to end the year pro forma from a leverage perspective, is there any updated thinking as to how you would -- or just break down what you think the different businesses post spin could look like from a leverage perspective, just given a little bit of a backtracking from where, I think, you were originally were supposed -- were targeting?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [29]

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Yes. I think here's the way it'd -- it's going to continue to shake out, is when we get to the spin decision and we get to the financing, our Board is going to make the right call on making sure each business is set up for success in the short, medium and long term. So probably a little early -- too early to call. I think the thoughts on DRiV carrying a little bit heavier than New Tenneco probably are still true just because of the cyclicality differences between the 2 business profiles, but I think it's too early to call as to where it'll end up, but the theme around how it will get divided is probably still true.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Okay. And, I guess, you're just waiting to see how -- if the markets do end up rebounding from an OE perspective as we enter into 2020. That's probably fair.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [31]

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Yes. Yes, and then obviously, we're going to aggressively as possible move that leverage ratio down as fast as possible.

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Operator [32]

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(Operator Instructions) The next question comes from Joseph Spak with RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [33]

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I wanted to maybe poke around a little bit on the New Tenneco side. So I think, Ron, on Clean Air, I mean, the negative $14 million in EBITDA on $18 million higher volume you identified. Think about $8 million of issues but normal incrementals would still -- you'd still expect that to be up, maybe $4 million or so. So is there any other color on the gap to what's going on there besides the bankruptcy and some of the engineering timing?

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Ronald T. Hundzinski, Tenneco Inc. - EVP of Finance [34]

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Right, Joe. In the script I gave some qualitative analysis. I didn't give you any numbers. But basically, Roger alluded to one -- we got labor efficiencies in Europe that we need to fix that was a headwind for us. A couple other items I gave, I didn't give you any color on the numbers, say, but we also had some steel costs that were headwinds as well that we're navigating through, and then we had some unfavorable product mix in Clean Air out of China as well. That made up the difference, basically. All of them were about equal value, I would say. Actually, if you come up with the math that would close the gap pretty much on the performance.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Okay. And then on the commentary, Roger, on diesel pistons versus gasoline, I guess, is there a path to get gas pistons to diesel pistons? Or is it, sort of, a structurally lower-margin business? If so sort of, what needs to be done? And maybe also just some assumptions as to what you're seeing for diesel mix for this year and also for a midterm outlook as you go out a couple of years.

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Roger J. Wood, Tenneco Inc. - Co-CEO & Director [36]

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Yes. So we have seen, as you know, a fairly decent decline, although, it's been moderated a bit because of the engines that we happen to be on in that part of the business. We're on the higher displacement engines, which typically had a slower decline, if you will, than the lower displacement engines. We see that moderating, as Ron had said in his talk during the call, throughout the rest of the year. So I think the pace of decline will be moderating a bit. We think it could drop another 200 to 300 basis points, if you will, and exit the year maybe in the mid-30% range, somewhere around that for total diesel penetration.

From a gasoline versus diesel product mix, if you will, it is a bit of a lower margin business, but that said, there are opportunities for technology to be employed or deployed, if you will, for the gasoline side of the business. And we have those technologies actually in-house, and we're working with our customers on those. So we can improve the gasoline performance, if you will, from an EBITDA perspective, but it probably won't get all the way back to where the diesel has been historically.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Okay. And then last one for me. I think this is probably a total Tenneco number, but it looks like CTNOH (sic) [CTOH] was up and industrial, I guess, was up 7% in the first quarter, and so you gave some good color about assumptions on the light-vehicle side, but what are you assuming for that market for the year?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [38]

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Yes. Probably low single digit down is what we're looking at, a lot of China and India coming off of that. That's -- I would call that the primary driver.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [39]

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So flat to down for the year, so a big reversal from, sort of, the growth in the first half -- in the first quarter?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [40]

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Yes. We're comping against a very pretty good second half last year.

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Operator [41]

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The next question comes from Ryan Brinkman with JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [42]

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This is Rajat Gupta on for Ryan. Just wanted to just clarify a little bit on the free cash flow this year. Based on your pro forma leverage target, I mean, could we see positive free cash flow in 2019? I just want to make sure I have that baseline correctly?

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [43]

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Yes. So that estimate of the year-end leverage is going to, of course, cover the transaction costs over the course of the year. That -- those have come down a little bit from the guidance we provided last quarter because the delay into 2020 for some costs like some of -- the cash tax costs that was associated with this as well as some of the other ancillary costs. So a lot of the free cash flow is offset by those types of investments over the course of the year as well the investments into its synergies. We've communicated the total $150 million to achieve those synergies and that's being spent over the course of this year. So there is the cash flow that is being generated by the business is then being used to fund those types of investments back into the transaction in the process.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [44]

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Got it. So if you think about next year, I mean, how much of onetimers should we think does not repeat next year, somewhere in the $150 million to $200 million ballpark? Is that a fair assumption?

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Jason M. Hollar, Tenneco Inc. - CFO & Executive VP [45]

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So -- yes. I think what we said last quarter is we had about $70 million of tax and $60 million of advisory. And like I said, those numbers are probably going to come down a little bit this year. Of the $150 million, we've not broken that out, but this is the heavier year between the 3 years, the very end of '18 and then a little bit going into '20, so the -- a greater portion of that $150 million will be in '19, so that would be, of course, onetime as well and those would be the biggest impacts, of course. Over the course of this year we are having a lot of the -- you saw going into the first quarter from the fourth quarter results, we did achieve a lot of our working capital synergy in the fourth quarter so we had a much stronger start to working capital last year, being that there's less of that $250 million of working capital actually in '19 because we had a much better starting point. So there'll be a little bit more of that working capital coming in the balance of the $250 million into this year to be a partial offset.

And then, when you're looking at actual cash flow outside of operating cash flow but actual cash, just remember that we had the Öhlins transaction of about $160 million that closed in the quarter. There's a little bit of cash inflow for the sale of the wiper's business but to a much smaller extent.

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [46]

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Yes. The other way to think on the DRiV side, I mentioned our CapEx this year is heavier than normal. We'll wrap up the China relo this year. The East Europe footprint expansion investment will be behind us this year. The synergies that Jason talked about will come through in Öhlins. So there's a little bit heavier cash usage on our Ride Performance business this year than will be repeated going forward, for sure.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [47]

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Got it. Looks like free cash flow can be much better next year. Just a follow-up on the EBITDA margins for full year '19, could you help break that out between the 2 businesses? How much we should be expecting across both of them?

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Brian J. Kesseler, Tenneco Inc. - Co-CEO & Director [48]

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Yes. I think if you go to the outlook for the full year, DRiV was about flat margin rate and the -- down 30 to 50 in New Tenneco year-over-year on the pro forma basis.

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Operator [49]

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This concludes our question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.