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Q4 2019 Earnings Call Transcript

Published: 20 Feb 2020

[Operator:]

Good day and welcome to Tenneco Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that the event’s being recorded.I’d now like to turn the conference over to Rich Kwas, Vice President of Investor Relations. Please go ahead.

[Rich Kwas:]

Thank you and good morning. Earlier this morning, we released our fourth quarter 2019 earnings results and related financial information. Presentation corresponding to our prepared remarks is available on the Investor 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.Also note that all pro forma comparisons are measured at 2018 constant currency rates and include the Federal-Mogul acquisition in prior periods. We will discuss year-over-year comparisons on a pro forma basis. When we say EBITDA, it means adjusted EBITDA. When we say revenue, we mean value add revenue. Unless specifically described otherwise margin refers to value added adjusted EBITDA margin. 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.We will be attending a couple of investor conferences in the near future including the Wolfe Research Global Auto, Auto Tech and Mobility Conference in New York and the JP Morgan High Yield Conference in Miami. We look forward to seeing many of you.Now onto the agenda. CEO, Brian Kesseler will summarize our key messages to investors. Provide an update on our strategy and touch on Q4 enterprise performance and 2019 highlights. CFO, Jason Hollar will review segment performance across the divisions for the quarter. Provide comments and color on our balance sheet and updated credit amendment and covenant. Brian will then review our 2020 guidance and give closing comments before taking your questions.With that out of the way. I’ll turn it over to Brian.

[Brian Kesseler:]

Thank you, Rich. Good morning, everyone and welcome. Please turn to Page 4. To start, we went to address the major topics on the minds of our investors and analyst. Over the last several months, we’ve been taking proactive and purposeful actions to mitigate the headwinds we’re facing in our end markets and to create a better financial position for our businesses. You can see the early effects of some of these actions in our fourth quarter results as we delivered the high end of our revenue and EBITDA guidance and continued to manage our cost structure against uneven demand trends.I want to start by walking you through some of the key areas of focus and the steps we’re taking to achieve our objectives. First; we’ve completed all critical tasks and requirements needed to separate our systems and processes allowing the businesses to operate independently. The work completes to-date on a structural cost reduction in both divisions is providing benefit in a volatile market place.This brings me to the second point. We demonstrated our ability to deliver on cost savings initiatives in 2019, as we achieved our $200 million run rate target of cost synergies from the Federal - Mogul transaction by year end. This was achieved nearly a year ahead of our original plan. Building on the process we used to deliver those results. We are executing on an Accelerate program that we expect to deliver an incremental $200 million in run rate cost savings by the end of 2021.Third, coupling those reduction initiatives with the actions we’ve implemented to improve our capital efficiency. We expect adjusted free cash flow to return positive in 2020. Fourth, we’ve recently secured an amendment to our credit facility that increases our covenant ratio to 4.5 times through the first quarter of 2021. This amended credit facility in addition to our enhanced cash flows will provide us with the flexibility we need to continue to execute our strategy and deliver on our goals.Lastly, as we execute these initiatives to strengthen our business, we continue to evaluate various strategic alternatives. We started our evaluation during the middle of last year and the Tenneco board in consultation with the company’s advisors has taken a thorough and comprehensive approach to identify the best path forward. While I cannot share anymore at this time, I want to stress that the board and the management team are committed to evaluating all opportunities to maximize shareholder value.On Slide 5, I want to take you through the key factors that contribute to our continued commitment to separate the divisions into two standalone market leading companies. Each division possesses unique strategies to create enterprise value which would be enhanced as separate standalone businesses. Operationally, OE and aftermarket businesses have unique business models with very different resource requirements. Different complexity to be managed and different capital requirements that make more focused capital allocation models appealing for each business.Aftermarket demand is generally more stable, relative to the OE markets and businesses with significant aftermarket exposure tend to trade at higher valuation multiples than pure OE-centric businesses. Given the unique profiles of each division, we continue to believe significant shareholder value can be unlocked by separating these businesses and harnessing the unique strengths in each.Turning to Page 6, we share our 2020 enterprise priorities. Our first is to execute our Accelerate Program. This solely focused on accelerating implementation of operational cost improvements. In this program, we’ve identified incremental cost reductions that should benefit our performance through 2022. Specifically, we expect to achieve $200 million run rate of cost savings by the end of 2021. We estimate about $100 million of savings will be realized in 2020 inclusive of carryover projects.We expect to incur approximately $150 million in one-time cost in 2020 associated with the implementation of these initiatives. Our second area of focus is increasing cash generation. On an enterprise basis, we’ve targeted $250 million in additional working capital improvements. We expect most of this improvement to come from inventory management and ensuring that our standard payment terms are deployed. We expect that we’ll be able to realize half of the targeted value by the end of this year.We are also keenly focused on achieving higher efficiency in our capital expenditures and methodically moving each of our divisions CapEx investments through a more sustained level. We’ve embedded $100 million decreasing CapEx for 2020 and would expect this CapEx level to be relatively constant over the next few years. The first two focus priorities will be essential on delivering our third; the overall reduction and leverage. We have set our objective to reduce our net debt to EBITDA ration to under three times in the intermediate term. We view achieving this threshold as a critical component in facilitating the spin of dry [ph] from new Tenneco. While we have set a plan to achieve this objective organically through our cost reduction and cash flow improvement actions. We would note that we’re also reviewing potential asset sales from the divisions portfolios that could expedite this process and accelerate the separation timeline.On Slide 7, I wanted to provide an update on our board refreshment process. On February 5th, we announced Chuck Stevens joined the Tenneco Board of Directors. Many of you know Chuck, he brings a wealth of financial and operating experience to our board which will assist us as we execute our operating strategy and strive to maximize shareholder value. Importantly, our board refreshment process is ongoing. As we’ve done over the past year, we continue to seek high caliber candidates who bring the requisite skills and experiences relevant to the development and execution of our strategy and operations.On Page 8, we summarize Tenneco’s 2019 financial performance. As we’ve been discussing over recent quarters. We’ve faced headwinds through the year related to uneven and lower market demand trends. Our value add revenues fell 3% year-over-year in constant currency and EBITDA margin declined versus 2018. We are able to somewhat mitigate these headwinds through operational cost improvements and synergy capture. We expect our Accelerate program to build on this momentum and better position us for success in any environment.Slide 9, lists a few of our business highlights for 2019. Our Clean Air segment was busy preparing for 27 commercial trucks and off-highway launches to help our customers meet more stringent China VI emissions standards. We signed a strategic cooperation agreement with New Carzone, the leading China aftermarket channel and retail services company to further expand our motor parts business in that market.In Ride Performance, our NVH Performance Materials team won new programs with six different Global Electric Vehicle Manufactures and we completed the integration of the Öhlins team to further build our industry leading capabilities in advanced suspension technologies. Also notable, we published our first comprehensive corporate social responsibility report this year. The report is based on the GRI framework and highlights our sustainable business practices and community contributions including the lengths between the environmental, social and economic dimensions of our business.Page 10 summarize our Q4 performance. Total revenues declined 2% year-over-year and value add revenues declined 6%. The GM strike on a pro forma basis reduced revenue by $88 million or about 2%. The EBITDA was $314 million and translated to 9.3% margin. The GM labor strike reduced our EBITDA by $27 million and our margin rate by approximately 50 basis points. New Tenneco experienced a margin decrease year-over-year fueled by weakening trends in above average margin demand verticals such as CTOH and industrial.DriV margin was flat year-over-year at 8% despite lower revenues due to improved operating performance. Adjusted EPS was $0.28, higher than anticipated tax rate in the quarter lowered our EPS by about $0.07.Now I’ll turn it over to Jason to discuss our business segment performance.

[Jason Hollar:]

Thanks Brian. I’ll start with operational performance for new Tenneco followed by DriV. Please turn to Page 12. Clean Air value add revenues decreased 4% year-over-year on a constant currency basis. Despite the labor stop at GM which cost the business about $35 million in revenue, light vehicle revenues outperformed underlying global light vehicle production by approximately 200 basis points. CTOH revenues fell 6% year-over-year. EBITDA measured $142 million in the quarter down about 8% versus the prior year.EBITDA margin was 14.6% versus 15% in Q4, 2018 however adjusting for currency and the GM strike revenue and EBITDA margin were about flat with the prior period. Please turn to Slide 13. Powertrain revenue decreased 7% year-over-year at constant currency. Adjusted for the GM strike sales fell 4% year-over-year. Powertrain EBITDA measured $82 million in the quarter. EBITDA margin was 8.1% versus 12.1% in the year ago period. The GM strike negatively impacted EBITDA margin by about 60 basis points. In addition, lower volume from other customers and a related impact on non-consolidated JV income as well as timing of certain costs negatively impacted year-over-year margin performance.Contribution margins are generally higher in the Powertrain business. Therefore, the sudden demand fluctuations that we’ve been experiencing put incremental margin pressure on our results. When demand rebounds in China and India and the commercial and industrial markets we would expect above average margin contribution from the business. Meanwhile the team is executing additional restructuring and cost reduction actions to mitigate demand pressures and improved results.Turning now to Page 14 for look at Motorparts segment. Starting with revenue, similar to last quarter. Lower revenue was driven mainly by inventory adjustments with two large retail customers in North America and the continued consolidation among several other customers in Western Europe. The revenue comparison was also impacted by our sale of Wipers product line in the first quarter 2019 which is called out as portfolio changes and loss business due to the pre-acquisition channel conflict in the Federal-Mogul business which is included in volume and mix.The year-over-year margin improvement continued in the fourth quarter with strong operating performance and effective cost control more than offsetting lower volumes. Fourth quarter EBITDA was $103 million and EBITDA margin increased 220 basis points to 13.9%. Ride Performance segment results are on Page 15. Fourth quarter revenue was down 5% year-over-year which was in line with lower global light vehicle production. The GM strike had an $18 million negative impact on revenues in the quarter and excluding the strike, revenue was 2% lower versus last year.Commercial truck, off-highway and other revenue was up 3% in the quarter and includes the additions of the Öhlins business. Ride Performance EBITDA was $34 million which included an $8 million impact from the GM strike and reflected lower industry volumes. Excluding the GM impact margins would have been slightly better than last year’s fourth quarter.Turning to Page 16 for a brief update on our net debt and leverage. At year end 2019 net debt was $5 billion and net leverage was 3.5 times consistent with our prior guidance. Our liquidity position remains strong with $1.5 billion available and no significant near-term maturities on horizon. Last week, we secured an amendment to our senior credit facility that provides us increased financial flexibility. The maximum leverage ratio was increased to 4.5 times through the first quarter of 2021, after that the ratio steps down gradually until reaching 3.5 times by the fourth quarter of 2022. This amendment gives us flexibility to operate under more challenging market conditions if necessary and execute our strategy.As Brian discussed, lowering our leverage profile was a top priority. We believe the Accelerate program actions, we’re taking to reduce cost, enhance cash flow generation and strengthen our balance sheet will enable us to achieve our leverage targets and position both our divisions for a successful planned separation.Now back to Brian.

[Brian Kesseler:]

Thanks, Jason. On Page 18, we’ve highlighted some of the assumptions used to prepare our 2020 outlook. Additional details are available on the appendix. In 2019, constant currency rates we expect revenue down 2.5% at the midpoint of our guidance. This is in the phase of global wide vehicle production that we expect to be down 4%. Commercial truck, off-highway and industrial production down mid-to-high single digits and the global aftermarket about flat year-over-year which would continue our longstanding trend of outpacing underlined light vehicle industry production, included in our 2020 expectation, our plan to program rationalizations in Ride Performance and product line complexity decisions in Motorparts that in combination are expected to reduce revenue by $150 million. These rationalization decisions are expected to improve the return profiles in both segments.In total revenue was expected to lower year-over-year by approximately $500 million at the midpoint inclusive of $160 million in negative currency. Nevertheless, through our continuous improvement efforts and the Accelerate program, we anticipate EBITDA margins above the in-line with 2019 at the midpoint. Importantly, we are planning for positive adjusted free cash flow in 2020 driven by disciplined CapEx reductions, lower one-time transaction costs and the working capital improvements we discussed earlier.The details of our outlook for full year and the first quarter are on Page 19. We continue to monitor the effects of Coronavirus on the automotive industry. The uncertainty of its full impact results in a wider outlook range for revenue and EBITDA than its customary. Included in our outlook is our current estimate that the equivalent of four full weeks of productions will be lost in China in the first quarter which would have an estimated negative impact of approximately $150 million on revenue and $50 million on EBITDA. The lower end of our revenue range assumes no recovery of that lost China volume and the upper end represents a full recovery within the year. This estimate does not anticipate a prolonged impact on our global supply chain or those of our customers.Turning now to Page 20, I’d like to give a few brief comments before we open the line up to your questions. In 2019, we navigated a volatile industry environment and concluded the year by meeting our Q4 guidance on both revenue and EBITDA. Looking ahead, we’re intently focused on executing our Accelerate program to reduce cost, enhance cash generation and strengthen our balance sheet. Ultimately position a new Tenneco and DRiV for the planned separation; having delivered on our acquisition related cost synergy targets almost a year ahead of schedule in 2019.I’m confident in our team’s ability to deliver on our Accelerate program targets. These actions will continue to strengthen our business moving into 2020 and beyond. As we’ve said while we continue to see a compelling value creation opportunity through a planned separation. We are also reviewing strategic alternatives to ensure we’re pursuing the best path for our company and our shareholders. We are confident that the steps we’re taking will better position each of the business regardless of which path we ultimately pursue and ultimately deliver enhanced value for all of our shareholders. We continue to provide updates regarding this plan and timing as appropriate.In summary, we have a strong consolidated leadership team in place and a sound strategy. Both of which give me confidence and the opportunities ahead of us. We also have 78,000 dedicated team members around the world who take pride in working together to make Tenneco, a stronger, more successful company. I want to thank all of our team members for their support and efforts in delivering our results in the fourth quarter and for their focus on achieving our goals in 2020.And as always thank you for your continued interest in Tenneco and for joining our call this morning. With that, we’re ready to take your questions.

[Operator:]

[Operator Instructions] the first question comes from Rod Lache, Wolfe Research. Please go ahead.

[Rod Lache:]

I had a couple questions. First, this cost reduction plan that you talked about today. Can you give us a little bit more detail on that? It sounds like from the description it was a little bit more skewed towards the DriV business, what the split between the two businesses and can you give us a sense of what you’re looking at is some of the additional opportunities there?

[Brian Kesseler:]

Rod, this is Brian. About the benefits we’re going to get out that or expected to be about equal between the two businesses. When we went through our synergy capture process you could see we had about $115 million run rate benefit that we expected in DriV 85 [ph] in new Tenneco and we achieved that. This one’s about equal and about 100 and we continue to find opportunities that allows the division levels to share more of the business support functions in the region, we also find opportunities to rationalize the capacity in certain product lines.

[Rod Lache:]

Okay and any color on the financial impact of the plants that are closing and more broadly, curios if you could give us a little bit of sense of how you sort of size up the opportunity here? Your CapEx is running around 4.5% of sales, is there a significant percentage of the company or plants that are running below 4.5% to 5% EBITDA margins?

[Brian Kesseler:]

As you know in our aftermarket business, we run below that in general, it’s just a characteristic to the model. We have a couple of the product lines in the OE side across Ride Performance, Clean Air and the Powertrain business. In general, the range between it isn’t very high. Obviously, it spikes now and then depending on growth and new launches. But the 4.5% is kind of in range, we would look for that to get to be 4.5% on the OE side and probably in the three-ish range on the aftermarket side of the business.

[Rod Lache:]

Okay and then just lastly, I was hoping you can give us an update on where exactly the strategic option process currently stands and any word on whether you’re leaning towards one option or another spin or sale and presumably the different businesses that you’re looking at have different levels of leakage from tax or pension or whatever. Can you give us a kind of sense of - if you think about the enterprise value of one side or another where would the net cash proceeds be higher?

[Brian Kesseler:]

Let me get the process as we announced earlier in the year. We’ve brought in some fresh eyes from an advisory perspective to make sure that we’re looking at all possible alternatives. We have not set a timetable for the completion of that process. Obviously right now we’re intently focus on executing the business. We’ve got to make sure we deliver on results especially with some of the uncertainty we have with the Coronavirus here in the quarter and probably knock on effective across the global market.I wouldn’t say we’re leading one way or the other because it’s still an open process. Our base case is, as we highlight in and why we believe these two divisions operate better long-term separately is the spend, but if there is a way to maximize shareholder value in a different form then obviously, we are wide open to that. The options we’re considering go all the way from individual product lines in each of the division to sale of a division, if that makes sense and if - and that’s the right value. As far as net proceeds or tax leakage. I’ll let Jason grab that.

[Jason Hollar:]

Sure. I’d say that under most scenarios that we’re looking at, tax is most likely not going to be a hindrance to the process. Certainly, the tax free spend is always going to be the most efficient. But under most scenarios that we have evaluated tax is not the differentiator as to whether or not we would do something. So, this will be very much around what Brian highlighted in terms of returning the total shareholder value and in most cases. I think it’s going to be dependent upon the actual gross proceeds in terms of pre-tax type of influence.

[Rod Lache:]

Okay, great. Thank you.

[Operator:]

Next call comes from James Picariello, KeyBanc Capital Markets. Please go ahead.

[James Picariello:]

Within DriV’s guidance, you called out the revenue impact from the Ride Performance plant closure $75 million what was the impact in 2019 and would you expect any carryover headwind in 2021 or does this full abate? And then, the follow-on is, when thinking about $20 million to $25 million in structural run rate savings to be achieved by the end of next year. Would that require any recapturing of some of the lost volumes you’re calling out now or not necessarily?

[Brian Kesseler:]

Not that would be, all kind of volumes controls is the way I would think about, the last part of that question. From the Ride Performance it’s really the Ride Control business in North America that we’ve been talking about, we started to see those volumes as they balance out per out plan beginning in Q4 a little bit, then this year is where we’ll see the 75 and we’ll lap that by the middle of 2021. As we’ve said before, we expect run rate improvement on this footprint about $20 million to $25 million into our run rate beginning at the end of 2020.

[Jason Hollar:]

I think the key addition there is, the volume that’s been taken out that we’re talking about is relatively low margin volume and it’s all wrapped up within that $20 million of improvements that we’re highlighting. So, any spill over into 2021 certainly does an impact to the top line, but we’re not thinking as a significant impact. In fact, there should be additional savings coming through for the carryover effect from 2020 to 2021 as it relates to the underlying cost reduction.

[James Picariello:]

And the spill over into 2021 could be roughly half of the headwind in this year?

[Jason Hollar:]

Probably a little bit less.

[James Picariello:]

Okay and then the other bucket that you call out within DriV for Motorparts. The $75 million does this relate to the legacy lost share impact or is this a new dynamic to be thinking about with respect to the product manufacturing and complexity reduction. And then, can you just confirm what the lost share impact was in 2019 and based on your progress due this year? I think you’ve been calling out progress through the quarters here. What are you baking in for 2020 assuming this $75 million is a separate item? Thanks.

[Brian Kesseler:]

Let me get the channel conflict losses first. We drew a two, three-year period of beginning in Federal-Mogul before the transaction and after the equivalent lost business was about $300 million. We experienced some of that in 2018. In 2019, we fully lapped [ph] that now as we exit 2020. With the team is going to work and done a very nice job of - we believe we’ve captured about a third of that back and that will be ramping into 2020. Obviously as we go to regain the relationships and confidence of the customers in that we’re - they’ve had to find the alternative sources and as they wind down some things we ramp up and so, I think it’s going to be a little tough to talk about exactly how much of that 100 [ph] is going to ramping in, I wouldn’t want to estimate at this point. But we feel real good about where we’re at on that.Let me get into maybe the manufacturing and complexity reductions or optimizations that we’re doing. We’re taking a disciplined 80-20 approach to the Motorparts business. We’ve got in all the regions we execute; we have seven product categories that we deliver and distribute to our customers, inside those seven product categories we have 42 product lines. And so, we’re methodically moving through each region, categories that are offered there and the product lines are offered there. And identifying with very, very good analytics as to where we generating and capturing the most value from that complexity and products and product lines and where aren’t we and we’re exiting some product lines in different regions. We are actually existing some categories in different regions based on where we need to focus our growth.In that complexity reduction, there’ll be some revenue that would drift away in those decisions but expectation in the medium term, is as we turn our attention, our focus to I’ll call the 80s [ph] product lines and the 80s [ph] customers and we have approximately 9,000 customers in our Motorparts business. We will continue to optimize the network for with those decision. So, this is what we’ve got into, the decisions are ready and we’ll continue to do those. The end of the day, we would expect our cash flows to improve in our return profiles and return our assets to improve [indiscernible].

[James Picariello:]

Appreciated. Thanks.

[Operator:]

Next question comes from Armintas Sinkevicius, Morgan Stanley. Please go ahead.

[Armintas Sinkevicius:]

When I look at the leverage exiting 2019 at about 3.6 and I look at your guide for 2020, adding the free cash flow that you plan to generate in 2020 and in backing out some of the restructuring costs from that. It gets about 3.6 leverage by the end of 2020 and I’m just wondering with you targeting three times leverage for the spin. Is the spin still on track for this year or when do you anticipate that intermediate term to get three times leverage in order to be able to execute on this spin?

[Brian Kesseler:]

Well couple points, we exited the year at 3.5 times.

[Armintas Sinkevicius:]

Right.

[Brian Kesseler:]

And we’ve got the range in our EBITDA for a reason. We’re going to continue to go to work and offset as much of this Coronavirus impact that we can without - with not counting on any of it coming back. So, we’re obviously going to be always driving to the business to get to more of a top end of that range, but it’s very uncertain at this point in time. To peg a, we’re not pegging a data on the spend because as you can imagine several variables that we consider. Sale of a particular product line or a couple different product lines come together and we move our leverage down then under three is where we open up the window for the consideration, once we get to that mark. We’ll be looking at the end markets we’re serving to see how stable they are, we will have to refinance the DriV sides.We want to make sure the financing markets are conducive to an affordable structure there. But I’ll reiterate, the only reason we’re not already separated. We’ve solved all the variables from an execution, operational side is making sure that the two businesses have the right capital structure coming out of the gate to operate the way they need to. So, we’re not putting any specific timeline on a spin because there is a lot of variables come in there, that can improve that or depending on end market performance could get a little - push it out a little bit.So, we’re intently focused on executing the business. Making sure we’re being very deliberate and disciplined on the strategic alternatives and as the opportunities present themselves, we’ll - that maximize shareholder value we’ll execute on.

[Jason Hollar:]

Yes, and a couple of other elements to reminder ourselves. When you think about that leverage ratio of course we’re using it trailing 12-month type of view and so it’s really going to be important streaming [ph] together a couple of quarters that imply, that forward leverage is going to be sustainable for those business because that’s going to be a lot more important than just a trailing 12 view. For example, we will certainly add in the first quarter some noise as it relates to Coronavirus just because that’s included in our guidance doesn’t necessarily mean that should be how we think about the forward earnings potential of this business. Likewise, in the fourth quarter, we had the substantial impact from GM strike so we just need to make sure we’re normalizing for those effects to ensure that as we go forward, we have a sustainable underlying leverage ratio that makes sense for these businesses.

[Armintas Sinkevicius:]

Okay and then maybe you can touch on the aftermarket business. Last year when you were reporting first quarter results. Aftermarket was a bit soft there. How do we think about this year and the cadence there? Are we starting to look at some easy comps there in the first quarter and just holistically how does the aftermarket business look for the whole of 2020?

[Brian Kesseler:]

Let me talk about first quarter in last year. We came out of the gains pretty strong. I think the entire industry was doing okay about the January and February and the back half of the quarter really dried up in a hurry. We’ll have about one more quarter of the Wipers divestiture kind of lapping here at the end of first quarter. We obviously had - we covered the rationalization on a complexity that we’ve been doing on the program. I’m very pleased with the Motorparts segment performance.Last year our margin expanded 120 basis points, for the things we knew about coming in. The Wipers divestiture, the loss business on channel conflict and if I take the currency out, we were down about 5% year-over-year and we had two large customers in North America, go through some significant inventory destocking and optimization. Obviously one of those starting to taper off, the other one is probably at the same pace as they accelerate some store closings. And in Europe again, more destocking and consolidation of the customer side from several distributors especially in the middle of the year. We’re starting to see that taper off too.As we continue to put the right mix of product lines and product categories to work in North America and in Europe, I feel real good about the progress the team is making. Obviously, we’re making strong investments in the China aftermarket as those vehicles and operation continue to age. But the short medium and long-term and the aftermarket business I’m optimistic.

[Armintas Sinkevicius:]

Appreciated.

[Brian Kesseler:]

Thank you.

[Operator:]

Our next question is from Ryan Brinkman, JP Morgan. Please go ahead.

[Rajat Gupta:]

Just had a question on the EBITDA guidance for 2020. It looks like you’re guiding to somewhere around down $75 million at the midpoint on $500 million revenue decline. But you’re also seeing $100 million of year-over-year benefit from cost savings. Just on a core business basis, I mean that would imply pretty decremental on your revenue decline. Just curious as to what’s driving that, I mean is it, I know Coronavirus has an impact in the first quarter but are some of the other like business realignment actions or channel conflict revenue decline are those coming in at high decremental. And I have a follow-up.

[Jason Hollar:]

The single greatest decremental would be related to China and the piece that’s implied for that, as we highlighted in the prepared remarks that we have, all of that included at the low end and none of it at the high end. So, you can kind of imply the midpoint about half and half. So, you can see $50 million on $150 million revenue, is at fairly high decremental. We’re also seeing weaker CTOH in the guidance consistent with a lot of other reports and peers. So those generally have a higher decremental as well, but then outside that you would expect most everything else to flow.

[Brian Kesseler:]

Yes, I’d add something onto the China margin impact. So, it’s stronger than usual I would say because the ability to flex out the cost is a little bit following the government mandate. We have to pay all our people while they’re not at work. So that makes kind of all the way through of our variable operating cost are acting more like fixed in that manner. So, a lot of that kind of coming in, is packing the entire average.

[Rajat Gupta:]

Got it, that’s lot helpful. And then just with the free cash flow bridge, just walking through from EBITDA to free cash flow. How much is the working capital assumption there within the bridge including the savings you expect to get and then, any one-time reason there and also like how much is cash restructuring in those numbers?

[Jason Hollar:]

The working capital is roughly half that $250 million as it relates to the performance associated with the Accelerate plan. The restructuring we highlighted in the year, when we said $250 million over the course of the two-year plan and then.

[Brian Kesseler:]

About 150 then.

[Jason Hollar:]

In 2020, the initial estimate is that certainly that’ll be moving around a little bit. And then we also have within this cash plan as the remaining payments associated with the antirust settlement from a few years ago, which should be behind this spend at the end of 2020.

[Rajat Gupta:]

Got it, so working capital is a positive this year, is that?

[Jason Hollar:]

Yes.

[Rajat Gupta:]

Okay.

[Jason Hollar:]

That’s right. And you can think about it as fairly similar to the first $250 million from the Synergy projects were completed at the end of 2019 so this is an additional $250 million and you can think about the cadence being somewhat similar where we spread it out over the first couple of years 2018 and 2019 for synergies and now the next step will be 2020 and 2021, so continuation of the efforts that are already in, than in progress doing more of.

[Rajat Gupta:]

Got it. So, I mean it seems like, if you work on EBITDA to the $100 million to $200 million, they’re the sizable drag from cash restructuring and some of the settlement payment. If you look to 2021 obviously EBITDA can go in any direction. But like how much of one timers do you think do not repeat in 2021 and then also from a CapEx perspective how do we see that progressing? That will be all. Thanks.

[Brian Kesseler:]

I think as we mentioned in the call. We would envision our CapEx to be about constant over the next couple of years after the reduction that we’re making here in 2020. We would anticipate on Accelerate program to have $50 million less restructuring about $150 million this year would imply about $100 million in 2021 and we’ll continue to see, antitrust payment coming through and further working capital improvement.

[Jason Hollar:]

Yes, I can provide a little additional color. I think earlier in year we’re highlighting about $200 million of transaction cost in 2019, that turned out to be a little less than that about $150 million. And then for 2020, we’re thinking about half that, it’s still necessary for the finalization of more tax than any other single category in terms of the payments to separate the legal entities associated with that final separation. And then on top of that, the antitrust payments that I referenced earlier. You add that all up and it’s about $100 million of transaction at antitrust that we would anticipate being paid in 2020, that’s fairly unusual and not likely to repeat in future period.

[Rajat Gupta:]

Got it, that’s super helpful. Thanks so much.

[Operator:]

[Operator Instructions] our next question comes from Joseph Spak, RBC Capital. Please go ahead.

[Joseph Spak:]

Maybe just sticking with free cash flow, I know your definition includes the factor in proceeds. It looks like it’s historically been like $150 million to $200 million, is that also what we should be thinking about for 2020?

[Jason Hollar:]

It should be relatively consistent. But it’s going to fluctuate with not only the underlying business but our decisions [indiscernible] factor. Remember I mean we treat that just like cash flow being - it’s just the whole bag piece relatively small percentage the total factor in proceeds. It’s a whole bag piece that is going to be come through as cash flow, so we treat it as cash flow for how we measure our performance.

[Joseph Spak:]

And then does that, sort of thinking about the division. Is that mostly related to DriV and some of the aftermarket receivables and I guess just more broadly, maybe you could help us? I know you sort of talked about different capital intensity in the business. But if you could help us think a little bit more about how that enterprise free cash flow breaks up by division that would be helpful.

[Jason Hollar:]

Sure. The factoring is more over weighted towards DriV certainly with the Motorparts business with the longer term, that’s more of industry standard, so it’s consistent with that. As it relates to the underlying cash flow dynamics of the individual divisions, DriV and new Tenneco. They have similar characteristics depending upon the volume timing of course it fluctuates year-to-year. but over the last couple of years as well as consistent with our future view of the plan and the guidance it’s relatively consistent to have the operating cash flow at the division level as a percentage of revenue is generally pretty consistent.

[Joseph Spak:]

The $250 million in restructuring charge, that’s all cash?

[Jason Hollar:]

That would be cash, correct.

[Joseph Spak:]

Okay, all right. And then just bigger picture. In the past you guys sort of talked about shocks and struts that business or I guess ride controlled it. But at an industry level having bunch of overcapacity. I mean you definitely done some action, but the margin there is sort of continue to deteriorate [ph] in 2019. Like what else is going in that, in sort of the broader industry like have competitors also work to started - to reduce some of the capacity. Like how sort of competitive dynamic change in that business.

[Brian Kesseler:]

If I think about it in the three major regions. If I go to China, we’ve been gaining share there and on our side been very deliberate about where we’ll cap our capacity and in the North America market, we do sense that there’s a couple competitor struggling a little bit in the conventional side of the business and taking capacity down and somewhat the same in Europe. We moved our footprint in Europe a couple years back to [indiscernible] and have been happy with where we’re at there. So, I think from a conventional side as we get the North America footprint consolidated look forward to, we’re pretty well set up for the long haul.

[Joseph Spak:]

And is the rest of the industry rationalized as well?

[Brian Kesseler:]

I think in the mature markets there - we understand that there is some rationalization going on. Obviously, those of our competitors that have a Western European footprint that gets a little more challenged as everybody is aware. But we’re - all I can tell you is we’re happy with where we’re ending up here at the end of this year.

[Joseph Spak:]

Okay, thank you very much.

[Operator:]

This concludes our question-and-answer session and the conference is now ended. Thank you for attending today’s presentation. You may now disconnect.