Tsakos Energy Navigation Limited
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good day and welcome to the Tenneco Inc. First Quarter 2021 Earnings Conference Call and Webcast. Please note this event is being recorded. I would now like to turn the conference call over to Ms. Linae Golla, Vice President, Investor Relations. Ms. Golla, the floor is yours, ma’am.

[Linae Golla:]

Thank you and good morning. Earlier today, we released our first quarter 2021 earnings results and related financial information. A presentation corresponding to our prepared remarks is available on the Investors section of our website. 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 and other earnings materials. When we say EBITDA, it means adjusted EBITDA. Unless specifically described otherwise, margin refers to the value add adjusted EBITDA margin. The earnings release and other earnings materials 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.

[Brian Kesseler:]

Thank you, Linae. Good morning, everyone and welcome. Let’s start on Page 4. We had a solid start to the new fiscal year building on positive momentum from the second half of 2020. There are three key areas I’d like to highlight today

[Kevin Baird:]

Thanks, Brian. I will start with our first quarter enterprise performance on Page 7. As Brian mentioned, our value-add revenue was $3.6 billion in the quarter, up 13% year-over-year after excluding the positive impact of currency exchange rates. Our top line benefited from strong commercial truck off-highway and industrial markets as well as a significant recovery in China light vehicle production. All of our reporting segments showed revenue and margin growth in the quarter. Adjusted EBITDA grew 62% in the first quarter, because of continued solid operating leverage on the higher volumes. Our Accelerate Plus restructuring program that we started a year ago is delivering the savings we anticipated and provided a lift to our operating performance this quarter. Our value-add adjusted EBITDA margin increased to 10.7% in the quarter or up 310 basis points, with all segments showing improvement. Adjusted EBITDA includes $47 million in corporate costs.

[Matti Masanovich:]

Thanks, Kevin. I will start on Page 13. At the end of the first quarter the company’s liquidity was $2.1 billion with no outstanding balance on its $1.5 billion revolver. The company’s net leverage ratio declined to 3.9x, a 0.4x improvement from year end. EBITDA growth benefited our performance. As well, our cash usage was well below normal seasonal levels for our first quarter and also contributed to the net leverage ratio improvement.

[Brian Kesseler:]

Thanks, Matti. Turning to Page 15, I will close with a summary of our priorities for driving shareholder value in both the near and long-term. First, we are highly focused on driving disciplined performance. Our cost reduction efforts are yielding sustainable structural benefits and our Accelerate Plus program is on track to achieve $265 million run-rate savings by the end of 2021 as compared to a 2019 baseline. We continue to lower our capital intensity through a mix of optimized capital spending and working capital management. In addition, we are broadening the use of value stream simplification tools across the company to enhance our long-term growth and margin performance. Second, we intend to build a strong balance sheet for the long-term. Our free cash flow generation continues to improve and net debt reduction has the potential to create the most value in the near-term. Additionally, our debt maturities are being extended. Our most important capital allocation priority is funding projects that enhance profitable above market growth. In the near-term, we will use our free cash flow performance to reduce our net debt to EBITDA ratio to a target range of 1.5x to 2x. Once those first two priorities are met, we will evaluate strategic acquisitions that enhance the positioning of our key quarrel platforms and balance those opportunities against returning capital to shareholders. On the right side of the page, you see our priority to generate long-term sustainable growth. Our growth platforms are our linchpins to increasing our growth over-market. Motor parts, performance solutions and commercial truck off-highway and industrial are positioned to drive the growth of the company in the intermediate to long-term and the emphasis on these businesses should lessen our exposure to light vehicle internal combustion engine. Over the mid to long-term, we are targeting 80% plus of our revenues to be unrelated to light vehicle, only internal combustion engine technologies. Additionally, we are managing the Clean Air and Powertrain segments for high cash conversion to reduce our financial leverage, as we invest more in our core growth areas. The strategic relevance of our business lines will evolve over time and we intend to maximize their value for the benefit of our shareholders. We continue to build on our positive performance with them, strengthening our balance sheet, improving our margins and reducing our leverage ratio. Above all, we remain committed to managing our business in a way that will generate sustainable growth and returns. We are encouraged by our strong start to 2021. We would like to thank nearly 75,000 Tenneco team members for their commitment and resilience and for taking care of each other and working to keep our facilities around the world operating safely. We are proud of the high level of service they deliver to our customers as they continue to drive improvements in our business performance. Thank you for taking the time to join us today. Operator, we will now take any questions.

[Operator:]

And the first question we have will come from Ryan Brinkman of JPMorgan. Please go ahead.

[Ryan Brinkman:]

Hi. Thanks for taking my questions. Of the 1Q beat and the 2Q guide and the increase to the full year outlook, I think arguably, the 2Q guide is the most impressive as other companies we cover, when either reaffirming or raising their outlook for the full year, they have, for the most part, cautioned on 2Q, whereas you are sort of guiding above The Street here. I just wanted to check in on some of the drivers of that, including relative to the top line and the degree to which you think you might be differentiated relative to other suppliers when it comes to semiconductor impact. So, could you maybe talk about your light vehicle OE customers? Are they maybe allocating chips more towards the products you have higher content on versus those which you have lower content? And I guess, primarily, I am thinking of pickups, but any other color you might have there. And then I imagine your higher aftermarket exposure helps there. What about your non-light vehicle end markets? On the Meritor call, there was some discussion of – starting to see some impact now on commercial on-highway from semis. But I am presuming it’s less and I don’t know, some of your other end markets like agriculture, etcetera. What impact are you seeing?

[Brian Kesseler:]

Yes. I mean I will start with the light vehicle side. The – our North America makeup of our revenue generally is about 85% plus to trucks, SUV, CUVs, which are some of the higher selling vehicles, obviously, these days and in that light truck space, where we see ROEs focusing their allocations into that production. Obviously, we are seeing a big drop off here in the quarter versus what we saw in the first quarter in those production rates. We believe we have got that appropriately forecasted out, still a little conservative as we talked about in our guide. So, we think we have got that. I think the rest of our benefits come from the diversification of the portfolio. CTOHI is still very strong for us. Yes, we are starting to see some production delays, if you will, from some of the players in the commercial truck space, especially in Europe. Off-highway continues to do well. In our China business, while the China production, we forecast probably going down over the year versus what we saw in the first quarter, we have got big gains there from the China 6 regulation and the content. And then our aftermarket is, as you have followed us for a while, our second quarter is generally our strongest aftermarket quarter. So, we feel pretty good about the guide from a – being a little bit still more conservative on light vehicle. Obviously, Matti talked about using $80 million as the build for our assumptions for the balance of the year. That’s about $1 million more conservative per quarter than the mid-April IHS. We anticipate IHS May numbers to come down based on all the recent announcements in the last year or 2 years. So, I think this is just an indication of where our diversification and end markets really, is helping us out.

[Ryan Brinkman:]

Okay. That’s helpful. Thanks. And then just lastly for me, I would like to check in on the environment for M&A, including as results – as it relates to potential dispositions, right? So we have been asking other companies this quarter about the M&A environment, and they have mostly been complaining because for the most part, they are looking at acquisitions, but finding that the transaction or potential transaction multiples are quite elevated, including because of the rally and the broader equity markets and because of the – just generally a lot of liquidity that’s out there. Given that you have spoken more of the potential for dispositions though, including to accelerate de-leverage, etcetera, I would imagine for you, you might be happier about this backdrop. So, I know you are often limited on what you can say on this front, but is there anything to maybe report about the number of inquiries or maybe the multiples that are being discussed or anything else that might be encouraging?

[Brian Kesseler:]

Yes. Ryan, as you said, we are in limited on what we can talk about it. I do think an active M&A demand is positive overall for us, but we are also going to make sure we are balancing here the right value for the right time. We have got some very good cash engines in the business, and our optionality really increases dramatically by getting our debt reduction down into that range. We talked about 1.5x to 2x on the leverage ratio. At that point, we feel pretty good. Now of course, we will listen for different opportunities, but we will always go through the lens of maximizing shareholder value for both the near-term and the long-term. Debt reduction, if you just do the math, drives the most near-term shareholder value. And that’s – our focus on cash flow. We were really happy with our Q1 cash flow, free cash flow performance. Traditionally, that’s a very large outflow quarter for the OEs in general, in us. But this is – we were pretty good, I think, $74 million in operating cash flow, which is really far below our 10-year average for our first quarter.

[Ryan Brinkman:]

Very helpful. Thank you.

[Operator:]

And next, we have Joseph Spak of RBC Capital Markets.

[Joseph Spak:]

Thank you. Good morning.

[Brian Kesseler:]

Good morning.

[Joseph Spak:]

The – in Clean Air, you consistently over the past three quarters have been above the sort of 15% EBITDA margin level. Now, I understand that next quarter probably takes a hit a little bit. But have we sort of turned the corner here? Is sort of 15% more sustainable level and where can we go in that segment?

[Brian Kesseler:]

From a Clean Air perspective, a lot of our growth that’s highlighted on the call was CTOHI. We continued to move the mix in there. So – and that generally has higher margins for us. Obviously, Clean Air is a big portion of our North America business where the pickup trucks, light vehicle, SUV, CUV, these are big. So, this downtime in the second quarter hurts them a bit. But we are going to be moving both the Clean Air and Powertrain mix to more, over the mid-term to long-term, to more of a 50% CTOHI revenue makeup and a 50% light vehicle makeup. So, that should, maintaining our right disciplines, continue to give us opportunity in our margin rates there over the mid-term to long-term. That 15% where they have been having lately is pretty good. And we just got to manage through some of the challenges here in the remainder of the year.

[Joseph Spak:]

Okay. In the new Performance Solutions segment, it seems like that re-class is helpful to the margins. Can you just give us maybe some color on, I guess, the underlying legacy ride performance this quarter?

[Brian Kesseler:]

Yes. So, we continue to be very pleased with – right now, we are running five business lines, business units underneath there. Our advanced suspension technology business continues to grow a lot of what Kevin mentioned in the new business awards. Again, that’s above average margins for us. Our NVH performance materials business is in that group, again, good growth, forecasted, lots of opportunity on the battery electric vehicle side, where we are seeing most of our growth in that segment. We moved the systems protection group over there, again, great opportunities there. All three of those are really highly engineered solutions that bring a lot of value to our customers and help them address issues that they have as they look to differentiate their vehicles and protect the performance of their vehicles. Our Ride control group is making steady progress. We struggled with the consolidation to – from 4 plants to 2 in the midst of all the other COVID challenges. But that team is really starting to hit their stride. So, we expect that to continue to improve throughout the year. And then our braking business has a couple of challenges inside our North America side that, again, they are starting to hit their strides. So, I like the trends we are on for the performance solutions group.

[Joseph Spak:]

Okay. And then lastly, you mentioned some of the – specifically the 2Q guide, some lower margins. It sounded like you were, relative to the first quarter, it sounded like you were basically just assuming, I guess, less leverage on sort of the lower volume sequentially. But is there anything we should be thinking about from – either for the second quarter or the balance of the year from a commodity or a freight perspective? I mean these are obviously headwinds like even – I know steel has sort of historically been something that hit you in certain segments, but we have also seen resins increased quite significantly as well. So, I am wondering whether there is anything baked into the forecast there. And if so, what are some of the offsets?

[Brian Kesseler:]

Yes. So, most of the material cost – we are experiencing the material cost headwinds just like everybody else. Steel is a big impact for us and there are several other commodities. Now if you remember 2 years, 3 years ago, we went to work hard on getting formal recovery mechanisms in place on steel, and that’s benefiting us at this point. What we are seeing is we still have to do negotiations. We are working very closely with our suppliers and then our key partners there are helping impressively as we go through that. What we are seeing is the timing issue. Normally, there is a 90-day lag. Sometimes there is a little bit longer lag depending on the customer side. So the commodity increase, we still got a little net risk out there that we will continue to manage, and our goal is always to offset. But most of our challenge in the next couple of quarters is depending on where these – if these commodities continue to escalate, is going to be the timing of the recovery and when that comes back in.

[Joseph Spak:]

Okay. And is your current thinking that things stabilize at that back half of the year or is it a ‘22 event?

[Brian Kesseler:]

If things stabilize, I think it’s the back half of the year. It’s usually 90-day, maybe 120-day lags, again that depends. There is a lot of variation customer to customer. Aftermarket is usually a 90-day lag. Obviously, we pass that through on price. That goes all the way through the market. So, it’s just a matter of making sure we get through this. If they continue to escalate, then we continue to have that lag as we go. Now, if it comes down, then we get the benefit of that at some point, hopefully.

[Joseph Spak:]

And on the aftermarket side, have you pushed through price increases or are those at sort of predetermined calendar dates?

[Brian Kesseler:]

No, we generally push them through.

[Joseph Spak:]

Okay. Thank you.

[Brian Kesseler:]

Thank you.

[Operator:]

Next, we have Bret Jordan of Jefferies.

[Bret Jordan:]

Hi, good morning guys.

[Brian Kesseler:]

Good morning.

[Bret Jordan:]

On the aftermarket business, I think you have commented about strong POS late in the quarter. Could you talk about what your retail inventories are looking like year-over-year and obviously some pretty strong sales in that channel? Are they light going into the second quarter?

[Brian Kesseler:]

Yes, we saw the pickup. As we went through the first quarter, we had a pretty big lull there in February with some of the big weather disturbances in the South and in the Midwest affect us from a production wise, but also from a demand wise. We saw our customers POS really starts to take off. They had some pretty good quarter, pretty much across the board, and now some of those are seasonal categories that we don’t produce or deliver, but we did see a good POS. Usually for reorder points after a good, strong POS. It’s a 30-day to 60-day lag as those orders come in. So, we saw a good order bank coming into the quarter. We were happy with what we saw in April. So, we like from their retail inventories, I think it’s normal ebb and flow off of their demand and supply, but they are restocking off after a pretty good March in early April.

[Bret Jordan:]

Okay. And that was like, the second question was as far as specific categories that you were seeing strengthen, was it I guess anything specific and seasonal mix versus anything that was out of the ordinary?

[Brian Kesseler:]

No, pretty much across the board. I mean we have got a couple places where we have purposely discontinued a product lines as we go through our BSS work. They just weren’t adding the value and allows us to do a lot of what we are doing from inventory optimization. And Kevin mentioned, taken out 3 DCs that lowers our structural costs, so nothing out of the ordinary, pretty much across support, but a little bit of variation as we go.

[Bret Jordan:]

Okay. And then one final question. I think you mentioned the performance solutions, you are getting into some of the semi-active suspension products into the EV and hybrid, is that higher value or higher margin than the average mix in the segment?

[Brian Kesseler:]

Yes.

[Bret Jordan:]

Okay. Have you talked about sort of what the spread is on margin mix versus the average?

[Brian Kesseler:]

Well, I think it’s a little bit of when you snap the chalk line. I mean we have got some work to do to get our conventional products up to the right margin mixes. I think we have talked generally about any of these OE segments being at about a 7% EBIT performance. And so when the mid-term we are looking to drive the business there from where it’s at and we are making good – I think we are making good progress. Obviously the stronger mix we get into our systems protection business, our NVH business and our advanced suspension technology side, we would expect to start to drift above that.

[Bret Jordan:]

Great. Thank you.

[Brian Kesseler:]

Thank you.

[Operator:]

The next question we have will come from James Picariello of KeyBanc Capital Markets.

[James Picariello:]

Hi, good morning guys.

[Brian Kesseler:]

Good morning, James.

[James Picariello:]

I just want to go back to get some color on the rationale for the re-segment thing. So, the Powertrain and Ride performance businesses, is this just, in name and reshuffling a few of the underlying business lines, right? In terms of how they are reported or is there something more strategic that’s driving the realignment, right, in terms of cross-selling, efficiencies along those lines?

[Brian Kesseler:]

I think there is a little bit of a combination of it, the makeup and the, I will call it, the sell of the systems protection business is very, very similar to the sell on NVH performance materials and AST. It’s a very much a problem solving, highly engineered product line. And so we still go to market, separately, going on some of the same customers, but it does allow for some of those problem areas to be looked at as opportunities faster. Kevin, I don’t know if you want to...

[Kevin Baird:]

I think also systems protection products, applications are essentially all over the vehicle. And so it came via the other Federal-Mogul acquisition. So, it fit within the rest of the Federal-Mogul products, but it really isn’t a pure Powertrain product. And given where we are with AST and NVH, and also the growth in battery electric vehicles, which we also have applications for through systems protection, just seems like a much better match.

[James Picariello:]

Got it. And my apologies if I missed this, but did you quantify or provide any context on your net commodity exposure for the year? And how are you thinking about the back half and what’s embedded in the guidance?

[Brian Kesseler:]

We haven’t netted that out because it’s fluctuating quite a bit, mostly because of what we discussed earlier, which is the timing of the recoveries we are hard at work with our customers and with our supply base. Our intent is always to fully recover it. If there is some parts of that we can’t get to, then we work to offset it somewhere else. So, that’s a little bit difficult and moves around quite a bit on us. By the time I said it to you right now, would probably change in 5 minutes.

[James Picariello:]

Yes, no, I hear that.

[Kevin Baird:]

On a final point on that though, we do have escalation agreements with the customers. And so on the vast majority of the commodities, we are able to pass them through. Various customers have different time lags on them and when we go and get that pricing, but they are contractually agreed to.

[James Picariello:]

Got it. And can you just remind me the seasonality of price increases within motor parts or within the aftermarket businesses? Is that assessed twice a year? You are not always passed, but is that assessed twice a year or, is it like in July timeframe, I kind of forget? Thanks.

[Brian Kesseler:]

Well, generally it goes through, I mean, when we are experiencing commodity increases or even freight economic increases that we are seeing across the network today, when we experience them and we lock them in, we will pass them right away. And then there is usually a 90-day lag. So, I don’t know that there is a specific schedule. In fact, there isn’t a specific schedule as to when price increases go. It’s when we see a significant movement, then we put it to the market and it usually goes in place 90 days out to the market.

[James Picariello:]

Thanks.

[Brian Kesseler:]

Thank you.

[Operator:]

Well, sir, no further questions at this time. We will go ahead and conclude today’s Q&A and conference call. I would like to thank the management team for their time today. And thank you all for attending today’s presentation. At this time, you may disconnect your lines, take care, everyone, again, take care and have a wonderful day.