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Q4 2014 Earnings Call Transcript

Published: 2 Feb 2015

[Operator:]

Good morning and welcome to Tenneco's Fourth Quarter 2014 Earnings Release Conference Call. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until the question-and-answer segment of today’s call. Now, I would like to turn the call over to Ms. Linae Golla, Executive Director, Investor Relations. Thank you. You may begin.

[Linae Golla:]

Good morning and welcome. This morning, we issued our earnings release and related financial information. On our call today, Gregg Sherrill, Chairman and CEO and Ken Trammell, Chief Financial Officer, will take you through our quarterly and full year results. The slides related to our prepared comments are available on the Investors section of our website at www.tenneco.com. After our comments, we will open up the call for questions. Before we begin, I need to let you know that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP measures in our press release attachment. The earnings release and attachments can also be found on our website. In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. And with that, I will turn the call over to Gregg.

[Gregg Sherrill:]

Thank you, Linae, and good morning everyone. Almost 2 years ago, we launched a vision and strategic direction to drive profitable growth and position Tenneco for long-term success. The cornerstone of this is alignment along our clean air and ride performance product lines. I'm pleased to report that with strong execution on strategies unique to each business, we delivered excellent results in 2014 with record high revenue and earnings and improved profitability. These results also reflect the strength of Tenneco’s balance across geographic regions, end markets, customers and vehicle platforms. This balance is seen in our extensive global manufacturing and engineering footprint which we expanded this year with the new clean air engineering center in Kunshan, China and new plants in Poland, China, the UK and in the US to accommodate growth. We serve diverse end markets. In 2014, our OE light vehicle revenue was 72% of total revenue. The aftermarket was 15% and the OE commercial truck and off-highway business generated 13% of our total revenue. And finally in terms of balance, we have an outstanding global customer base with no more than 15% of revenue from any one customer and our largest platform out of more than 300 generates just 4% of revenue. In summary, we had an outstanding year supported by strong execution, balanced across our operations and strategies that leveraged our growth drivers. And now let’s take a closer look at the results. Turning first to revenue on Slide 5. Total 2014 revenue was a record high $8.4 billion, up 6% year over year, including a 7% increase in OE revenue in spite of severe currency headwinds later in the year. Excluding substrates and $126 million in currency, total revenue grew 8%. Our structural revenue drivers continued to generate growth in both clean air and ride performance. OE light vehicle revenue outpaced global industry production for the year by two percentage points. We had a 16% increase in commercial truck and off-highway revenue despite lower industry production volumes, particularly in off-highway equipment and in the Brazil commercial truck market. And our global aftermarket revenue was up 1%, driven by stronger North and South American sales. I also want to highlight our fourth quarter revenue. Total revenue was $2 billion, including a 4% negative currency impact. Excluding currency, revenue increased 3% to $2.1 billion, driven by higher OE light vehicle and global aftermarket revenue. Turning to our earnings growth on Slide 6. We delivered record high adjusted EBIT in both the fourth quarter and for the full-year, up 7% and 15% respectively, and these results reflect earnings growth in both clean air and ride performance. Overall, our earnings were driven by the strength of our light vehicle business globally where we launched new programs and capitalized on stronger volumes. We also benefited from higher year-over-year commercial truck and off-highway revenue and stronger North American aftermarket sales. Our EBIT improvement also includes benefits from restructuring activities, our product cost leadership initiative and managing operational costs. As I said upfront, our overall goal is to drive profitable growth and the chart on Slide 7 shows excellent progress. With full-year adjusted value-add EBIT margin of 8.9%, we delivered our fifth consecutive year of margin improvement. This reflects a strong fourth-quarter performance with clean air adjusted EBIT margin up 80 basis points to 11% and ride performance improving 60 basis points to 8.9%. Finally, behind our success as a global team of 29,000 employees, we never lose sight of our customer commitments, working every day to continuously improve our operations and deliver high quality cost-effective products. Their results-oriented focus and dedication to the team work are examples of shared values that bond us together and create a winning culture. And now before Ken covers our segment results, I want to formally introduce Brian Kesseler, Tenneco's new Chief Operating Officer. Brian brings outstanding global executive and operational experience from his career with JCI. He joined Tenneco just three weeks ago and hit the ground running having already visited engineering centers and plants around the world. I'm excited to have him in this critical role and look forward to his leadership. And with that, I’ll ask Brian to say just a few words.

[Brian Kesseler:]

Thanks, Gregg for that introduction and good morning. I'm excited to join the Tenneco team and thought I would share just a little bit about my background. Although new to Tenneco, I am not new to the industry and especially the supply-side. My career began with Ford where I worked in assembly operations and from Ford, I joined Johnson Controls [inaudible] I was fortunate to work in all three divisions, serving most recently as President of Power Solutions. From my experiences at Ford and JCI, I gained broad experience in both OE and the aftermarket, hands on operational performance around the world, and a deep understanding of the opportunities and challenges facing our customers and the supply base. As a business leader, my focus has always been on strategy development and deployment to create customer value, drive operational excellence and ensuring that we are developing and investing in our people. One of the many reasons I'm excited to join the Tenneco team is because of the tremendous growth opportunities. It's not often you have a chance to join a company in this position and Tenneco strategies are clearly working. We have an outstanding team and the operations are focused and well run. I plan to bring my experience and fresh perspective to enhance what’s already being done to capture growth, drive better efficiencies and create even greater opportunities for the business. And with that, I'll turn the call over to Ken who for this quarter is going to take you through our operational results.

[Ken Trammell:]

Thanks, Brian. Let me first quickly review the fourth quarter revenue and earnings for clean air and ride performance, beginning on Slide 8. For the fourth quarter, clean air value-add revenue, excluding currency, was 3% higher year-over-year with improvement in all three geographic segments. In North America, clean air value-add revenue, excluding currency, was up slightly in the fourth quarter, primarily driven by our strong platform position on light vehicle programs and higher aftermarket sales. These positive drivers more than offset lower off-highway revenue, which was impacted by the tier 4 interim pre-buy that occurred in fourth quarter 2013, by the ramp-down of the Navistar business and by the timing of the Ford F-150 changeover. Overall, North America clean air had a strong quarter, including revenue growth with most customers. For the Clean Air Europe, South America and India segment, value-add revenue rose 4%, excluding currency. Higher light vehicle and commercial truck and off-highway revenue in Europe and higher light vehicle revenue in South America drove the increase for the region. In the Asia-Pacific clean air segment, we delivered another strong quarter with 5% higher value-add revenue, excluding currency. China drove the results for this segment with higher light vehicle and commercial truck revenue, which more than offset lower revenues in Australia and Thailand versus the year ago. Looking at clean air EBIT on Slide 10. Adjusted EBIT increased 6% to $103 million. The improvement was driven by stronger light vehicle volumes in China, North America and South America and a strong aftermarket performance in North America. As Gregg mentioned, clean air value-add adjusted EBIT margin for the quarter was 11% and that’s an 80 basis point improvement on slightly lower revenue. Now turning to ride performance on Slide 11. Total revenue, excluding currency, increased 4% in the fourth quarter. Revenue in North America was up 3% excluding currency with higher commercial truck and aftermarket revenue more than offsetting slightly lower light vehicle revenue. The Europe, South America and India segment revenue, excluding currency, increased 3% last year. Driving the improvement were higher OE light vehicle revenues in Europe, including growth on several platforms with our Monroe Intelligent Suspension Advanced Technology. South America also contributed to the increase with higher OE light vehicle revenue and stronger aftermarket sales. In the Asia-Pacific ride performance segment, revenues, excluding currency, improved 8% to $64 million, driven mainly by higher light vehicle revenues in China and Thailand. Looking at ride performance EBIT on Slide 13. Total adjusted EBIT rose 6% to $54 million, which includes $5 million in negative currency. The remain positive drivers were stronger light vehicle volumes in China, Europe and South America, higher commercial truck revenue in North America, stronger aftermarket sales in North and South America and the benefit we’re seeing from our global product cost leadership initiative. Similar to the clean air division, the ride performance team did an excellent job, increasing profitability on lower year-over-year revenues. For the quarter, ride performance adjusted EBIT margin improved 60 basis points to 8.9%. During the fourth quarter of 2014, currency was clearly a significant headwind for all companies that do business outside of the US. In a few minutes, Gregg will walk you through our expectations for 2015 revenues. I want to point out that those expectations will exclude the impact of currency. However when you look at Slide 26, you'll see estimates of the impact of various foreign exchange rates. Now let's turn to some financial updates beginning on Slide 14. In the fourth quarter, we recorded $21 million of restructuring and other related costs. The breakdown includes $13 million related to our European cost reduction initiative, $5 million related to organizational changes in the fourth quarter, $2 million in the North America ride performance business and $1 million in Australia. To recap our progress on Slide 15. In the European cost reduction initiative, we recorded $111 million of costs through year end. We saw $9 million in cost savings in the quarter and are on track to reach an annual savings rate of approximately $60 million during 2016. Turning to Slide 16, we recorded pension and postretirement benefit charges in the fourth quarter. We completed the buyout program we told you about during the second quarter earnings call where 60% of the eligible participants received payments from the pension plan assets during the fourth quarter. This program reduced the pension liability by $50 million and resulted in a charge of $21 million. In addition, we recorded a charge of $11 million related to the postretirement medical liability. Turning to Slide 17. In December, we completed the refinancing of our senior secured credit facilities. We extended the maturities of the facilities to 2019, reduced pricing by 75 basis points and increased the size of the overall facility to $1.5 billion, including a $1.2 billion five-year revolving credit facility. Our financial covenants remain unchanged. In addition, we raised $225 million of new 10-year senior unsecured notes priced at 5.375% in order to refinance our 7.75% notes that became callable in 2014. In the quarter, we recorded charges of $13 million related to the refinancing and we expect interest expense during 2015 will be approximately $75 million. Moving on to tax expense on Slide 18. Tax expense in the quarter was $14 million. Before adjustments, our effective tax rate was 31% and 33% year-to-date. The tax rate this quarter benefited from the renewal of the US R&D tax credit in December as well as receiving a high-tech designation at another of our China joint ventures. In 2015, we expect an effective tax rate before adjustments in the range of 33% to 36%. During 2014, we made cash tax payments of $136 million and for 2015 we expect cash tax payments in the range of $150 million to $175 million. Relating to the ongoing antitrust investigation, we incurred $4 million of legal and related costs in the quarter. Turning to debt on Slide 19. At year-end, debt net of cash balances was $844 million. As a result of our earnings growth, the net leverage ratio improved to 1.1 times, essentially at our goal of one times. Finally, let’s go over cash flow on Slide 20. In the fourth quarter, cash from operations was $252 million, in line with our historical positive trend of cash generation. Now this compares to a record high $412 million in fourth quarter 2013, which was a result of significant year-over-year improvements in working capital management versus 2012. Our last three months working capital metrics were strong in the current quarter with days sales outstanding and accounts receivable, excluding factoring, at 55 days, inventory days on-hand at 37 days and days payable outstanding at 73 days. For the full year, cash generated by operations was $341 million. At year-end, working capital as a percent of revenue was 4.8%, better than our seven-year average of 5.3%. Capital investments for the full year were $317 million as we continued to invest for growth. In 2015, we expect capital investments between $300 million and $320 million. In the fourth quarter, we spent $22 million to complete the 400,000 share repurchase authorization for 2014. And with that, I’d like to turn the call back to Gregg to cover the share repurchase program we announced today.

[Gregg Sherrill:]

Thanks, Ken. Before I get into our outlook, I’d like to make a few comments on our announcement this morning on the $350 million share repurchase authorization. As we’ve been saying for a long time, balance sheet strength is a key priority since we operate in the cyclical business. With the improvements we’ve made to our leverage ratio over the past several years as shown on Slide 21, we’re better positioned to expand shareholder returns through a stock repurchase program. You can see on Slide 22 that our priorities for cash flow allocation have not changed. Organic growth opportunities are our number one priority and we will make the capital and working capital investments necessary to capture that growth. Likewise, we will continue to invest in opportunities to streamline our existing operations and improve their cost competitiveness. Maintaining balance sheet strength is also a priority and as we always have, we will evaluate strategic opportunities to improve our existing business through acquisitions. Finally, we will deploy available cash flow to fund shareholder returns through the program we announced today. Under this program, we have flexibility in the timing of repurchases, so the cadence of the program could be affected by potential opportunities and other priority areas. Now turning to our outlook for the first quarter and full year. Let me begin with a review of our structural drivers that are the building blocks of our revenue growth. These include

[Operator:]

[Operator Instructions] The first question today is from Colin Langan with UBS.

[Colin Langan:]

Just to clarify, looking at Slide 26, I mean it looks like given where rates are today there is about a 6% headwind. Is that sort of the right way to think about it for full year? So when we take your guidance ex-FX we should take out around 6% or any color there to make sure I'm interpreting that properly?

[Gregg Sherrill:]

That’s what we were trying to show you there with the currency risk. I mean we just gave you three currencies. We don't know what they’re going to be. Obviously there is a lot of volatility in the currency markets and there could be more to come. But if you assume currently we’re probably closer to the 115 on the euro, you can see two other currencies there, RMB and the real that also affect us but that’d be correct. You take about 6% off at those levels.

[Ken Trammell:]

Colin, I think it’s important to point out, remember roughly 40% of our revenues are US dollar-denominated, 60% are in other currencies. So obviously the currency rates will have a big impact as we move through the year.

[Colin Langan:]

Okay. I just wanted to clarify that. And in the past I don't know if I missed it and didn't hear it that you’ve given a five-year outlook for sales. Has that changed at all or did I miss that section? Is that the same as it has been in the past?

[Gregg Sherrill:]

What we've really done this year is reaffirm that there's no change whatsoever in our longer-term outlook five years and even sort of beyond for structural content growth. What we're not trying to do is give you any kind of revenue guidance that would be based on currency because the volatility or the market cyclicalities that we’ve seen. So minus those, there's no change whatsoever. If you took the same assumptions we used last year and underlying all of that, you’d have the exact same outlook as last year.

[Colin Langan:]

And when we are looking at your assumptions for ‘15, what is the -- any color on what you are thinking about take rates in China are on the commercial vehicle side for the full year? And then any color on where you think ag and construction end markets are going to be that’s based into your outlook?

[Gregg Sherrill:]

I think in China, we are now looking at, I think, roughly a 40% to 45% compliance rate, we’re kind of calling it, okay, with the NS4 regulations for full year. And clearly, your other question, I think related to the off-road markets -- certainly agriculture we’ve seen reports that ag sales could be down 20% next year, other off-road down as much as 10%. So definitely weakening production levels, again for us, being offset by the higher content as we continue to ramp up which will have some favorable comparison to last year on the large diesel engines, in that segment, as well as the launch of that whole middle sized class of diesel engines that had to start meeting the regulations this year.

[Colin Langan:]

Just one last one. Any color on percent of your sales that are in ag and actually now that construction is getting weaker in construction type end markets?

[Ken Trammell:]

Colin, we actually can’t answer the question. When we build aftertreatment, we build for engine not for a particular market. So I couldn’t tell you where our customers sell the ultimate engines. I think the best way for you to take a look at it is assume, obviously Caterpillar, big customer for ours, we do all of their engines that have to meet regulations, more heavily weighted toward the construction and those type off-highway markets. And then we do all of Deere’s tier 4 final and their medium-sized engines and smaller sized engines for the diesel particulate filters and diesel oxidation catalysts, obviously more heavily weighted toward agriculture.

[Colin Langan:]

And Deere is currently of the top three ag names, it is the only one you currently have content on and it’s about 1.5% of sales, is that right?

[Ken Trammell:]

I think in 2013, it was 1.5%, but we haven’t run the numbers up for you yet, but it will be higher this year for 2014.

[Operator:]

Thank you. The next question is from Ravi Shanker with Morgan Stanley.

[Ravi Shanker:]

So I believe the level of emissions content on the light vehicle side is fairly directly correlated to horsepower ratings of the cars. So have you seen any initial uptake in customers maybe taking advantage of $2 gas to spec their cars with more powerful engines which could potentially be a driver [ph] for you?

[Gregg Sherrill:]

Ravi, certainly with lower gas prices the pressure on the cost of operating a larger vehicle, which tends to have a higher horsepower engine -- the pressure is off a little bit and certainly in North America, that's good for light trucks and light trucks are a significant position for us. I mean as I think you guys know we have some content on practically every light truck that’s built in North America. So that’s certainly a benefit for us. I don't know that we've seen an overall trend one way or the other in Europe but certainly lower on the light vehicle side, lower fuel prices are a benefit for us.

[Ravi Shanker:]

And also on the ride control business especially in North America, the margins are pretty healthy this quarter but they were I think the first year on year decline in margins in a while and that segment has been very, very strong this year. Anything going on there, I mean does the momentum keep up into ‘15 and any color you could give us would be great?

[Gregg Sherrill:]

I think the momentum in ride performance is still quite strong and I am not at all concerned about one quarter for comparison. It could easily be in the mix of products that we sell etc. So no, the overall momentum, you can see the overall business, some of these savings are going to come in more strongly in one region versus another, it’s not just a perfect linear line in each region. But I am sitting here feeling very good about the overall ride performance business.

[Operator:]

Thank you. The next question is from Brett Hoselton with KeyBanc.

[Brett Hoselton:]

Good morning, Gregg, Ken, Linae and welcome Brian. First of all, when I look at your 5% to 8% revenue growth expectation in 2015 obviously that’s coming up a little short of your five-year outlook of a CAGR of 10%. What is the primary driver of that? Is it lower production in 2015?

[Gregg Sherrill:]

Yes, it’s lower production. Again that's in the commercial, the off-road stuff that we’re in. We’re still – and I think I also mentioned in my opening remarks, it’s off-road production we mentioned that a moment ago, both the agriculture and all the other markets being down and Brazil is still quite down where we have a strong on-road presence.

[Ken Trammell:]

And light vehicle production is only projected to grow about 3% this year –

[Brett Hoselton:]

And then last year you actually broke out your expectations for commercial truck and off-highway growth. This year I don't see it on the slides here, maybe I am overlooking it but can you kind of give us a sense of what your expectations are for that particular segment?

[Ken Trammell:]

Brett, you’re not overlooking it, it’s -- that business is now a much more mature business than when we started breaking it out in the past. So we do expect to see growth, we talked about it qualitatively on the script discussion. I think Gregg pointed out that we will see content growth. However there is going to be production levels that will be down especially in the off-highway business and continued weakness in South America, another important market for us. If you took out currency impacts and market cyclicality, we would see very strong growth probably north of 20% this year but obviously markets are going to be down and currency is going to be a headwind for us as well. So overall that’s in the numbers that we gave you in the 5% to 8% and as we work through the year, we will see how those markets develop.

[Brett Hoselton:]

As we look at fourth quarter, obviously revenues kind of pulled back a little bit year-over-year but margins expanded. And so what are your expectations in 2015? It seems like European restructuring ought to be a bit of a tailwind. I'm not sure what revenue mix brings to the fold here but how do we think about your margins in 2015? What are the major puts and takes and ultimately do you expect margin expansion?

[Gregg Sherrill:]

Yes. I mean I think we will see another full year of margin expansion as we have, that’s certainly what this entire organization is geared towards. You’re absolutely right. We'll see a tailwind from the cost reduction program on the Europe side that we have in place. We will see continued expansion from the growth in the commercial vehicle markets and it’s just an overall continued heavy operational focus particularly on gross margins and we see no reason that we shouldn't have the clear year-over-year margin expansion. Like I said last year, I'm not sure we can say that will be every single quarter as we have but we continue to drive it on an annual basis. I think there is no question.

[Ken Trammell:]

And Brett, I think you made a good point that the best way to look at revenue is going to be excluding these unusual currently changes that we've seen. And we’re obviously in a period where there is a rapid change as currency rates seem to reset and in the fourth quarter if you look at it without currency, we had pretty good revenue growth and like we’re saying in our estimates for 2015, we expect pretty good revenue growth as well. But obviously we’re going to have to look at it without the impact of currency.

[Operator:]

Thank you. The next question is from Rich Kwas with Wells Fargo Securities.

[Rich Kwas:]

Just following up on Brett's question, on the commercial vehicle side, so do you expect growth ex-FX but including market cyclicality in 2015?

[Ken Trammell:]

Yes. That’s exactly what Gregg said in the script, Rick.

[Rich Kwas:]

So just ex-FX, commercial is going to be up year over year?

[Ken Trammell:]

Right. That’s really we are seeing in spite of still some tough cycle conditions in the markets.

[Rich Kwas:]

And then on Western Europe, there has been some discussion and some moves by some countries over there regarding diesel in terms of deemphasizing it, looking to deemphasize it over time. Gregg, how do you look at that as a risk down the line? I know you back the longer term revenue guidance but what are the puts and takes there in terms of the impact to Tenneco longer term?

[Gregg Sherrill:]

Yes, we kind of know what particularly France has said, we don't see it. Let me just say that at the outset and I don't think IHS sees it either. They’ve got forecast for that split all the way out through the mid 2020s and I won’t even go out that far. There may be a moderating influence on the overall mix but that’s due to Eastern Europe as those volumes ramp up, Western Europe’s mix may change slightly but not very much at all. It’s still staying in the high 40s to around 50%, out through 2020, 2022 type timeframe. And just a very small moderating effect from maybe Eastern Europe. I think it’d be difficult for anyone country just to change fuels or direct towards a different fuel. And the other thing was, don't forget -- the most efficient engine still out there from a fuel economy point of view is the diesel. There's no question about that. And with the way, particularly the European regulations are going on aiming for a particulate matter and particulate matter counts versus just the mass etc. there's going to be some added content going into gasoline engines in the future, particularly in Europe that will even further sort of close the gap if you will between the initial purchase cost of a diesel and a gasoline engine. We will see all of that shakes out but we do not see in the foreseeable future major shifts there at all. Ken, I don’t know if you have anything you want to add to that?

[Ken Trammell:]

Gregg, I think you hit the key points. The fuel economy advantage for diesel with the CO2 regulations in Europe are going to be key and you can’t forget Rich and this is something I think that, that most people don’t focus on, there cannot be a significant shift in the mix of gasoline versus diesel without a lot of investment by the original equipment manufacturers and engine capacity. Those investments aren’t happening, therefore I doubt there's going to be a near-term shift and like Gregg said even over the long-term it appears to be very small.

[Gregg Sherrill:]

And that's another good point. We're not getting any message of any sort from the customer base over there regarding any big shifts in power-train plants.

[Rich Kwas:]

Just quickly back on commercial. I think, Gregg or Ken, you talked about down 20%, ag down 10% and other off-road just seeing forecasts for that. Is that what is embedded in your commercial outlook for the year?

[Ken Trammell:]

What our customers expect to build in 2015 is what’s embedded in our outlook.

[Gregg Sherrill:]

And that’s along the lines of those figures.

[Rich Kwas:]

So we should think of that broadly speaking as a good benchmark for 2015 as we see the macro data?

[Gregg Sherrill:]

That’s right.

[Rich Kwas:]

And then last one on legal costs, $4 million in the quarter, Ken, how should we be factoring that in for the next couple of quarters?

[Ken Trammell:]

So we said several quarters ago that we would see sort of that 3 million to 5 million a quarter for the rest of 2014 and we would see it ramped down just a bit in 2015 and maybe a bit more sort of up and down but we’re still on that 2 million, 3 million, maybe even $4 million range for the first several quarters of 2015 as well.

[Operator:]

Thank you. The next question comes from Joseph Spak with RBC Capital Markets.

[Joseph Spak:]

So just going back to commercial vehicle real quick. I was wondering if you could at least help us out with some of the regional breakout as that business gets larger so we could maybe make some of our own assumptions as to how FX could affect your outlook there?

[Ken Trammell:]

Yes, I think Gregg addressed it in the discussion. We’re going to see roughly from a market standpoint continued weakness in South America. Remember that we’ve got fairly good market share in South America with the customers that we have listed for you. North America, we talked about ag and the construction, the off-highway business, the underlying production levels will be down. However our content will be up. So we will see some increases there. Similar situation in Europe, with the underlying production levels of our customers down but t content up so that overall we’re up. And then I think Gregg addressed China by pointing out that we do expect to see an increase in the enforcement in the compliance level, if you will, in China and our estimate is in that sort of 45 plus -- by 45 maybe 50% compliance level in China.

[Joseph Spak:]

And about how much of that overall business is in euro or euro exposed?

[Ken Trammell:]

It probably roughly reflects our overall level. Remember that roughly 60% of our revenue is other currencies and about 40% is US dollar.

[Joseph Spak:]

And then on the 5 to 8 top line, can you give us -- are you assuming any change in the substrate level? And I know you don't take price risk on any of that but roughly how does the stronger dollar impact the outlook there?

[Ken Trammell:]

No impact from substrates.

[Joseph Spak:]

And then just touch on the buyback a little bit, I know you said funded from free cash flow. Should we expect a bigger ramp up in the free cash flow next year? I know you gave some CapEx guidance but maybe some of the other puts and takes as to how we should think about that for ‘15?

[Ken Trammell:]

Well, certainly as the business grows, there are investments we make in working capital and CapEx but the earnings growth should exceed that. So we should see – as we have seen over the last several years, an increase in our free cash flow.

[Joseph Spak:]

But 2014 came in a little bit on the lower side did it not? So is there anything unusual there or that should reverse out in 2015?

[Ken Trammell:]

Well, remember that we pointed out in the conference call script that what you saw was a significant change in working capital management levels and working capital performance in 2013 and obviously we just couldn't repeat in 2014. I think in 2013 you saw about a 10 day improvement in the net working capital investment with a very small change in 2014. So that's the primary comparison difference that you’re looking at.

[Gregg Sherrill:]

If you look at the overall trend, that clearly 2014 was sort of the exception but the overall [indiscernible] cash.

[Joseph Spak:]

And then last one real quick on the European restructuring, so you said $9 million benefit this quarter. So it is a pretty good annualized run rate. Is it fair to assume there is a euro translation hit in that benefit as well and that you are actually running even ahead of what that would imply?

[Gregg Sherrill:]

Well certainly we translate the euro at the exchange rates for the quarter. So that is a headwind against the number but I don't think that headwind is going to go away next year either.

[Joseph Spak:]

So then is there any change to your $60 million or are you just running better?

[Gregg Sherrill:]

We think we will still be able to achieve 60 million based on where we stand today.

[Operator:]

Thank you. The next question is from Patrick Nolan with Deutsche Bank.

[Patrick Nolan:]

Most of my questions have been answered. I just have a couple of follow-ups. First on the FX, Ken, can you help us understand how that 6% potentially impact on the top line rose through the operating margin line? Do we just apply an operating margin to that? And also can you let us know if there is any transactional benefits in FX that would maybe mitigate that impact on your operating line?

[Ken Trammell:]

So Patrick, we have -- generally around the world we’re fairly well-balanced in where we produce parts and are in the currencies in which we produce parts and sell parts. There are exceptions that have transaction impacts and those are both positive and negative -- net negative in the fourth quarter. Those exceptions are for example we have a number of Eastern European plants primarily in Poland and the Czech Republic that also sell parts and in euros. We have exposure to the South African rand versus the euro and the dollar because of converters -- substrates and converters that are built in South Africa. Certainly in North America there is a exposure to Canadian dollar. We do have a good bit of aftermarket revenue in Canada, obviously the cost for that is in US dollars. So that's a little bit of a headwind and we have some exposure between some parts that we purchase out of Japan and sell in other currencies. So the exchange impact has generally recently been a negative for us as opposed to a positive but overall we’re fairly well hedged and exchange impacts will be relatively small unless there is a extreme volatility in a particular quarter.

[Patrick Nolan:]

I think a good deal your steel buy is either through the programs or hedged out. Is there any exposure there that you could see a benefit from the decline in steel prices?

[Ken Trammell:]

So it’s not really under programs, most of our steel buy is actually done in our particular supply-chain management group. We do have arrangements with our customers where most of the alloy surcharge which is what we’ve seen most of the change in, is indexed. And so we don't see significant changes either up or down from those components of the steel price.

[Operator:]

Thank you. The next question comes from Brian Johnson with Barclays.

[Brian Johnson:]

Just wanted to maybe hit on three topics in a little greater detail than have been broadly touched. First vis-a-vis Europe, you talked about the broader IHS views that sort of maybe there isn't a threat from some political posturing. But maybe getting more detailed – we’ve already had Euro 6 roll in for new platforms. Next fall it’s rolling in for existing platforms. Can you first maybe talk about the CPV impact on a program that goes to Euro 6? Are we seeing it this year or are most of the new programs that have been there already and then what you are seeing in the showrooms and kind of the thinking when it rolls out in the fourth quarter of ‘15 across the broader product -- across existing models?

[Gregg Sherrill:]

Brian, the Euro 6, it’s actually the next version of Euro 6, I can’t remember Euro 6B or Euro 6C that focuses on particulate number, that’s not been implemented yet by the folks in Europe. We are expecting that on the light vehicle side, certainly it’s going to focus on particulate number as opposed to particulate mass. That change is going to be unfavorable for gasoline engines, not yet certain which way all of our customers are going to go. There is a way to do it through the engine, that’s generally more expensive and has a fuel economy penalty. So it could be an engine or a gasoline particulate filter addition in which case we would benefit from that. But I can’t tell you for sure which way everybody is going to go. So right now we’re not really seeing an impact yet from the change in the focus on particulate number.

[Brian Johnson:]

When does the step down in NOX occur for new vehicles?

[Gregg Sherrill:]

Off the top of my head, Brian. I don't recall.

[Ken Trammell:]

You’re talking about on the light vehicle side?

[Brian Johnson:]

Yes, on the light vehicle side.

[Ken Trammell:]

I don’t have that.

[Gregg Sherrill:]

It’s in the regulatory timeline that we show in the presentation that you guys are familiar with. I don't have in front of me and don’t recall what the data is. But that again is not for another couple years here.

[Brian Johnson:]

The Carquest business, can you dimension it at all, give us some color, is it just sort of people could get Monroe shocks where they couldn't get them before and maybe comes at the expense of other retailers or do you think this will actually boost the sales of the Monroe product line?

[Ken Trammell:]

We anticipate it will boost the product line and we’re not giving out specific numbers or anything. But no, we see incremental sales coming through it.

[Brian Johnson:]

Okay and then finally any way to bucket the content growth contribution from larger engines on the commercial side in 2015 versus smaller engines?

[Gregg Sherrill:]

Brian, I am not sure if I understand your question. But the content growth certainly on the medium-sized engines is a little bit less but the volume is higher. Again like I said earlier if we weren’t facing currency and a down market we would see very strong growth, certainly higher than we even saw in 2014. However obviously the markets are going to be down in the off-highway business and currency is going to be a headwind as well.

[Ken Trammell:]

There really and I mentioned it but I want to be clear. There are kind of two buckets in the off-highway that are generating content growth for us this year. One is the continued ramp up on the larger sized diesel engines which launched last year. And that kind of goes throughout the year that ramp up. So it’s a year where we will already see benefits of that here in the first quarter. Then there are new content, new programs launching for this middle class of engines, so 75 to 174 horsepower diesel engines and that one will kind of start here in the first quarter so and ramp throughout the year. So it’s really two buckets there of content for us.

[Operator:]

Thank you. The next question is from Ryan Brinkman with JPMorgan.

[Ryan Brinkman:]

Thanks for taking my call. So I thought I heard when you mentioned the cadence of repurchases but you are still targeting 1 times leverage and so a buyback would be funded by free cash flow but that this could also be affected by the timing of other things you might want to do. So can we delve into what those other things you might want to do could potentially entail? Are you thinking more discretionary internal investments or acquisitions and would those options be funded also just by free cash flow or could they potentially cause you to want to depart from your 1 times leverage target?

[Gregg Sherrill:]

We gave you a list sort of in priority order for our capital allocation if you will. And so sitting here today all I could do is think of examples right -- for example, significant new content platform wins above and beyond what we anticipate would fall under the organic growth category. Obviously that would be a high priority to us and we have to evaluate that against the share buyback program. Strategic opportunity, if one were to come along, we would evaluate that clearly from a shareholder value point of view and whether that would take priority. So that's really only me [ph] is that there could be things that would come along and those other priority areas that would cause us just to change the cadence by whatever amount was required on that program.

[Ken Trammell:]

Ryan, said another way, if you look at the list of the capital allocation priorities that's also in order of shareholder value creation. Obviously things that are greater shareholder value creation would take priority over the buyback and even if those opportunities arose.

[Ryan Brinkman:]

And then I know you are not specifically calling out any longer year commercial revenue growth expectations in percentage change terms only to say that they will grow ex currency. But can you help us in terms of how much your 2015 outlook is expected to be driven by changes in content versus changes in industry production?

[Ken Trammell:]

Industry production is expected to be down, therefore all of the growth that we do expect to see in 2015 is driven by the content addition for those things that Gregg walked you through just a minute ago.

[Ryan Brinkman:]

When you do forecast that growth whatever it is that’s embedded in your total revenue growth forecast, I am curious what you have assumed when it came down to the price of significant -- of diesel fuel being lower year-over-year if that’s a tailwind you think to the commercial fleets relative and how that might help your forecast relative either in 2014 or what you are thinking for ‘15?

[Gregg Sherrill:]

It’s kind of two sides to that coin, right? Clearly those that are users of trucks etc. are seeing a heck of a windfall in prices out there right now. But off-road equipment for example that services the energy industry, the way the energy industry is cut back on capital investment that’s a headwind on that side of thing.

[Ryan Brinkman:]

I'm sorry, how do you think that nets out?

[Gregg Sherrill:]

Well, net-net our content is going to grow in the commercial vehicle segment. I think Ken gave you a number a minute ago, ex all those stuff around 20%, I mean it’s very strong year-over-year this year and it is very tough for us to sit here today and say exactly over the year how the offset from energy capital allocation pullback is going to offset any increase in truck usage. I don't know, I don’t know how to make that call. It’s kind of a volatile situation but we’re very confident. When we look at 2015 and we say 5% to 8% growth, man, I am not apologizing for that at all considering the market cyclicality situation that we’re in, still on the off-road equipment and the Brazil commercial markets. As those things over time even move back to midcycle the opportunity is fabulous, because we’ve launched all that content. So again I'm sitting here feeling really really good about the way we’re lining up for 2015. When it comes to the currency translation that we’ve all been talking about it is very volatile right now. Therefore we’ve given you several exchange rates. I would think that would be fairly useful to you. We’re not trying to forecast exactly what the currency is going to be but we've all seen a very significant shift. It will primarily be translational for Tenneco. We will get through that once these currencies kind of re-settled out, we will simply be growing from there again. And so even the long-term I see has been very very positive, as all these underlying growth drivers just continue to generate content for us.

[Ken Trammell:]

Ryan, listen, another way to look at, we've talked about this several quarters ago -- another way to look at where we are in the cycle for commercial truck and off-highway road, is our utilization of the capacity that we've installed and that’s still running in probably the 50% range. So there is a lot of upside when that cycle turns and heads back in the other direction.

[Ryan Brinkman:]

I am sorry, Gregg, what did you say would grow 20% this year?

[Gregg Sherrill:]

The whole kind of commercial segment.

[Ken Trammell:]

Ex currency and take out the market cycles would be 20% plus in terms of our growth but obviously the market cycle will offset some of that.

[Ryan Brinkman:]

Okay. So when you say you take out the market cycle that essentially means content then? Is that what you mean?

[Gregg Sherrill:]

It means that we are growing content by that much, that's right.

[Operator:]

The next question is Matthew Stover with SIG.

[Matthew Stover:]

Thanks very much for taking my question. Most of mine have been addressed. Just one clarification on the restructuring that was announced, if you could just give some details about what operations are being affected.

[Ken Trammell:]

Most of the charges that we talked about again are in the European cost reduction program. What we said in the script was that $13 million, $14 million of that was related to the European cost reduction program, Matt and that gets just to about $111 million of the costs that we said a couple years ago that we would incur on that. So obviously we made a lot of progress in terms of implementing actions, still the ways to go in terms of getting to the full run rate of savings of 60 million. We also had some restructuring announcements or some restructuring costs that we incurred in the North America primarily related to our ride performance business as we worked on balancing some of our plants there. We had a little bit in Australia and then we also had some in the fourth quarter related to some of the organization changes that we announced.

[Matthew Stover:]

And then one follow-on question for Gregg because in Gregg's answer to a question, he seemed to endorse a long-term growth target of 10% for the whole company and I'm not sure that is what you mean. Are you still holding onto your 10% longer-term growth rate for the OE business and does that have any bearing on how you see growth for the total company?

[Gregg Sherrill:]

The 10% number was a five-year number.

[Matthew Stover:]

For which business?

[Gregg Sherrill:]

For OE, I am sorry –

[Matthew Stover:]

Not for the total company.

[Gregg Sherrill:]

That was for OE. Total OE.

[Operator:]

Thank you. Our final question today is from Richard Hilgert with Morningstar.

[Richard Hilgert:]

Thanks, good morning. On the European side, the market over there for commercial vehicle seems to be very bifurcated at this point. The light commercial side still up 10% year-over-year on a monthly basis. On the medium and heavy truck side, the monthly year-over-year comparisons went down dramatically here at the end of the year. I take it that on the heavier side that has to do with the Euro 6 introduction and there was some pre-buy going on 2013 into 2014 as that rolled out this year. But with the economic situation in Europe being what it is and stimulus package being out there now, with the heavy truck side, do you think that in 2015 given that the volumes for commercial vehicles have been down for so long over there that we will start to see that market pick up on the heavy side again and maybe tail off on the light side going forward? Just wondering if you could give us a little more color on what’s happening in Europe?

[Gregg Sherrill:]

Richard, couple of answers to your question. First of all, I am going to point out that our primary exposure is more on the heavy side and with really a couple of customers, some business with Daimler and some business with Scania. So I think our view to that market is probably somewhat limited from that perspective. I would say though over time there are always going to be quarterly cycles driven by things like regulatory changes but over time we may have to look at the growth in the overall underlying economy in Europe to drive a change in that number. And there is a little bit of recovery expecting next year in Europe but not a lot. End of Q&A

[Operator:]

Thank you. I would now like to turn the call over to speakers for closing comments.

[Linae Golla:]

Thank you. This does conclude our call. An audio replay will be available on our website in about an hour. You can also access a recording of this call by telephone. In North America, you may reach the playback at 866-427-6423, for those outside North America, the number is 203-369-0900. This playback information is also found in our press release. Thank you for joining us today.

[Operator:]

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect at this time.