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Q3 2008 Earnings Call Transcript

Published: 4 Nov 2008

[Operator:]

Good morning and welcome to Tenneco’s third quarter 2008 earnings release conference call. All lines have been placed on a listen-only mode until the question-and-answer session. (Operator Instructions). Today’s call is being recorded. If you have any objections you may disconnect at this time. Now I’d like to turn the call over to Mr. James Spangler, Vice President of Global Communications. Thank you, Sir. You may begin.

[James K. Spangler:]

Good morning and welcome to Tenneco’s third quarter 2008 financial results conference call. Earlier this morning we issued our press release and associated financial information and in a minute I’ll be turning the call over to Gregg Sherrill, Tenneco’s chairman and CEO, and Ken Trammell, our chief financial officer. Gregg and Ken will spend about 30 minutes taking you through a detailed explanation of our third quarter performance. Slides related to their prepared comments are available on the financial section of Tenneco’s website at www.tenneco.com. The two then will take your questions during the second half of our call. The conference call operator will explain the process for asking a question at that time. Keep in mind we’ll do everything possible to address all of your questions on our call today. Please note that our discussions today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers as shown in our press release attachments. The press release and the attachments are also posted in our website. In addition to reviewing our third quarter financial results some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. With that I will now turn the cal over to Gregg Sherrill. Greg?

[Gregg Sherrill:]

Good morning, everyone, and thanks for joining us. The global automotive industry is clearly operating in an extremely challenging environment. The events are unfolding on a daily basis that are unprecedented as to the speed of occurrence as well as the impact on both markets and the economy. To be a little more specific about the macro environment and its effects on our business, you’ll recall last quarter we told you that North American customers were continuing to cut back light truck production while several OEMs in China were reducing their summer production schedules. These realities are reflected in our third quarter results. On slide four, in China light vehicle production increased 4% in the third quarter which reflects the slower pace of growth compared with the 2008 second quarter’s 16% and the 2007 third quarter’s 21%. Although overall production increased slightly, Volkswagen, GM, Ford, and Brilliance all took unplanned plant downtime in the summer resulting in a year-over-year 14% production decline for these OEMs. These negatively affected our business in China as these are our largest customers in the region. With the fourth quarter production in China is expected to increase 4% over the 2007 period. Of course, North American production also continued to shrink. In the third quarter light vehicle production declined an estimated 16% and the fourth quarter also is projected to see a 16% decline year over year. Western Europe again is significantly weakened as we enter the fourth quarter. According to Global Insight, Western Europe’s auto production for the third quarter declined 5% year over year and is projected to fall 13% in the fourth quarter. Eastern Europe reported production growth at about 12% in the last quarter, but this region also is beginning to feel the effects of the weakening global economy, especially in Russia. Eastern Europe production is now forecasted to decrease 4% in the 2008 fourth quarter. The intensity of the slowdown in automobile demand, brought on by frozen credit markets, high fuel costs, and rising unemployment, is far greater than anyone could have anticipated even a couple of months ago. Furthermore, while material prices have declined from peak 2008 levels, commodity costs are still higher than year-end 2007 representing continuing (inaudible). There will be more market risk in the near term, so right sizing our business is a priority. I want to assure you that over the past several months we’ve been highly focused in this area with cost savings and efficiencies initiatives under way. Last week we announced a restructuring program expected to yield $64 million in annual savings with a payback period of less than one year. You’ll see on slide five as part of that program we’re in the process of closing four manufacturing plants and one engineering facility, and restructuring an emission control plant to adjust to reduced OEM demand. These initiatives and other actions will result in the elimination of approximately 1,100 positions worldwide

[Kenneth R. Trammell:]

Thanks, Gregg. Before I go into business segment analysis let me review some of the items that affect comparability between the third quarters of 2007 and 2008 on slide nine. Third quarter 2007 adjustments include three items

[Gregg Sherrill:]

Thanks, Ken. We anticipate continued volatility across the global industry driven by the ongoing economic crisis with continued production buying declines in North America and with key customers in China. We also expect to now combine weakness in Europe in the fourth quarter as our OE customers continue to adjust schedules to declining vehicle sales. Global Insights’ latest production forecast is summarized on slide 30. Currently we’re in the process of reviewing and finalizing our plans for 2009. You can expect ongoing investment to support business growth, along with aggressive cost management. We’ll be able to give you more colour on our strategy and expectations during our fourth quarter call in February. We have confidence in the capabilities and determination of our people, and our ability to execute in each country and each segment in which we operate. Our business model is solid. We continue to maintain our financial flexibility and our relationships with our vendors are strong. This is a company that has successfully weathered hard times in the past, so we know what needs to be done and how to do it. We know what our priorities are and we know what challenges need to be overcome. This is a very experienced team. Throughout our ranks every person is making a contribution and I’m confident we’ll get where we need to be to effectively perform in the midst of this unprecedented economic cycle. At Tenneco there are a number of things we’re confident about. Among them is our market share growth, particularly in the commercial vehicle segment, and another is the content expansion we’ll benefit from as a result of worldwide environmental regulations. In the press release we told you that we’re still comfortable with our compounded annual revenue growth projection for our global OE business of 11% to 13% between 2007 and 2012. This is on slide 32. Among the basic assumptions underlying this projection are third party projections for light vehicle and commercial vehicle build rights in 2012, our own market share estimates based on business already won and new business we expect to capture, the mandated timelines for worldwide emission regulations, and the increased content requirements to meet those regulations. Regarding these basic assumptions, we have seen no significant changes in the regulation time line and no changes in required content. There have been some changes within the forecasted 2012 build rate, but the total rate overall is virtually unchanged. As you know, due to the timing of regulations the majority of our growth in this five-year time frame comes between 2010 and 2012 with approximately half of the total growth being generated in the commercial vehicle sector. Our success in winning new production and development programs remains on track. With that we can open the call for questions.

[Operator:]

Thank you. (Operator Instructions). Your first question comes from Brian Johnson – [Brathwaites Capital].

[Brian Johnson:]

Good morning. I want to focus a bit on decremental EBIT margin in North America. My calculations have it somewhere between 30% and 40%. Can you help us with how you calculate it and also what’s driving that versus sort of the 20% to 25% we’d seen in earlier quarters?

[Gregg Sherrill:]

Yeah, a couple points to take into account there. You’re talking North America in particular.

[Brian Johnson:]

Yeah.

[Gregg Sherrill:]

We said it in the script there, but let me go back to it. In this last quarter our light truck mix represented about 46% of revenue. In the second quarter it was at 58% of revenue. If you go all the way to 2007 it was 72%. That’s probably not even relevant right now. So that is one of the items. There are obviously overall more quarter-to-quarter sales. You have the seasonal issue in there. I think also currency affected, between the Mexican Peso and the Canadian Dollar. And then the last thing is the timing on some steel recovery that we expect now in the future quarter. I think those are the big drivers there. Ken, you got anything you want to add?

[Kenneth R. Trammell:]

I think that covers it. Brian, I think one thing you probably just want to think about that Gregg mentioned is the unusual movement in currency, especially near the end of the quarter. Because we found that was, like Gregg said, about a $6 million currency headwind that we had not clearly anticipated.

[Brian Johnson:]

Right. But if I strip out the currency, the $28 million, if I divide that into the revenue decline ex substrate seems to get me to a 40% decremental operating margin.

[Kenneth R. Trammell:]

Yeah. And then the other things that Gregg mentioned I think are the things that you need to take into account. Certainly the mix deteriorated faster in the third quarter than it did in the second quarter. We also had the timing issue on the steel recovery. Which, as Gregg said, we anticipate to recover in a later quarter.

[Gregg Sherrill:]

Probably the biggest factor in the mix continuing to deteriorate was the tundra shutdown.

[Brian Johnson:]

And as we think about Europe what kind of decremental margins should we be thinking about going into 4Q in Europe?

[Kenneth R. Trammell:]

I don’t know that I have a percentage to give you, Brian. As usual, it kind of depends entirely on the mix. We don’t have the same mix issue in Europe obviously that we do in North America where the light trucks have made up such a large percentage in the past of the overall build rate. But there will certainly be some headwind [inaudible].

[Gregg Sherrill:]

Yeah, Europe is kind of where North America was several months ago. So we’re getting literally daily updates on production schedules and plant downtime and that sort of thing. It’s just too volatile to really forecast at the moment.

[Brian Johnson:]

Okay. Thanks.

[Operator:]

Your next question comes from Rich Kwas – Wachovia Securities.

[Rich Kwas:]

Good morning. Gregg, just touching on Europe here, with margins in the past you’ve talked about OEM margins there, the opportunity that you have given the macro environment here. What are you thinking in terms of preserving margins in Europe and your ability to do that? How does the recently announced restructuring program go about in terms of helping you out on that end?

[Gregg Sherrill:]

Well, the restructuring program, particularly if you look at the workforce implications, were balanced between North America and Europe. So there was a big piece of it in Europe. Now Europe takes a little bit longer to get those in place. You can move a little bit quicker here in North America; I think we’re all fairly aware of that. Nevertheless, by the end of the whole thing Europe was well represented. The plants themselves, I mean, we’ve been doing quite a bit of restructuring in Europe lately and we just closed the emission control plant in France at the end of last year. The plants were all North America oriented. We had to get it fast and we have been working on that. I think we’ve told people we were working on that one over the last several months. The engineering centre was down in Australia, so it was really impotent in either of those two regions. The main plant restructuring is North America, but the overall workforce implications were pretty well balanced between the two regions, I think.

[Rich Kwas:]

Okay. So do you feel that you’ll, it may take a little longer here, but do you feel that you can preserve margins at a reasonable level going forward here in Europe?

[Gregg Sherrill:]

Certainly. You know, that’s what the whole restructuring program is aimed at is preserving margins. Now, we can’t say for sure right now the degree to which the volumes are going to get in Europe. As I said a moment ago, we’ve got that same level of uncertainty that we had in North America just a few months ago. That’s something to watch very, very closely. But that’s all a part of rolling it into our 2009 plan and I can assure you that we’re going to keep that thing as up to date as possible. If we have to take further actions in the future we’re going to be prepared to move there as well if things do deteriorate further than what our current planning is calling for.

[Rich Kwas:]

Okay. And then that just segues into my next question on restructuring here. It looks like you’re kind of getting close to the limit in terms of cash restructuring under your current covenants. Are you starting to have discussions with your banks on the level of added flexibility that you may be able to generate going forward?

[Kenneth R. Trammell:]

Rich, I think there’s a few ways to look at the restructuring benefit. The first is, it’s not a limit on restructuring spending. It’s simply a limit on the amount that’s automatically excluded from the debt covenant ratio. So one alternative to it is, you know, I’ve always, especially when it’s a fast payback project, to continue to implement restructuring and let it impact the debt covenant ratio. So the banks don’t prevent us from doing restructuring. We just have to go back to them if we want to then renew or change the amount of the basket. And that’s something that we have historically done. We have a pretty good track record of being able to accomplish that. And if we decide that’s the appropriate approach that’s one that we would follow and we expect to be able to get done.

[Rich Kwas:]

Okay. And then in terms of steel, I know you’re not still higher than levels exiting 2007, but kind of first thoughts in terms of next year. Do you expect it to be a headwind?

[Gregg Sherrill:]

I don’t know that we can actually say yet. We do know that steel prices are continuing to come down. They’ve lacked some of the other commodities a little bit. I think everyone’s aware of that. And we’re currently clearly at a point in time where we’re in negotiations, but also deferring negotiations really as late as possible as we watch what is really occurring with steel costs. I think it’s a little too early to say exactly where they’re going to come out year over year.

[Rich Kwas:]

How much of those negotiations do you expect to have finalized by the time that you report Q4 in January?

[Kenneth R. Trammell:]

I’d say it’s a decent amount of it, Rich. I think a lot of it depends on how commodity prices are turning at that time. But we’ll certainly keep you updated as things progress.

[Rich Kwas:]

Okay. Thank you.

[Operator:]

Your next question comes from Brett Hoselton – KeyBanc Capital Markets.

[Brett Hoselton:]

Good morning. Let’s see. Restructuring; $64 million in annualized savings. Kind of by the end of 2009 or is that going to push back into 2010?

[Kenneth R. Trammell:]

We should reach the run rate by the end of 2009. Of that a substantial portion of it relates to the head count reduction, so we’ll probably get, I think, north of 80% of that in the end of 2000.

[Gregg Sherrill:]

Pretty quick, yeah.

[Brett Hoselton:]

And then if I understood your answer to Richard’s question correctly, it sounds like you can go to the banks and basically spend some additional cash if necessary, if you can demonstrate that the payback period is quick enough.

[Kenneth R. Trammell:]

Yes. If you think about it, Brett, our interest in the bank [inaudible] when it comes to restructuring so we’ve had a pretty good history and been able to get an amendment for that. We would expect to follow that if we decide that’s the right way to go.

[Brett Hoselton:]

And then the ramp up is fairly consistent throughout the year, you think? Or is there going to be stair step function sometime during the year?

[Kenneth R. Trammell:]

Because the headcount reductions will be pretty much a full run rate by the end of the first quarter. I don’t see a decent amount of it in the first quarter and then, like I said, we’ll get north of 80% of it for the full year. So it will ramp up relevant to –

[Gregg Sherrill:]

It’s the plant fee, so it’s a little bit slower, obviously.

[Brett Hoselton:]

Okay. And then as we think about the decremental contribution margins, I know we were trying to drive at that earlier, can you provide us with any sense of what the decremental contribution margins would be, maybe on the value-added side of the OE business in North America and Europe.

[Kenneth R. Trammell:]

You know, Brett, it’s tough to give you a rule of thumb. I think this quarter is probably a great example of that because the margins are driven by so much more than just the rule of thumb. I mean, if you think about it, like we’ve said before, a substantial portion of our cost base is certainly labour and materials. Those are fairly flexible in the short term for us in North America. But because of the mix change that’s going on with the light trucks and SUVs, the currency headwind, the other things that we talked about, there’s not a rule of thumb that I can give you on having a look at that.

[Gregg Sherrill:]

It’s still volatility of production volumes. It has as much to do with that as anything.

[Brett Hoselton:]

If we think about the cash constraints as you say with your debt covenants, you obviously have a fairly significant amount of new business coming on line over the next several years. How should we think, are the cash constraints, do you think going to be an impediment to being able to capacitize for some of that new business going forward or are you not concerned about that at all?

[Gregg Sherrill:]

Well, you know, when we built our restructuring program we took all that into account. So when we set up our plans, what we’re looking at for what we think are very conservative levels of production volumes, continuing to grow, supporting our customers, supporting the business that we’re working on, all that rolls into it. So we feel good at this point in time that executing that restructuring program keeps us on track, not only for the base business, but for the growth aspects as well. Again, if conditions were to continue to deteriorate we’ll ramp that up and continue to keep the critical growth aspects front and centre as part of our consideration.

[Brett Hoselton:]

Okay. And then just finally, we tend to focus on the OE side of the business and the aftermarket is obviously a different animal. As you think about the aftermarket performance over the next 12 months or something along those lines directionally do you have any sense of where the aftermarket may or may not go in North America and Europe over the next 12 months?

[Gregg Sherrill:]

Well, again, the aftermarket’s always an interesting question. We’ve seen some improvement here this quarter. I would say we’re looking for probably flat to maybe moderately up. I don’t think we’re anticipating any huge increases at all. But we’re going to stay focused. We’ve been winning new business and we’re going to stay focused on winning new business as well and continuing to drive that piece. I mean, it’s still a very strong performing part of our overall portfolio.

[Brett Hoselton:]

Thank you, Gregg. Thank you, Ken.

[Operator:]

Your next question is Douglas Carson – Banc of America.

[Douglas Carson:]

Great thanks. Good morning. A question on Europe. GM has just announced their production is going to be down 51% there, which was kind of shocking. It looks like your plan is closer down to between 4% in Eastern Europe and 12% or 13% in Western Europe. Which other OEMs do you feel could pressure that percentage decline you guys have kind of baked in? It seems like we’re getting a lot worse numbers than the numbers you guys kind of have put out here.

[Gregg Sherrill:]

Yeah, we’ve provided the Global Insight numbers as a reference point. Now, underneath that is clearly what platforms are we on, what specific programs were up or down, and what are running. That gets back into this volatility I’ve been talking about. We are getting every day updates to production schedules in Europe. I can’t overemphasize that. It is exactly where North America was several months ago where from one day to the other you could get an announcement on your way out that a plant was going down for three months. That’s the sort of thing we’re seeing in Europe. So we’re not trying to suggest that you can translate that forecast. Right now we’re in Europe for, the nearer the term is is almost the more difficult it is to forecast, just like we were in North America. So sure, as those numbers come out we’re going to be adjusting and looking at what the long-term effects of those potentially are. But that’s all I can say. You’ve got sort of a Global Insight general number. Underneath it we are looking every day at our production schedule. So anything that GM announces that impacts my production we’ll roll right into our planning. Or a Volkswagen, or a BMW, or a PSI, it doesn’t matter who. We’re getting it in from everyone right now.

[Douglas Carson:]

So is GM kind of like a modest part of the business in Europe? Is it up a few percent or is it up to 10% of what you’re doing in Europe.

[Gregg Sherrill:]

I’m not sure what percentage of the full European business is GM. I mean, our GM business is more concentrated in North America than it is outside of North America. They are an important piece. [Inaudible} virtually all the European.

[Douglas Carson:]

And then finally, the 2007 to 2012 OE revenue plan is unchanged. The marketing conditions are pretty bad. At least the last six months have been horrendous. Could you give us more detail on the split of that growth? I know it’s a long-term plan, but how much is kind of commercial vehicles or slight vehicles? You’re probably one of the only guys that have a growth rate that high for the next few years.

[Gregg Sherrill:]

Again, I go back to what basically under turns that growth rate. It starts with that regulatory timeline. Those are absolute mandatory requirements as they sit on the books today. In regards to your question on the commercial and light vehicle split, about half of the total growth between 2007 and 2012 is in the commercial vehicle segment. And that just happens to have a lot to do with the fact that the regulatory activity in this time frame is more heavily involving diesel engines, which obviously pick up commercial, on-road, off-road, you name it. Again, we said before our technologies scale up just fine and work quite well for that segment.

[Kenneth R. Trammell:]

Doug, one of the keys, and don’t forget the way Gregg put it in the presentation, that we try to validate growth rate based on looking at what 2012 production volumes are. While there’s certainly bad economic climate today I think everybody’s projecting that there’s a full recovery by 2012. That’s a big driver of why the growth rate is what it is.

[Gregg Sherrill:]

Yeah. I mean, clearly we’re looking at some lower than what we had planned revenue expectations in 2009 and probably in 2010 as well, depending on how long this thing goes, right? Those are just all volume dependent. By as Ken just said, by 2012 we’re expecting a recovery. As I think pretty much everyone is.

[Douglas Carson:]

All right, guys. Thanks so much.

[Operator:]

Your next question comes from Chris Ceraso – Credit Suisse.

[Chris Ceraso:]

Thanks. Did you say what the actual build rate is? The third party build rate here for 2012? I know you said it changed a little bit, it came down, but what’s the number?

[Gregg Sherrill:]

I do not have that in front of me. We can get that for you. I have no problem sharing it.

[Kenneth R. Trammell:]

Yeah. It’s the Global Insight number for 2012. I just don’t remember the exact number off the top of my head. I’ll take a look and see if I’ve got it with me and if not we’ll get it to you.

[Chris Ceraso:]

Okay. I may have missed this. I apologize. But did you quantify what that steel recovery was that slipped here out of the third quarter and do you expect to get that in the fourth quarter?

[Gregg Sherrill:]

It’s our expectation to get it in the fourth quarter. We did not quantify it. It’s only because of sort of the state of the talks with the customer right now. So we would like to just hold off on that.

[Chris Ceraso:]

Okay. Is it, like, are we talking nickels or dimes?

[Gregg Sherrill:]

It’s not insignificant.

[Kenneth R. Trammell:]

Or else we wouldn’t have mentioned it.

[Gregg Sherrill:]

Right.

[Kenneth R. Trammell:]

To your other question, Chris, I’m looking at, let me make sure I’m looking at the right numbers here. It looks like the number of units in 2012 is about 1.8 million units on a global basis. And there’s ups and downs. Compared to where we were before it’s just down in some regions and up in others. But net-net it’s virtually unchanged. It’s actually down about seven-tenths of a percent.

[Chris Ceraso:]

Okay. With regard to the deferred tax valuation allowance, is it just the US where you’ve taken that? Is that where you’re unprofitable?

[Kenneth R. Trammell:]

There are other overseas locations, like the UK, where we have not traditionally been valuing or would not have traditionally been booking an asset for that because those that have not traditionally benefit, but this charge that we’ve taken is really in the US.

[Chris Ceraso:]

And then I know it gets really difficult to forecast your tax rate on a go-forward basis once you’ve done this, but you’re saying $10 million to $15 million in past taxes in the fourth quarter. Is book tax going to look like that too? Does that work on a go-forward basis?

[Kenneth R. Trammell:]

Cash taxes and book taxes, I know, Chris, will look significantly different. I’ll be honest with you, we’re still trying to figure out how to give you better visibility on it. I know once we finish the quarter we’ll give you perfect visibility because we’ll let you know what the impact of not benefitting US [inaudible] and hopeful that might help with the process of evaluating what the [inaudible].

[Chris Ceraso:]

And then the last one. You spoke to this a little bit, but it does look like the aftermarket was a bit stronger here. Is that evidence, do you think, of people holding on to vehicles a little bit longer and having to maintain them or am I reading too much into that and it’s just one month that was decent?

[Gregg Sherrill:]

Yeah, I would be just a little careful. Again, I’ve said before, the aftermarket in the short term is fairly difficult to predict because there are so many seasonality related items in it. But I mean, over the long haul, if the fleet ages, which it’s currently doing, that is a positive pick up for the aftermarket. I mean, it’s certainly not negative pressure. It’s more positive. But you can really month to month and quarter to quarter almost drive yourself crazy because of some of the seasonality issues again.

[Kenneth R. Trammell:]

Chris, you asked about is it a month in the quarter, we’ve seen some decent performance in the aftermarket for the last several months. If you go back into the second quarter you could see that we had a pretty good second quarter in the aftermarket as well.

[Chris Ceraso:]

Right. Okay. Thanks a lot.

[Operator:]

Your next question comes from Patrick Archambault – Goldman Sachs.

[Patrick Archambault:]

Hi. Good morning. I just wanted to get a sense of the CapEx number that you have put out there for 2008. How much could you, how much of that might be maintenance CapEx, how much is supporting your books or your business for next year? In kind of a worst case scenario what could that be flexed down to in 2009 if need be just to shore up cash without getting into trouble with some of your customers?

[Kenneth R. Trammell:]

Your definition of maintenance and mine are probably different. So let me just kind of put it this way

[Gregg Sherrill:]

Yeah, the only other one, and I mentioned it earlier, make-versus-buy decisions which we’ve been looking at very, very critically for deferred capital spending as well. But the one on our ride control business deferring some of the expansion that we had planned is important. We can ship ride control products fairly efficiently. And I wouldn’t trust the defer nature there until market conditions improve. That’s just simply prudently taking advantage of existing temporary capacity while markets are down in our major regions to hold off on capital spending.

[Patrick Archambault:]

And then allow me to just push that question a little further. At the very least, I know we’ll get more in January, but at the very least can we think about a CapEx number that’s maybe flatter, even a little lower than what you have this year? Would that be hard to do?

[Gregg Sherrill:]

We’re still working through all that. I really would like to wait until February when we’ve got that all worked out in some detail.

[Kenneth R. Trammell:]

Patrick, we literally tore up our 2009 plan and started over. We’re making sure we’re focused very intently on capital to be sure that we’re being very efficient. But it’s just too early to give you anything specific about 2009.

[Patrick Archambault:]

Okay. And on slide 25, the $99 million, or I guess the $120 million program that comes up for renewal in January, can you just give us a little colour on that? I mean, have you had those discussions? Are you having those discussions? Are you fairly optimistic about being able to renew that? If not, I take it what that means is kind of a $99 million working capital headwind unless you replace it with other things. In the worst case what might some of those other things be?

[Kenneth R. Trammell:]

Yes, Patrick, we are highly confident of renewing the program. We have renewed it each of the last eight years and don’t see any reason why it shouldn’t be renewed this year. We’ve had discussions with the bank. They don’t see any reason why it shouldn’t be renewed.

[Patrick Archambault:]

Okay. And just a last quick one. I guess your FX margin is negative with a tailwind on revenue and then headwind on EBIT. Just on a go-forward basis I understand there’s a lot of moving pieces, but how should we think about modeling currency, particularly as we’re getting into quarters where the revenue is going to be negative. How should we think about modelling that, at least in terms of an EBIT impact?

[Kenneth R. Trammell:]

Patrick, it is a general rule, and obviously third quarter is an exception, but it’s a general rule that we make and sell parts in very similar currencies. Where that’s broken down in the quarter was the Canadian Dollar and the Mexican Peso where there is a lot of cross-border activity. Where it sometimes has an impact is some of the Eastern European countries, like the Polish Zloty and the Czech Koruna versus the Euro. Those were not a significant issue in the quarter, but what we did see in terms of the headwind was the unusual movement right near the end of the quarter, especially the Mexican Peso and the Canadian Dollar. I can’t give you a projection of what those are going to do. Traditionally they don’t move as rapidly as obviously they did in the third quarter. I would expect a return to more normal.

[Patrick Archambault:]

I guess in the past has, just with you producing and selling in the same regions, is then kind of the EBIT margin at least a good first pass modelling assumption?

[Kenneth R. Trammell:]

That’s a good rule of thumb in a normal environment to use.

[Patrick Archambault:]

All right. Thank you very much.

[Operator:]

Your next question comes from Itay Michaeli – Citigroup.

[Itay Michaeli:]

Good morning. I just want to circle back to a couple balance sheet questions. It looks like you still have quite a bit of room under your revolver covenants, but if things get progressively worse, if you could just say what some of your options might be? Is there any more collateral you could offer the banks should a future renegotiation be required? Any thoughts or colour you can share there?

[Kenneth R. Trammell:]

Yeah. Itay, obviously the restructuring that we announced last week is designed to make sure that we continue to meet our covenant. Obviously our first goal is to make sure that we don’t get to the position that you’re talking about. But I should point out that in the past, if you go back to the early part of this decade, we’ve had a history of being proactive and talking with our banks and renegotiating covenants as necessary. Based on where we are today we would expect that we should be able to be successful if that’s the position that we need to pursue.

[Itay Michaeli:]

All right. That’s helpful. And then just another quick on one pension. Any update to having US pension as a type of formula? I think the underfunding last year was about $60 million. Any direction view or order of magnitude over how we should be thinking about next year’s pension contribution?

[Kenneth R. Trammell:]

Yeah. I think next year’s pension contributions will be up a bit, but I don’t think it’s going to be a significant change year over year.

[Itay Michaeli:]

Okay. Is that because you have any pension credit offsetting that or is that just the timing of catch up payments?

[Kenneth R. Trammell:]

Yes, there’s certainly a timing of catch up payments. The assets are what most people, most pension plans are a mix of fixed income and equity, none of which have obviously performed very well in the last 45 days. But as we’ve moved toward the end of the year we’ll get a better view of what that impact will be. I’m not expecting it to be a huge cash flow headwind next year.

[Itay Michaeli:]

That’s helpful. Thanks a lot.

[Operator:]

(Operator Instructions). Your next question is from Rich Kwas – Wachovia Securities.

[Rich Kwas:]

Just a quick follow up. Gregg, EPA just announced some new emissions rules for boat engines and lawn mowers and that type of stuff takes effect in 2010 and beyond, how meaningful is that to you? I know you’ve talked about the off-road being a driver in the future, but when you’re talking about the content on these types of products it seems like it’s going to be a lot lower than vehicle. How should we think about that?

[Gregg Sherrill:]

We said all along we’ll continue to do that. Any of these that we refer to as adjacent markets we’ll evaluate on a business case basis. Obviously you’ve just named two that are completely different from one another. We are certainly looking at the marine market, but we’ve not made any commitments there yet one way or the other. We’ve done much less work on the lawn mower market at this point in time. But again, we’ll just evaluate those on a business-by-business basis. It is fundamentally the same type of technology. It is scalable in either direction. But we have to make sure their the right markets for us, the right business that we can take advantage of the economies of scale moving back into our components areas to efficiently address those markets. The two that you mentioned, one of them is under study and one is really not at this point. Again, we will stay apprised of all that, including stationary applications as well. It doesn’t have to be mobile. There are a lot of stationary applications for, say, diesel engines out there.

[Rich Kwas:]

Okay. Very helpful. Thank you.

[Operator:]

Your next question comes from Tony [Vetrino] – Federated Investors.

[Tony [Vetrino]:]

Thank you. How are you doing? Just a quick clarification on the China sales. Do all those stay in the Chinese market or do any of those get sent back to Europe or the US?

[Gregg Sherrill:]

I think it’s virtually all domestic consumption.

[Tony [Vetrino]:]

Okay. So then the declines there are indicative of what’s going on with the Chinese market then.

[Gregg Sherrill:]

Yeah. And like we said, the overall market may have been up a little bit, but it was very much, there was no real consistency. I mean, there were some customers went down and some went up. It had a lot to do with where they were introducing new models or not up there. But like we mentioned, in the quarter Volkswagen, GM, Ford, and Brilliance, which happen to be four of our significant customers, were all literally down. And that’s down year over year. Actually, their plants were literally down for a while.

[Tony [Vetrino]:]

And then moving on. You said, I think, if I got the number right, there was $40 million that you brought back from Brazil. Is that correct?

[Gregg Sherrill:]

That’s right.

[Tony [Vetrino]:]

How much cash do you have overseas in other areas and do you expect to bring more of that back? What’s your plan for that?

[Kenneth R. Trammell:]

I see our overseas cash is designed to fund operational needs overseas. So of the $127 million that’s on the balance sheet we’ve probably got, I have to give you rough numbers, a third to a half of it in different locations around the world where it funds just those local needs, like China.

[Tony [Vetrino]:]

So none of that is really excess? Really the only excess would be in Brazil?

[Kenneth R. Trammell:]

Well, no. There is clearly excess cash in a number of different locations around the world, but generally speaking we design that to sustain those locations because we don’t want to use up our NOL assets by bringing cash back. That cash is generally available to fund operations either in the local economies, the local regions, especially like growth in China, or in the event that we need to we can certainly move it back to the US in a fairly expeditious way.

[Tony [Vetrino]:]

And did you have to pay taxes on that $40 million that came back?

[Kenneth R. Trammell:]

Yeah. That was part of the tax charge that we took.

[Tony [Vetrino]:]

Okay.

[Kenneth R. Trammell:]

Because of the NOL I guess there’s sort of a chicken or the egg question. If we had taken the NOL valuation allowance before then the tax charge would have been zero. If we did the dividend first then the tax charge for the NOL was less, which is why we grouped the two of them together for you. But that certainly did use up a piece of the NOL. From a signing perspective we felt it was important to get the cash back out of Brazil. From an exchange rate perspective we did it in the middle of September and I guess that turned out to be just about the best time to bring cash out of Brazil. We were glad to get it back when we did.

[Tony [Vetrino]:]

And then just one last one. Trying to understand the CapEx and the restructuring and your plans for the future. You’ve taken down or will take down four plants. Is that going to affect, I think before you were saying that the CapEx is platform growth in 2010 and beyond. Is this restructuring and the decreasing CapEx, is that going to affect any of your future plans or how will that affect your future plans?

[Kenneth R. Trammell:]

The only way it really affects our future plans is in the equipment itself there will be some freed up equipment that we can actually use to reduce our capital going forward. But we took nothing down from the way of a floor space point of view that was in any sort of a location that we could have used for that anyway. So it’s only a positive.

[Tony [Vetrino]:]

All right. That’s it for me. Thank you.

[Operator:]

At this time I’m showing no further questions. I would like to turn the call back over to your presenters for any closing comments.

[James K. Spangler:]

This concludes our call today. An audio replay of the call will be available on our website, www.tenneco.com. You may also access a recording over the telephone. If you’re located in North America you may reach the playback at 1-800-925-0608. For those of you outside North America the dial in is 1-402-220-3037. The playback will be available in about one hour from now. This call-in information you can find in our news release. If you are an analyst or an investor with additional questions please follow up with Leslie Hunziker, our executive director of investor relations, at 847-482-5042. Financial reporters may contact Jane Ostrander, our executive director of communications, at 847-482-5607. Thank you again for taking part in our conference call and have a good day.

[Operator:]

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