Tsakos Energy Navigation Ltd (TEN) 2002 Q2 法說會逐字稿

Good morning, and thank you for holding. I'd like to welcome you to the Tenneco Automotive second quarter earnings conference call. Your lines have been placed on a listen-only mode until the question and answer session of today's conference call. Today's call is being recorded. If you have any objections, you may disconnect at this time. I'd like to now introduce Mr. Jim Spangler, Vice President of Corporate Communications. Thank you Mr. Spangler, you may begin.

Thank you. Good morning, and welcome to Tenneco Automotive's second quarter earnings conference call. By now you all should have seen our press release and associated financial information. In a minute I'll be turning the call over to Mark Frissora, Tenneco Automotive's Chairman and CEO, and Mark McCollum, our Chief Financial Officer. Mark and Mark will spend about 25 minutes walking you through a detailed explanation of our second quarter performance. They will then take your questions. The conference call operator will explain the process for asking a question at that time.

But please note that we have many different audiences on the call today, analysts, bond and shareholders, bankers and media, and we'll do everything possible to address all your questions. I want to remind you that in addition to reviewing our second 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. At this point, I'll turn the call over to Mark Frissora. Mark?

Thanks Jim, and good morning everyone, and thanks for joining us this morning. Earlier today we announced second quarter 2002 results. Some of the highlights of the results include a 76 percent improvement in the profitability of our North American operations, and our ability to hold SGA&E flat as a percent of sales, and about $130 million of new business awards. However, for us the big story is cash. As you know, Tenneco Automotive is an EBA company, primarily focused on generating cash, which is extremely important as we work to pay down debt.

We made notable headway towards this key objective over the last couple of years, while continuing to invest in those areas of the business that create the greatest value. We're extremely pleased with the most recent progress achieved. You'll remember that when we became a stand-alone company in November of 1999, we had $1,715,000,000 in total debt, and we closed out 2001 with a balance of $1,515,000,000. At June 30th, 2002, our total debt stood at $1,421,000,000, representing a $94 million reduction since year end, and an $86 million decrease from March 31st, 2002. We completed the quarter with $1 million drawn on our revolver, which is $63 million less than the first quarter 2002 balance.

Our ability to pay down debt is being driven by a continued reduction in working capital, and improved earnings performance, as well as two specific transactions, which we'll talk about in a minute that contributed $47 million in the latest three months. As a result of this overall better performance, we significantly beat our bank covenant test ratios in the second quarter. Operationally we're focused on increasing revenues, improving gross margin and maintaining SGA&E as a percent of sales.

Revenues for the second quarter were up slightly as a result of stronger light vehicle and class A production schedules in North America, as well as price increases, and a stronger ride control premium mix in our aftermarket businesses. SGA&E as a percent of sales is unchanged from a year ago. Gross margin, excluding restructuring charges, finished flat in the latest quarter as increases in our North American businesses offset lower volumes and higher manufacturing costs in Europe. And reported EBITDA was 106 million versus $86 million in the 2001 second quarter.

On revenue, Mark McCollum is going to go through the segment results with you in a few minutes, but before he does, let me give you a macro view of our operating environment, and some of the initiatives we're undertaking to improve our position. Let's first turn to original equipment. North American build rates, and the latest SAR numbers we've seen are at a pace of around 16 and a half million vehicles. North American light vehicle production was up about six percent for the quarter, compared with a year ago, and North American class A heavy duty truck production rates were up about 24 percent according to ACT, an industry research group.

Conversely, light vehicle production in Europe is estimated to be down by about three to four percent, compared with the second quarter of 2001, according to the latest DRI-WEFA data. For Tenneco Automotive, North American businesses represented 57 percent of total revenues in the second quarter, while European operations contributed 34 percent to total revenues. For our original equipment businesses, total revenue for the latest three months rose three percent, compared with the second quarter of 2001. In North America, if you strip out pass-through sales, our revenues were plus nine percent, and they exceeded the market growth as a result of our strong position on top selling platforms.

Additionally, our high margin elastomer business is benefiting from the class A production increase. In Europe, our exhaust business was down 13 percent, adjusted for currency and pass-through sales, primarily as a result of lower than expected volumes on several existing and new launch programs, and timing issues between expiring programs and the launch of their successors. Specifically, GM's Opel, Gamma, Vectra and Astra platforms volumes and mix have declined 47 percent versus last year, as these models wind down. The Vectras was replaced by a successor model, which launched late, with lower than anticipated volume. Similarly, Volkswagen's PQ34 and MPB platforms are lower by about 11 percent from last year. The PQ34 is running out, and its successor, the PQ35 is not planned to launch until the end of this year. The point is, that this is a timing issue, and it's not a market share problem.

In the global aftermarket, total revenues increased about two percent, and we saw notable improvements in gross margin and EBITDA. In the North American aftermarket, new customer changeovers for the first half of the year were completed, and we shipped products to new customers representing more than $5 million in annual revenues. According to MEMA data, Tenneco Automotive captured 58 percent of the ride control market in the first quarter of 2002, and we expect to maintain our majority share of that segment this year. Our ride control premium mix continues to grow, and at the end of the second quarter represented 40 percent of total ride control sales, compared with less than 30 percent a year ago.

Price increases of about two percent on average were instituted for exhaust products in the U.S. and Canada, and we continue to benefit from 2001 carryover price increases in both our ride control and exhaust segments. These factors, in addition to heightened manufacturing efficiencies led to important increases in gross margin and EBITDA margin during the quarter. Revenue however increased only about four percent in the North American aftermarket, despite the favorable market trends we've seen over the last several quarters. The overall tough exhaust aftermarket resulting from longer product lifecycles and growing competition, coupled with the effects of a slow May and early June in the ride control business, adversely impacted sales. Regardless, we remain confident.

We have established a lean operating infrastructure, and consequently, as our premium mix continues to track higher, and we continue to benefit from sales to new customers, the profitability of this business should continue to expand. The performance of our European aftermarket operations, on the other hand, reflects significant market pressures that exist across the industry. Our European team is aggressively working to lower its cost of doing business. For example, through Project Genesis, we are reducing our European aftermarket exhaust capacity through facility closings and consolidations, to bring it more in line with market demand.

On the revenue side, we plan to grow share in both ride control and exhaust through new business and new product introductions. In the second quarter, we added $5 million in annualized new European aftermarket business, and the premium mix for ride control products increased three percentage points as a result of a continued roll up of our premium Reflex shock. Our premium mix increased from 28 to 31 percent of the shock business. Additionally we have expanded our coverage across both product segments.

Turning to gross margin, in the second quarter total gross margin adjusted for restructuring was 21.8 percent, unchanged from a year ago. Excluding pass-through sales, and restructuring cost, gross margin for the quarter was 26.3 percent, one of the highest among our peer group. For the first six months of 2002, we improved gross margin adjusted for restructuring by approximately one full percentage point. Right now every manager in the company is focused on improving gross margin. In the first half of the year we raised prices globally in the aftermarket, we continue to increase our ride control premium mix in the North American aftermarket, and have launched our top of the line Reflex product in the European aftermarket to achieve similar results.

Six Sigma and lean initiatives are also contributing to gross margin. We generated $6 million in savings from Six Sigma programs in the second quarter, representing $11 million in savings year to date. We are on track to meet our 2002 goal of $20 million in savings from this program, and we are also working diligently to improve manufacturing and distribution productivity worldwide through our Genesis restructuring plan. We're actually seeing significantly higher margins in most of our business operating units, with the notable exception of our European OE exhaust, and European aftermarket segments.

Our Europe OE exhaust business has struggled to sufficiently flex down their operations in response to lower market volumes. Moreover, several of the new OE platforms we're on have experienced delays and launch problems that further aggravate the problem. Most of these issues relate to our internal operations, therefore corrective actions are within our control. We already have Genesis projects underway to lower our fixed costs, improve efficiency and utilization, and optimize both our OE and aftermarket operations in Europe.

To give you a feel for the breadth of those projects, let me outline them for you. We are closing our Denmark aftermarket exhaust manufacturing facility. We are also consolidating two exhaust manufacturing facilities and one distribution facility in France into one manufacturing location. That's a three for one consolidation. We've also closed our Romanian aftermarket distribution operation. We've ceased exhaust distribution operations in our Madrid, Spain warehouse. We are significantly reducing manufacturing operations in Birmingham, U.K. exhaust location, we've cut that plant in half, and we are also closing our OE ride control engineering center in the U.K. And we're value mapping and rearranging all four of our major manufacturing facilities in Europe.

So that's a total of 12 projects that will in fact impact both the OE aftermarket and exhaust OE, and exhaust, OE and aftermarket exhaust plants and operational performance. And needless to say, these projects are extremely high priority for us. 67 percent of Genesis projects were in Europe this year. In the second quarter we spent $3 million in cash related to Genesis. Globally of eight planned facility closings, four are underway, and two were completed in the second quarter. 15 of 20 facilities slated for remapping and capacity relocation have initiated those actions, and five are complete. Year to date savings from Genesis were $2 million, and we still expect to realize about $11 million from this program in 2002. We anticipate annualized savings of $30 million beginning in 2004.

New business contracts, further productivity improvements, and lean initiatives, and the optimization of global manufacturing capacity and distribution processes should enable us to deliver on our long-term goal of a 24 percent adjusted gross margin, that's adjusted for restructuring. In 2002, in terms of overhead spending, we are matching our goal to keep SGA&E relatively flat at about 12 percent of total revenues. For the second quarter, SGA&E expenses were 11.6 percent of total revenues, equal with the 2001 second quarter level, despite investments in our aftermarket business, including $1 million incremental new customer changeover cost in the North American aftermarket.

Year to date SGA&E was 12.4 percent of total revenues, in line with the 2001 first six month adjusted level. Another key strategy for us is to reduce working capital, generate cash. Our goal for 2002 is to take $50 million out of working capital. After six months, we've already exceeded that goal, generating cash flow from working capital of $59 million in the 2002 first half. For the second quarter, cash flow from working capital was $33 million, a $41 million improvement from a year ago. All key working capital metrics continued to this improvement. Day sales outstanding, excluding factoring declined to 65 days from 69 days last year. Days inventory on hand was 46 days, down from 48 days, and days payable outstanding increased to 69 days from 60 days. Based on recent benchmarking studies, we believe we have a 150 to $200 million opportunity over the next couple of years to further reduce working capital.

Now I want to take a couple of minutes to discuss some commercial highlights before turning the call over to Mark for the detailed financial review. Tenneco Automotive's products were featured on 34 vehicle launches in the 2002 second quarter, valued at a $113 million annually, an 89 percent increase in the number of launches, and an 84 percent increase in the value of the launches from the second quarter of 2001. Looking at our OE position globally, we're investing in advanced technology to prepare for stricter environmental regulations being mandated for 2004 and 2005 models. Advanced technology is a competitive advantage for Tenneco Automotive, and it's an important new business driver for us.

In the 2002 second quarter, we've won 34 new OE business awards valued at approximately $130 million annually. Most noteworthy among those new business awards are Daimler Chrysler's Mercedes business beginning in 2005, that includes our hot end exhaust catalytic converter and leading edge diesel particulate filter products; Ford's F-150 platform, that should add $14 million in incremental revenue annually beginning in 2003 through the, through a five year contract, and this is high margin elastomer business; Nissan's Xterra complete exhaust business launching in 2005, and adding about $9 million in incremental revenues annually; and GM's exhaust business on the Corvette, scheduled to launch in the summer of 2003, and worth more than $9 million in incremental revenues annually over a five year contract. Year to date we've been awarded nearly $300 million in annual new business into 2005.

On the aftermarket side, in North America we added 41 new emission control SKUs to expand the breadth of our Walker and DynoMax brands. And in Europe we added 38 new emission control part numbers, and 112 new ride control part numbers to our product coverage, while at the same time reducing inventory on hand by 17 days versus the prior year. Our safety triangle marketing campaign, geared toward the aftermarket is progressing well. This campaign is designed to educate consumers on the importance of shocks and struts for vehicle stopping, steering and stability, and encourage motorists to have ride control parts inspected and replaced more frequently for safer driving. In the second quarter our salespeople kicked off a 20 city U.S. tour, hosting workshops and ride and drive evaluations to train about 7,000 installers on the benefits of the safety triangle. We're about one-third of the way through the schedule, and to date have received very favorable response to this program.

Finally, we continue to make notable progress on our Six Sigma initiative. To date we have nine Master Black Belt candidates, 38 certified Black Belts, and 86 Green Belts in the certification process globally. We have more than 500 active Six Sigma projects underway worldwide. In 2001, we achieved savings of $19 million from this program, and as I mentioned before, we have a goal this year of taking out an additional $20 million in cost as a result of this initiative. With that I'll turn the call over to Mark McCollum for a more detailed financial review.

Thanks Mark. Before I go into the business segment analysis, I'd like to recap some of the unusual variances that effect comparability between the second quarters of 2001 and 2002. Second quarter 2001 results included a pretax restructuring charge of $10 million, $8 million after tax, or 20 cents per share. Second quarter 2002 results included two items. First, pretax restructuring related expenses for Project Genesis of $2 million, $1 million after tax, or two cents per diluted share. And second, a gain of $11 million pretax, $5 million after tax, or 13 cents per diluted share from the sale of our previously closed Europe manufacturing facility in the U.K.

Now turning to the North American OE business. Our North American OE revenues for the second quarter of 2002 were $391 million, an increase of 12 percent compared with $350 million reported in the second quarter a year earlier. Excluding the impact of pass-through catalytic converter sales, OE revenues were up nine percent. Ride control and elastomer revenues were up 11 percent compared with the prior year, while North American exhaust revenues rose 12 percent. Revenues benefited from overall increased production volumes, particularly on certain General Motors, Ford and Honda platforms, and higher than expected class A truck revenues. Additionally, higher pass-through sales of catalytic converters contributed to the overall improvement. Pass-through catalytic converter sales increased by 23 percent to $90 million.

North American aftermarket revenues for the second quarter 2002 were $148 million, up four percent from the year earlier period. Improved pricing from 2001 price increases, new ride control business, and a higher ride control premium mix more than offset the lower exhaust volumes, driven by declining replacement rates in that segment. Second quarter EBIT for total North American operations increased to $53 million from $20 million in the second quarter a year earlier. better OE volume and aftermarket performance, coupled with better manufacturing cost controls in both segments drove the improvement. The elimination of $3 million of goodwill amortization was also a factor.

Included in 2002 second quarter results were restructuring charges of $1 million. Included in 2001 second quarter results were restructuring charges of $10 million. In Europe, we reported second quarter 2002 OE revenues of $231 million, an 11 percent decrease compared with the $259 million reported a year ago. Higher currency exchange rates benefited total OE revenues by $16 million. However pass-through catalytic converter sales at $57 million were 30 percent lower than last year. Excluding pass-through sales and currency, OE exhaust revenues were down 13 percent. While on average the industry was down four percent, as Mark explained earlier, volumes on many of our larger platforms were lower than anticipated, due to timing issues between several expiring programs, and the launch of their successors.

Ride control revenues were up four percent, due to a $4 million favorable currency impact. Excluding currency, ride control revenues fell four percent, in line with the market. Second quarter European aftermarket revenue was $90 million, a two percent increase from the $88 million reported a year ago. A $7 million positive currency trend is reflected in the increase. Excluding currency, revenues were down six percent. Ride control aftermarket revenues were flat excluding currency, while exhaust revenues were down primarily as a result of the market decline, due to the now standard use of stainless steel by OEMs.

Total European EBIT was $11 million for the quarter, compared with $22 million reported in the second quarter of 2001. Earnings were impacted by lower OE and aftermarket volumes, lower precious metals prices, which caused a decrease in the markup for pass-through sales, OE launch delays and costly startup issues for some exhaust platforms, a $1 million increase in reserves for recently identified warranty issues, and a $1 million restructuring charge for Genesis. All of these issues more than offset the gain on the sale of our York facility, which contributed $11 million to European EBIT. Currency was not a significant EBIT driver, because the positive impact of the strengthening euro was offset by negative currency movements relating to our intercompany supply chain activity between South Africa and Germany.

Our South American operations reported revenues of $28 million during the second quarter of 2002, compared with $37 million reported in the year earlier quarter, due to significant currency devaluation in both Brazil and Argentina. Second quarter revenues for the company's Australian operations rose 12 percent to $31million. Revenues were driven by a favorable currency translation, and strong market demand leading up to new model releases by Ford, General Motors and Toyota, that are scheduled for the third quarter of 2002. And finally our Asian operations reported revenues of $29 million during the second quarter of 2002, up 40 percent from the year earlier period as a result of new business and increased volumes in our China exhaust operation.

EBIT for the rest of the world, which includes South America, Australia and Asia combined, was $7 million, compared with $5 million in the prior year. Improved operating performance in South America, and strong OE demand in Australia more than offset the impact of the labor dispute at our Walker, Australia facility in late April. For the company in total, currency favorably impacted our year over year revenue comparisons by $17 million. The currency impact on EBIT was minimal. Depreciation and amortization was $35 million for the quarter, compared with $39 million in the prior year. The four million decline was related to eliminating goodwill amortization.

Interest expense for the second quarter of 2002 was $36 million. This was down $7 million compared with a year earlier as a result of both lower interest rates and lower average debt levels. We had a net tax expense of $16 million for the second quarter, versus an expense of $1 million last year. Our effective tax rate was 44 percent for the quarter. Cash taxes were $7 million outflow in the latest three months, compared with an $11 million outflow for last year's second quarter.

Now let's talk about cash and debt. On an overall basis, we completed the quarter with just $1 million drawn on our $450 million revolving line of credit. Including letters of credit issued under this facility, we had $388 million available on the revolver at the end of the quarter. Cash was down $4 million, to $52 million at June 30th. Our consolidated debt level decreased during the quarter by $86 million to $1,421,000,000. The senior term loans were $875 million at June 30th. This year the senior secured debt amortizes by $24 million a quarter. We made one senior debt principal payment of 24 million on April 1st. Because the second quarter ended on a weekend, we'll be making two amortization payments in the third quarter. One we already made on July 1st, and the second will be made on September 30th.

Under our senior credit agreement, we're also required to use the net after tax proceeds from the sale of York facility to pay down senior term loans on a pro rata basis during the third quarter. In addition, we have $10 million due in the fourth quarter for an old Tenneco bond. Cash provided before financing activities for the quarter was $89 million, versus $17 million in the second quarter last year, a $72 million increase in cash flow quarter over quarter. In addition to the increase in income, Mark mentioned earlier that we received $47 million from two specific transactions.

First, we received a $30 million net cash settlement in the quarter from Daimler Chrysler as reimbursement for expenses related to a cancelled platform contract in 2001. $11 million of this settlement is reflected as a reduction in receivables, with the remainder falling into an investing activities on the cash flow statement. Second, we also received $17 million cash from the sale of our previously closed York facility in the U.K. The remainder of the cash flow increase came from the decrease in working capital, which Mark has already taken you though.

Capital spending was $29 million for the second quarter, up $7 million from $22 million a year earlier. On a year to date basis, capital spending was $52 million, compared with $47 million in last year's first six months. For 2002 we still expect capital spending to run between 140 and $150 million. Our worldwide factored receivables were $149 million as of June 30th, compared with $112 million at the end of the 2002 first quarter, and $149 million a year ago. Of the $140 million outstanding this quarter, $85 million was from the U.S. accounts receivable securitization program with Bank One, and the balance from programs with regional institutions in Europe.

The decline in factored receivables from last year's second quarter occurred in the U.S., and primarily was caused by consistently lower overall receivables balances due to the implementation of early payment plans with General Motors and Daimler Chrysler. These plans began in June 2001 with an $8 million impact on accounts receivable in the second quarter of 2001, and have grown to $50 million as of June 30th, 2002. Since March 31, 2002, however these programs have actually declined by $2 million. We are significantly exceeding our bank covenant test ratios through improved performance and debt reduction, giving us additional breathing room in these calculations, which are based on the last 12 months results. At June 30, our leverage ratio was 4.29. It could be no more than 5.75. The fixed charge coverage ratio was 1.28. It must be at least .7. The third covenant, the interest coverage ratio, was 2.14. We needed to maintain this ratio above 1.65.

The interest margins on our revolver borrowings and tranche A of the senior term loans, as well as fees paid on letters of credit, are subject to adjustment based on the leverage ratio. Because this ratio dropped below 4.5 at the end of the second quarter, these rates will drop by 25 basis points starting in the third quarter. Based on $500 million of average borrowings between the term loan A, revolver and letters of credit, this rate decrease should save us about one and a quarter million dollars annually, or about two cents per share. Now I'll turn the call back to Mark Frissora.

Thanks Mark. As we navigate through these uncertain economies, our outlook for the second half of 2002 is cautious. In order to successfully manage the unpredictability of today's volumes, we will continue to work to optimize our cost structure for the long-term by holding the line on spending, and improving our efficiency. Our focus for the balance of 2002 will be to continue to implement our aftermarket strategy of introducing new products and investing in our brands. On the OE side, our objective of being the low cost producer at the highest possible quality levels will be achieved through lean and Six Sigma programs. And finally, we will continue to invest in advanced technology, capitalizing on changing environmental legislation and emerging safety mandates. Let's open up the call for Q&A .

Thank you. At this time if you would like to ask a question, please press star one on your touchtone phone. You'll be announced prior to asking your question. To withdraw your question, you may press star two. Again, to ask a question, please press star one. And the first question today is coming from . You may ask your question, and please state your company name.

Good morning. , Morgan Stanley.

Hi .

Hi. I was wondering if you could give us a little bit more information on the European OE side of the business, and what launch problems you experienced there, and the specific steps you're taking to improve things there?

Sure. I tried to do that in the, in the prepared remarks I guess. We gave you a lot of detail on specific platforms that were in fact expiring, and new platforms that replaced them. And that's one of the issues is the fact that on those platforms that I mentioned to you, that were in fact expiring, those platform's volumes are down on average 40 to 50 percent on a year over year, and two of those, you know, Volkswagen platforms and GM, those are like major platforms for us. High volume levels.

And then they're delaying the launch of the replacement programs, in one case on the, until the fourth quarter, on Volkswagen, and then on the programs that are under the GM management team I guess, those platforms are, the volumes right now are really low, will ramp up in the third quarter, towards the end of the third quarter, and the fourth quarter, but they're a slow ramp up. So that's the volume issue really. One ...

But you had, you had referred to some internal issues that you had full control over, and that's what I was referring to.

Yes. Those - well, OK on the internal issues that we've had on the launches, we're not flexing down on volume in Europe the way we should. In other words in the U.S. we flex down very quickly, you know, I can take, we can take, you know, maybe ten percent of our hourly workforce out really very quickly, and Europe's a slower process, and we didn't anticipate some of these launches the way we should have maybe, early on in the year, in the second quarter. So we're flexing now, we'll be, you know, we have a plan right now to take out hundreds of people, you know, about 300 people out of our hourly workforce by year end.

And it's kind of slow as you go, as you know, you work with the Worker Council unions there, but those people are coming out and once we do, you know, you save anywhere from 12 to $15 million a year just in the OE emission control business unit by taking out those 300 people. So that's essentially, if you will, what the internal operation problem was. We didn't flex down quickly enough in an anticipation of these programs that were slowing down. And we should have I think, I mean, you know, in hindsight, be honest with you, I mean, I think we should have been able to do that. So we took our eye off the ball a little bit on flexing down in the labor piece of our operations.

So if you, if you take out the gain, European EBIT was 11 million, taking out the gain, would you say that the European EBITs in the OE was negative in the quarter? And therefore we should be seeing, if you have this internal coordination, European EBIT on the OE side improve significantly in the second half of the year?

Yes. The answer to that question is yes, and you're right on your assessment. And the, there's two pieces, if you will, to the European, you know, fix it plan. One is to flex down on volume, and number two is Genesis. So, you know, I took liberties to go through Genesis with you in a lot of detail so you understood the magnitude of the changes there. It will significantly reduce our cost structure. So the Genesis coupled with the flexing down on volume will return to more normal operating margins that we normally experience in that business. And then the last thing, which I really failed to mention is the volume, the volume should start returning to more normalized levels by the fourth quarter.

And what would be more normalized EBIT margins for that business?

EBIT I don't know, are we allowed to say what the EBIT margins are?

We don't report that.

We don't typically report it.

I don't report it because ...

So I mean, just say an increase of, you know, around probably, you know, four or five percent EBIT margin. You know, I mean the increase should be in that neighborhood.

I do not, as we look at it ...

As a the percent.

Yes, as we look at it , you know, there were, there might have been a couple things in last year's numbers that were one-time issue benefits. We had some pricing things that we were able to get from the customer but, you know, normal EBIT for the quarter off of then, you know, significantly higher, ten to $15 million higher than what we experienced this quarter.

Was the European aftermarket a positive contributor on the EBIT this quarter?

Yes, slightly. Slightly.

Yes.

OK. And question on the amortization. Do you feel that given your, you know, working capital progress and, you know, earnings that you're projecting, do you feel like you can make the amortization, your 100 million amortization this year?

Yes. I mean, you know, obviously I hope that you get good at the sense from the, from the comments that we felt like the cash flow this quarter was a big win and that, you know, by pulling the revolver down on a net debt basis we've gotten very, very close to what we are required to pay down for the full year. And so, you know, we should, but the good news is that most of the working capital progress that we make on an annual basis, and the real cash flow from the business, which happens during the third and the fourth quarter.

Right.

And so we've managed to sort of hold the lid on our working capital during the two quarters when it typically goes up, and actually pulled them down this quarter. Got the benefit from two transactions and now as we, you know, sort of wind down the primary selling seasons in the aftermarket globally, we should still continue to see some benefit coming from working capital. So we're very optimistic about what's going to happen this year.

OK, thank you.

Thank you.

Thank you. , you may ask your question, and please state your company name.

Morning. UBS Warburg.

Morning .

Question for you on the cash flows Mark?

Yes.

Net debt went down by 82 million in the quarter. Did I hear you right that factoring was 149 up from 112?

It was 140.

140.

Up from 112 at the end of the first quarter.

OK.

It was 149 a year ago.

OK. And then asset sales contributed, the plant was 17 million?

17 million, that's right.

So if I take the 82 minus, you know, 28 for factoring, and then the 30 for Kinetic, and then 17 for asset sales, real kind of operating cash flow was more like seven, right? Am I doing this right?

Say that again? Go through it again

Well, you have $82 million in net debt reduction, right?

Right.

But factoring went up by about 28 million.

Yes, in the quarter.

OK, and then ...

It also went up last year in the same period too, let's see, go back through.

Yes, but just from the first quarter, if you, if you look at factoring plus ...

Including year over year, or quarter over quarter, what's the time frame you want to look at?

Just quarter to quarter. You take the 82 million in the quarter, but really 28 of that was factoring so that leaves you 54.

Yes ...

You know year over year, the way our cash flows swing, a better more accurate description would be really year over year because of the way our cash flows swing. I mean you could look at quarter to quarter and that's great, but, you know, a more accurate assessment would be year over year given the way our business swings on seasonality.

OK. I'll work through with that, work that ...

Yes.

... through that with you later.

... but last year in the second quarter of 2001 we got a $10 million benefit from factoring.

OK.

It typically goes up in second quarter because our receivables balances go up in the second quarter, and then it will come down toward the end of the year.

OK. Your, Mark your payables went up significantly in this quarter, and they didn't go up the same quarter last year. Was there any, you're just stretching the trade out, or is there any other, something else there?

Well we've been changing terms ...

Yes.

...because Europe, we've done a lot of work this year. Last year on, really in the second quarter the big benefit came in the third quarter, was changing terms for North American trade, and this year we've been working on Europe to a larger extent to try to get the terms changed there. So that's giving us a pretty good benefit.

OK. You gave a working capital outlook for the next two years. Could you narrow that down for maybe the second half of the year?

Well, you know, I don't know that I want to be very specific. I think we have said that internally, you know, the way that we had tried to challenge ourselves as a management team, and the way that we've laid out specific projects, or to go get, we've targeted to try to get $100 million out of working capital this year. I mean, that's been our stretch goal internally. And so, you know, we, you know, we're continuing to have that in our sights, and just because we cross the $50 million number that we, I think, had talked about externally doesn't mean that we're stopping.

OK. I mean, the second half is normally much stronger from a working capital standpoint. I just, there wasn't any pull ahead in your mind?

No.

OK.

No, I mean obviously, you know, part of the working capital benefit, $11 million came from the settlement of the Chrysler issue. Of the $30 million that we collected, $11 million was in that, in that number. And we knew that, that was a part of the plan to settle that out.

OK.

So, you know, again we still think that we have a lot of benefit coming.

Were there any accelerated receivables from the OE customers in the quarter, relative to the first quarter?

No.

That was, actually a $2 million ...

... yes, the ...

... bad guy to us in the quarter. We drawn down two million less than we were in the ...

Right. Yes. So the General Motors and Chrysler, that accelerated payment program actually went down $2 million dollars.

OK. And last question, you, have you thought any more about possible sale-leaseback transactions?

We continue to analyze it, obviously given the changes that are going to be happening with our overall cost of capital, you know, we continue to look at it from an incremental borrowing cost standpoint. And it's, we're going to be opportunistic, but it's got to make sense relative to what we're currently paying. And, you know, given where our bonds are trading today and some other things, we have been, we sort of waited to see, you know, what changes the market might make.

Your stock seem, certainly seems to be bucking the trends, so. Maybe that'll work for you eventually.

We hope so.

Hopefully.

Thanks guys.

Thank you.

Our next question comes from . You may ask your question, and please state your company name.

It's Salomon Smith Barney. A few ...

Hi .

Hi. A few questions. One is, on new business you threw out a lot of numbers. I guess one, the way I wanted to see if I could get from you was, how much incrementally do you expect to see coming on in '03 and '04?

Well, we gave you a number of 300 million through '05. And ...

Right. And I guess the question is how does that annualize?

... frankly, you know, one of the things, I don't, I don't have an annual split here because our, the ability for us to forecast what we will exactly hit in these yearly buckets has weakened because of the OE volatility. The ...

Sure.

... the original equipment manufacturers today are, you know, canceling and delaying programs, the rate of which has decreased lately in the last month or so. But, you know, the first five months of the year it's been pretty difficult for us to gauge. They're consolidating programs where they were going to launch, you know, two different programs, now are consolidating into one. So, that's what I'm saying, I mean, I could sit there and give you a number but it's almost like it's got so much noise in it I, you know, we've been resistant to do it. So, we feel confidant of the $300 million number going forward to 2005 and that's about the best information we can give you at this point.

OK. Is that, I guess the main thing I was trying to get a sense of was how front-ended or back-ended was it? And, I mean, obviously OE volumes are going to bounce all over the place, but ...

Yes, I mean ...

... and that's really what I was trying to get at.

I guess, you know, four and five would be probably where a lot of it comes in, I'd say, you know, 60, 70 percent of it, if I were to give you a rough guess, you know, comes in in four and five.

OK. Yes, that's helpful.

OK.

In terms of restructuring, how much, how much was spent in cash in the second quarter?

$3 million.

And how much, how much do you all expect to spend in the, in the second half?

I think about another ...

Probably another 10 to ...

Yes, I'd say 10 million. No more than that.

OK. And on the aftermarket you quoted a MEMA figure for 58 percent ...

Right.

... ride control share.

Right.

Do you have a similar number for exhaust?

I got Dave Gabriel in here with us, in the room. He's the General Manager for the North American Aftermarket. Dave, could you answer that?

Yes, first quarter '02 exhaust number was 32.4, and that was on a quarter over quarter, quarter basis. We were 31.9 in first quarter '01, 32.4 in the first quarter '02.

OK. Great, thank you.

Thank you.

. You may ask your question, and please state your company name.

, JP Morgan. Hello everyone.

Hi .

A follow-up to an earlier question, and I guess, what I gleaned from your answer on the European, I guess, they're not really extraordinary cost but it sounded as though European EBIT would be 10 to $15 million higher, would have been 10 to $15 million higher in the June quarter if it were not for these launch and startup costs?

That's correct.

Earlier in the presentation you mentioned that the premium mix in Europe was 30 percent of total ride control sales.

Well it's gone from 28 to 31 percent if you look at year over year comparisons on the ride control side, yes.

So you're at 31 there, it sounds like you're at, the premium mix in North America is 40 percent plus?

That's correct, it's 40, yes.

Is there any reason why you couldn't, I mean, I know that you're just in the middle of repositioning your ride control business in Europe, and I'm curious what the target is in terms of the premium mix and ...

Well our, yes, I'll give you some technicolor on that . It used to be our premium mix in Europe was 47 percent. So, you know, our goal was to get it back up over 40. Now we just launched Reflex but we didn't launch it, what we're doing right now is basically replacing some of the SensaTrac line with Reflex, so this is, this is basically a slow migration of the Reflex product line in to the customers. We actually formally launched it with advertising and promotion activity in the third quarter.

So in Europe we have yet to see on the ride control side, you know, full implementation of Reflex. It'll be probably the next three quarters to the next four quarters that we will see what the premium mix essentially will rise to. But yes, I mean the answer to your question, yes, the premium mix should go up to the same levels as North America and, you know, our goal is to hit at least those levels going forward into next year.

I know it's a complicated equation, you've got volume changes as you go, but what kind of EBITDA impact would that be if you got say, if you boosted that premium mix from 30 percent to 40 percent?

We don't report our operating results that way, so, you know, we consolidate obviously OE and aftermarket in Europe, so I, you know, can't tell you that. But I can tell you that I guess the improvement in profitability, if you look at what historically happened in North American aftermarket, you know, where they've gone, you know, and gone to historic highs, we can do the same thing in Europe and our plan is to do that. So it's going to be significant and it's, you know, you know, I guess the way we look at it is, you know, we're at X level today, you know, if we got to a 40 percent premium mix, my guess is it would be worth at least $30 million probably in EBITDA, at a minimum 30 to 40 million and that's a rough guesstimate of an improvement in EBITDA in the aftermarket, after it's fully implemented.

From our perspective, the biggest and most immediate impact that we think is going to be on earnings is going to come from Project Genesis and the implementation there. I mean, that's getting their capacity sized for the market as it exists today, is where the biggest bang for the buck is going to come. And the growth in the premium mix will also help, definitely, but it's going to, we're trying to work both ends to the middle and Genesis probably is going to have a more immediate impact.

How long would it take for that, the repositioning in Europe to take place and ...

You talking about on the Genesis line ...

Well, actually. First I was focused on the 30 to 40 million of incremental EBITDA from picking up ten points of premium mix.

Well I would, I would say that you'd move it from like the third quarter of next year going forward from that third quarter, you'd have that kind of annualized improvement in margin. OK? Because it typically takes us, you know, like it took us here a full year, year and a half into the execution before you start reaping the rewards of it.

You said you were at 47 percent premium mix at one point ...

In Europe we were at 47 percent, just as recently as like, I think four years ago, in '99, three years ago.

Yes. Has anything changed in the marketplace that would limit the, getting back to those kinds of numbers?

Just our support of marketing dollars and investment into brands and new products, I mean, basically it dwindled because we had very little support. If you went and talked to our customers, that's what they'd tell you. I mean, you know, it's basically coming up with the right product and the right materials and then promoting those products through your customers on a regular basis, and it ends up that coupled with the training that we typically do of the installers, so they sell up to the new product, that's the ingredients for success.

The same issue exists in Europe as has existed in North America too, with the car part. That we saw a bubble happening in the sweet spot, you know, for that area in the five to ten year category where people buy premium products, and you had a lot of cars moving into the older category where they tended to drift toward private brands. And we expect the same thing to happen in Europe as is happening in North America, as the car part shifts in the next two years, back into that sweet spot, we think the demand for premium products is going to go up.

Now the other thing in Europe that's encouraging is the block exemption, and I don't know how familiar you are with that, but that's going to release a tremendous aftermarket opportunity for us, because of our strength in the warehouse distributor segment in Europe. And we had meetings with aftermarket CEOs, customers, WDs, as well as some national retailers about two weeks ago. We hosted a meeting, and we have a whole strategy to take advantage of that, and that's a big growth opportunity we think.

I'm sorry. What is the block exemption?

I've got Hari Nair here with me as well, who is in town. He's Managing Director of Europe. Hari, you want to talk a little bit about the block exemption?

Yes. Thanks Mark. Block exemption in fact, what we're talking about is the repeal of the block exemption, which for various historical and political reasons has existed in Europe, that essentially protects the auto OEM distribution channel from what some might call fair and open competition. And as the block exemption gets repealed, which is happening in the EU parliament as we speak, what in effect happens is the OE distribution chain throughout Europe is now open to sell multiple brands, franchise alternate vehicles as well as service, set up independent service centers that are not restricted to the OEM channel of product distribution. So consequently independent aftermarket suppliers like us can access this new channel, which has heretofore been restricted somewhat to the OE controlled distribution. So ...

It's called OE service business ...

The OEM.

... and currently the total OE service market share in Europe is what?

Is as high as 60 percent in Germany, and on average is somewhere between 30 and 40 percent.

In the U.S. it's only about two percent.

Right.

So to give you a frame of reference, it's a huge piece of the aftermarket in Europe that is now going to be open if you will, in terms of almost being deregulated, you know, instead of having to buy the parts through only the OE original equipment manufacturer, the dealerships can now buy parts, and consumers can make choices on parts that are through warehouse distributor channels. OK?

Yes. So the beneficiaries of this would be manufacturers that have large aftermarket shares, and lower OE shares?

That's correct.

And good brands.

And good brands. That's correct. Strong brands.

OK. And I ...

Strong distribution system, and that's our strength, is warehouse distributor networks. So that's when you look at our market share, the aftermarket, that's where we're dominant.

And that, the timing on that is, the ...

The legislation is, it's been delayed quite a few times, and it's currently in its final stages. It's predicted that by November this year the repeal will be in effect. Obviously the full implementation will take, you know, one to three years, but it's not going to be overnight, that's for sure.

OK. And Project Genesis, I heard cost saves from that, you expect it to be 30 million this year?

No, no, no. 30 million once fully implemented on an ongoing basis. We won't be fully implemented on this phase one of Genesis until I believe the second quarter of next year?

OK. And then, and then one last question. It sounded as though you're going to be freeing up a lot of capacity in Europe, and I'm curious if you have any more rabbits up your sleeve, like you, like you had at York? If you've got another asset sale or two that might move the, move the needle.

We're always working on asset sales. And yes, we are going to be freeing up assets and, you know, that's something we continuously look at, and if we, you know, if we got a buyer for something at a fair price, we're willing to sell it. So, you know, I don't have any, you know, rabbits up our sleeves, but yes, we have the opportunity obviously to take advantage of assets that are, that need to be redeployed somehow.

The York, the York facility was an unusual situation. We actually had closed the plant and then had been looking out there to shop it for a while, but the guys that were working on this transaction very creatively were able to work with the, work with the local government to get the property rezoned as residential. And when it was rezoned as residential, the property value shot significantly up. So it was, it was a great win, but, you know, it was, so it was the kind of thing that we're looking for.

OK. Well in terms of the capacity that will be idled, you know, what, is there any way to quantify how much, you know, what's the book, what the book value of the idled capacity is? Just to give us some, something to work with?

Can't do that for you right now.

OK. Thank you very much guys.

Thank you.

As a reminder, if you would like to ask a question, please press star one. Again, if you'd like to ask a question, please press star one. And our next question comes from . You may ask your question, and sir please state your company name.

Hi. Actually it's from Robert Baird.

Hi.

Good morning. Just a couple of quick questions for you, a lot of them have already been addressed. One, could you just talk about steel prices, and what you've seen there, and any impact that's had on you?

Well we've seen our steel prices go up. I mean, at least attempted to go up. For us steel prices, most of our contracts are indexed so that we're able to get, if you will, relief from the OEMs. On the exhaust side of our business, 65 percent of our material cost is in fact steel, on average. So what'll typically happen, and historically this is the way it's always worked. If I have an increase of a dollar on steel, we'll get maybe, you know, 70 percent on that dollar effectively from our customers.

Now a lot of our steel is not going up as well, we have contracts in place on, for example, 409 stainless, which is the primary steel that's used in the exhaust system, and those contracts last for at least another year and a half I know. And that contract pricing allows us to lock in and keep our steel pricing constant. So on a good piece of our steel pricing, on our overall, as an overall commodity, we are locked in on current contracts.

OK. And what portion of your steel is locked in on contracts versus ...

Probably about, I mean, again it'll be a rough, I don't, I don't have the numbers in front of me here, but I'd guess 70 percent of our, of our total pricing on all metals that we buy is probably locked in through pricing right now roughly. I'd have to, I'd have to get back to you to fine tune that, you know, but I'm probably directionally accurate.

OK. Secondly, on debt reduction you've addressed this, that year to date reduction was just over 90 million, and in the past I think you've said there was 100 million or so due. What kind of upside do you think there is to this 100 million number for the second half? I mean you would, how much debt do you anticipate paying off now?

Well in the second half we have due on an absolute basis about $85 million. We've got three payments to make on the senior term loans, 24 million a quarter, and we had two this quarter. And then there's a $10 million bond that's due. So that's, so that we know about, then also the $17 million, I don't know what the after tax number is exactly, but it's probably about ten roughly, we're going to have pay on a pro rata basis to the senior lenders for the York's facility sale. So ...

OK.

... you know, that will have, you know, obviously our objective is to cover all that debt reduction through free cash flow. And the revolver, you know, will be a part of that swing. So that's what's actually due to the banks, but obviously part of the reduction this quarter was due to the pull down of the revolver.

Right.

So the idea is to try to make all those payments, and satisfy those through free cash. OK?

OK. And those numbers are just for the second half? The 85 million?

That's just for the second half. $85 million in the second half.

OK. OK. And then lastly here, on capital expenditures it's been 50 million to date, and you give guidance for 140 to 150 million. What's the split of that remaining 90 to 100 million between Q3 and Q4? Is that pretty evenly split?

We typically spend a higher percentage of our capital in the fourth quarter. Just because of the timing of platforms and things of that nature. But right now, as you notice, capital is tracking fairly close to last year. I think this quarter will see some incremental expenses over last year, based on some new OE exhaust business in North America, which we've picked up that we have, we're working pretty hard to be ready to launch early next year. But, you know, the overall trends for the fourth quarter should be pretty close to last year.

OK. Thanks.

Thank you.

. You may ask your question, and please state your company name.

Yes, still good morning. Couple things. Let me just table the thoughts, and then respond to them as you see fit. One is, if you could give us an update on sort of where you think you are on market share, and particularly in the context of an "Auto News" article a couple days ago that I think might have sold you a little bit light on, as it pertains to , because I know you've got some other Chrysler business that they didn't make reference to. So one is market share update. Two is there's a small warranty cost issue in the quarter, I'd like to know a little bit more about that. Three or four, or whatever my number is here, I think I've been using the cash restructuring charge or cost for you guys, it's probably too high for '02, you mentioned ten million for second half, three million in 2Q. I don't know what the 1Q, at least of the top of my head, 1Q restructuring number was?

And last sort of question and/or comment is, you talked about, you know, possibly changing payables terms in Europe, and the question/comment is, you know, are you, are you reasonably up to speed in terms of the cultural environment there? We've seen other issuers kind of blow themselves up, at least temporarily, by, you know, stretching the trade out a little bit in Europe, and I don't know how well aware of that situation you are but, you know, want to get a sense from you that you're comfortable with their cultural environment there in terms of, you know, pushing the trade a little bit harder. And, those are my questions.

OK. Well, I guess, you know -- I'll answer one of them, and I'll let Mark tackle the others.

In terms of the warranty issue, you know, we added $1 million to our warranty reserve. We reserved that amount to cover potential warranty issues, which we're currently addressing with a customer. And the issue is not safety related. And, you know, on any kind of discussion we have with the customer -- we have our standard confidentiality agreements in place, so we typically don't talk about that. So, again, all I can tell you is if it's not a safety related issue, it is a potential warranty issue. OK? And that's about all I can say on that particular issue.

Mark, let me ask you a question on that. Is the reserve, at this point -- do you deem that reserve to be sufficient relative to -- I realize it's kind of ...

relates to all know facts at this time, it's sufficient.

OK. Very good.

That's correct. And, obviously, if you can imagine in today's accounting environment, we make sure we're cautious. So, yeah. We feel pretty good about that.

Do you want to talk about the spending?

Go ahead and talk about the spending.

We spent $2 million in the first quarter on Genesis, spent three in the third -- I'm sorry, in the second. And we're anticipating spending 10 the rest of the year that would run through expense, OK?

OK.

So, that's 15 in total. Plus, in our capital expenditure numbers we're quoting, there's about $10 million on Genesis--related in the capital expenditure numbers. So, in total this year, we're spending about $25 million.

Now, Mark, you make reference to the ...

about 30, so maybe about five million less.

OK. And you make reference to that being related to Genesis. Is that also -- the reference we were making, that's cash restructuring. Is that a different animal? My question, basically, is sort of severance-related costs and downsizing.

That's all cash-restructuring costs that we're talking about.

OK. I just wanted to make sure we're talking the same thing.

Right.

OK.

And fortunately, we can't run, obviously, 15 million of it through anything other than expense, so, that's what we're saying that's the other piece. I don't know how you run your model, but ...

I understand.

OK. And then what else ...

The other issue was sort of market share in .

Yeah. In , there's no -- I mean, I feel real comfortable about our market share on exhaust. We, basically -- any stock that we lost in was more than made with the recently awarded Mercedes business. And Daimler Chrysler is trying to develop into a more global supplier, therefore, the game of "piece of business" in you will in North America, that's been know for us for actually about four months now. So, that's not news for us. I know it came out in the Automotive News article -- I think you read recently, probably, right?

Yeah. I knew it wasn't new. I was just kind of throwing you the opportunity to say, "hey, look. We've more than addressed it with new Mercedes business.

Yeah. Yeah. Exactly. Well, thank you. Yeah, that's exactly right. So, we feel pretty good about it.

And we're still announcing -- in terms of the light truck business that Chrysler - we're still very dominant.

Yup. Last thing, and Mark McCollum, I just want to sort of circle up with you. I know, historically, you have said that you will be able to manage the cash needs of the company, including the amortization out of operating cash. That's your goal. Is that still the right thinking for you guys for the year?

Still the goal.

Very good.

And then, you were asking about the payable thing in Europe, and Hari Nair, you want to talk to that?

Well, I think the question or comment was that there's a culture problem in Europe, and we have a good appreciation for what you're talking about. It isn't an easy dimension to manage, but we're doing--we've done a pretty good job so far, and we're very conscious, which is one of the reasons, as Mark McCollum mentioned earlier, we are focusing more heavily now, on changing terms, current and future, rather than just engineering short-term payable adjustments, so yeah, you make a good point, and we're very conscious of that.

Very good, thank you.

Thank you, David.

David , you may ask your question, and please state your company name.

Good morning, David with .

Hey David.

Hi David.

Hi. Two quick questions: Any more clarity on what heavy-duty truck's going to look like in the fourth quarter, and maybe the first quarter of '03?

Right, and you're talking specifically in North America, correct?

That's correct, yes.

You know, I don't expect the heavy-duty volume increase on a year-over-year basis to continue into the fourth quarter. I think that's about all I can tell you, I mean, you know while the volume in the second quarter looked significantly higher, my guess is the year-over-year improvement, in terms of absolute volume numbers, won't hold, so that's--I mean, there will be some modest increases, but not that significant. I don't have a quarter by quarter forecast in front of me here, but we're just assuming in a quarter-to-quarter forecast that that fourth quarter is going to be weak, that all of the sales increase that we are experiencing now is sales into the second and third quarter to get under the wire on some of the new emission standards.

Okay, and then the second question: I know it was just yesterday, but is it too early to comment on how the new California emissions regulations might affect your emissions business long-term?

Well, I mean, long-term it should help it, I mean you know there's no question about that, I guess, so but in terms of the actual implication and our business timing, etc., it's too soon to talk about, but as legislation requirements become stricter, and deadlines become more entrenched, that helps our business. Okay?

Okay, thanks.

Thank you.

At this time, I'm showing no further questions. Gentlemen, I'll turn it back to you for closing statements.

Great. Well, thank you all for listening in on the call. We appreciate your comments and questions, and if you have any further comments or questions Jim Spangler's got a few remarks and phone numbers to give you.

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