Tsakos Energy Navigation Ltd (TEN) 2003 Q1 法說會逐字稿

Thank you all for holding. All participants will be able to listen only until the question and answer session of today's conference. This call is being recorded. If you have any objections, you may disconnect at this time. Welcome to the Tenneco Automotive's First Quarter 2003 Earnings Conference Call. I would like to turn the call over now to Mr. Jim Spangler, Vice President of Corporation Communications. Sir, you may begin.

Thank you, Operator. Good morning and welcome to Tenneco Automotive's First 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's Chairman and CEO and Mark A. McCollum, our Chief Financial Officer. Mark and Mark will spend about 30 minutes walking you through a detailed explanation of our first quarter performance. They will then take your questions. The conference call operator will explain the process for asking a question at that time. We'll do everything possible to address all of your questions. Please note that our discussion today will contain information on non-GAAP financial measures, all of which are reconciled with GAAP numbers as shown in our press release and its attachments which are posted on our website. I also want to remind you that in addition to reviewing our first quarter financial results, some of our comments today will contain 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?

Good morning, everyone, and thanks for joining us. This morning I'm going to give you an overview of our first quarter and then Mark A. McCollum will provide details on the financial results. We are very encouraged by our improved operating performance over the latest three months, especially given the weak economy and the raw material pricing pressures impacting the industry. Our consolidated revenues rose 14% on the strength of our global OE business and favorable currency in Europe. In North America, OE revenues were up 9%, outperforming the market's 2% production increase. In Europe, excluding currency, OE revenues were also up 9%, a 1% increase in overall production for the quarter. The progress we've made towards streamlining our cost structure has enabled us to leverage the sales growth into a 15% increase in operating income. This, coupled with lower interest expense, allowed us to deliver an overall improvement to the bottom line, even before considering the tax benefits reported in each of the comparable quarters. For your information, in the first quarter of '02, the benefit was 10 cents. This performance represents our fifth consecutive quarterly improvement in profitability before the impact of the change in accounting for goodwill.

Moreover, a 14% increase in EBITDA and aggressive cash management enabled us to slightly reduce borrowings in a quarter that is typically a heavy cash use period in preparation for second quarter OE launches and the aftermarket spring selling season. As a result, we were able to outperform our covenant commitments in the first quarter of 2003, once again posting test ratios in line with the more stringent mid-2004 requirements. We accomplished these results by navigating through a difficult economic environment and because of our continued progress in growing revenues and reducing costs, each day we become better positioned to manage the uncertainty surrounding 2003's production outlook.

Now let me give you a macro look at our operating environment and some detail on the initiatives we've undertaken to improve our position. Let's first turn to original equipment. North American production and selling rates finished the quarter at a pace of around 16.2 million and 15.8 million vehicles, respectively. As I mentioned, North American light vehicle production was up about 2% for the first quarter of 2003 compared with a year ago and North American Class 8 heavy duty truck production rates were up about 3% according to ACT, an industry research group. Light vehicle production in Europe was up about 1% for the quarter according to DRI Automotive Group. At March 31, 2003, our North American business represented 52% of total revenues, while European operations contributed 37% to total revenues.

In the aftermarket, conditions worldwide continued to be soft due to uncertain economies, falling consumer confidence, and the longer replacement cycle on exhaust products. All of these factors are continuing to contribute to volume declines in the aftermarket. For Tenneco Automotive, on the original equipment side of this business, our worldwide OE revenues for 2003 first quarter rose 20% compared with the first quarter of 2002. In North America, our revenues were up 9% as a result of our continued strong position on top selling platforms like the GM Trailblazer Envoy, the Ford Expedition Navigator and the Honda Accord. Furthermore, our Class 8 Heavy Duty volume was up 7% year over year, considerably better than the industry average.

Total European OE revenues increased 5% adjusted for favorable exchange rates and higher pass-through sales. Again, our position on strong selling platforms supported the increase. On the ride control side, popular platforms like the Volkswagen Transporter, the Audi A6, Citadel, the Ford Fiesta and the PSA Citroen C-3, as well as new product launches with Volkswagen and Volvo, are driving significant sales increase. In our exhaust operation, we're seeing a nice ramp up in production volumes from some platform launches that were postponed beginning in the second quarter of 2002 as well as increased sale of the Audi A3, Mercedes E Class, the Opal Vectra and several Peugeot models.

In the global aftermarket, total revenues declined about 3% as economic weakness worldwide and a shrinking exhaust market continued to adversely impact replacement rates and offset the benefits of strong currencies overseas. In North America, aftermarket revenues declined 15% from a year earlier, primarily as a result of weak economic situations and inclement weather conditions during February and March. For our part, we launched our 2003 safety marketing campaign in the first quarter to raise awareness of the need for regular shock inspections and to support the Monroe brand. We also reduced production schedules in our aftermarket facilities to bring down inventories and we eliminated about 110 positions through selective layoffs and an early retirement program to reduce ongoing labor costs. These initiatives and minimal new customer changeover costs this quarter enabled us to maintain our North American aftermarket EBITDA at prior year levels despite the lower sales volumes. It's important to note that the lower sales volumes, much of which were driven by the bad weather where we had at least five full days taken out of our schedules in the Northeast.

European aftermarket revenues were up 17% as a result of favorable exchange rates and when you exclude currency, revenues fell 4%. The rollout of our Reflex Premium Shock and a 53% increase in catalytic converter sales to the OE service market were more than offset, unfortunately, by the overall exhaust market weakness. On a positive note, our ride control premium mix increased 1.6 percentage points in the European aftermarket and unit sales of ride control premium products rose 5% over the prior year quarter. For consolidated gross margin, we have a goal this year of 22%, up from 21% achieved in 2002. We believe we'll get there through initiatives like Genesis, Six Sigma, lean manufacturing and more effective global supply chain management. For the 2003 first quarter, gross margin was 19.3% as cost savings were more than offset by a less favorable sales mix as the higher margin aftermarket business slipped to 23% of total revenues from 27% in the first quarter of 2002. The good news is that our European OE exhaust business, which experienced some adverse launch timing and related manufacturing inefficiencies beginning in the second quarter last year, continues to enhance its gross margin on a sequential quarterly basis as the volumes come back and manufacturing productivity improves. This marks the third quarter in a row of sequential improvement.

First quarter 2003 gross margin for our European OE exhaust business was up about 5% from the fourth quarter of 2002. This represents the third quarter, as I mentioned before, of improvement. Toward that same goal, our global supply chain management team is undertaking a multitude of projects to offset rising raw material costs. As we told you before, we are working to consolidate our supplier base, renegotiate contracts and source more products from lower cost countries and use alternative materials where appropriate. In the first quarter, we sourced several components such as forged and machine bar parts, cast brackets, stamped flanges and rubber bushings from India and China that should result in significant savings. We also outsource tube mill production from Denmark to Poland that we expect will result in a notable cost reduction. Our global supply chain management strategy was successful in the first quarter and we expect to accrue greater long term benefits from these initiatives as the year progresses.

We also continue to make progress on our Six Sigma initiative, which delivered ongoing expense savings of about $6 million in the first quarter, on page to meet our 2003 goal of $20 million in Six Sigma savings. Finally, let me take a minute to bring you up to date on Project Genesis, our manufacturing and distribution restructuring program. In the first quarter, we generated savings of $6 million, of which $5 million is incremental. As you know, we anticipate completing the majority of the initiatives of Phase I Genesis in the first half of the year and expect to realize total savings of $27 million in 2003 of which $15 million should be incremental. The full benefit of Phase I Genesis is expected to be $30 million annualized beginning in 2004. Additional restructuring activities beyond Phase I Genesis were undertaken during the quarter. As you know, we're always studying our business looking for ways to streamline and improve its efficiency and to upgrade quality. As such, during the quarter we initiated staff reductions, began downsizing one small manufacturing facility, and relocating three sites including a warehouse in Japan and one manufacturing location each in Beijing and Shanghai. Early benefits from these actions resulted in $200,000 in savings in the first quarter. The success of all these programs - - restructuring, Six Sigma, remanufacturing and global supply chain management - - will be instrumental in driving gross margin to target levels.

In looking at SGA&E and in terms of overhead spending in 2003, we have a goal of brining SGA&E in under 12% of revenues. At the beginning of the year, we instituted a hiring freeze. We also restricted travel and we eliminated a 2003 salary increase for the top 700 managers at Tenneco Automotive. We are also capitalizing on opportunities in Europe to consolidate administrative services among two or more facilities. Despite increased promotional spending in the European aftermarket, these actions coupled with a favorable year over year SG&A comparison in the North American aftermarket where we had minimal new customer change over expenses in the 2003 first quarter, supported total SGA&E of 11.6% of sales, a 1.6% point reduction from the similar period last year.

Increasing EBITDA and working capital are key strategies towards generating cash to reduce borrowings. At March 31, 2003, we reduced days sales outstanding to 47 days from 48 days a year ago. We increased days payable outstanding to 75 days from 63 days. Our inventory days on hand, however, increased to 47 days from 45 days a year ago as we built inventories in preparation for OE platform launches and the aftermarket selling season. Given the normal seasonal upswings in working capital, our numbers in the first quarter don't reflect as much progress as we would have liked. However, we still believe we have at least a $150 million opportunity over the next couple of years to reduce our investment in this area. We're especially determined to bring down inventories this year. Our manufacturing team is focused on shrinking inventories by 10 days which would translate into a $75 million cash flow improvement.

Now I want to take a couple of minutes to discuss our sum commercial and operational highlights before turning the call over to Mark A. McCollum. We continue to work diligently with our customers to enhance process quality and service in advanced leading edge technologies. To that end in the first quarter, we launched our computerized electronic suspension technology on Volvo's S60R and V70R models. This technology has substantially more content value than a standard shock absorber. Priced at about $290 per vehicle versus, on average, $40 per vehicle with most of our platforms around the world. We were also recognized for our contribution to four customer successes with the 2002 Toyota Quality Award and a 2003 Pace Honorable Mention for our Lightening Rod Technology. Earlier this month, we received two Ford World Excellence awards, a Silver World Excellence Award for our Gripper product which is the innovative stabilizer bar technology, as well as our standard stabilizer bar bushings and a recognition of achievement award in the consumer driven Six Sigma category. The Silver Award is given to suppliers that stand out in quality, delivery and cost. The consumer driven Six Sigma award recognized supplier black belt projects that had a direct impact on Ford's consumer satisfaction. We received this award for a black belt project involving our catalytic converter technology. Also noteworthy was a new business award from Volkswagen for the full exhaust system on its Sentana passenger car in China which should add about $8 million in annualized revenues beginning in 2004. This will be our largest platform in China and will make our Shanghai plant the number one exhaust supplier in this fast growing market.

Switching to the aftermarket, in North America we added 7 new customers from which we expect to generate $2.5 million in annualized revenues. Of the total, $1 million in initial orders was recognized in the latest first quarter. Our European aftermarket unit signed a deal this month with Quick-Fit, an automotive parts retailer in the U.K. for ride control products. We expect to realize $5 million a year in revenues from ride control products from this new business. In summary, and in the light of difficult market conditions, we thought it was a pretty good quarter for Tenneco Automotive. Now I'll turn the call over to Mark A. 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 special variances that affect comparability between the first quarters of 2002 and 2003. Our first quarter 2002 results included four items - - restructuring expense for Project Genesis of $1 million or one cent per share, cost related to the March, 2002 amendment of our senior debt of $2 million pre-tax, $1 million after-tax, or 3 cents per share, and a $4 million or 10 cents per share tax benefit related to lower than expected costs for withholding taxes. Our first quarter 2003 results included two separate items - - restructuring and related charges of $5 million pre-tax or $2 million after-tax or seven cents per share, and a $3 million or 8 cent per share tax benefit related to the resolution of several tax audit issues. Comparatively, these items favorably impacted our first quarter 2002 results by a net six cents per share and for the first quarter of 2003, special items impacted results by only a penny a share net.

Now let's start the first quarter 2003 business segment analysis with the North American OE business. North American OE revenues for the first quarter 2003 were $373 million, an increase of 9% compared with $341 million reported in the first quarter a year earlier. This compares favorably to a 2% increase in the average industry production rate for the first quarter. Excluding the impact of pass-through catalytic converter sales, our OE revenues were up 12%. Ride control and the last of our revenues were up 16% compared with the prior year. Our North American Exhaust revenues in total rose 7%. Revenues benefited from overall increased production volumes, particularly on our Honda, General Motors, Ford and Heavy Duty Truck platforms. Additionally, 2% higher pass-through catalytic converter sales added to the overall improvement. Pass-through catalytic converter sales were $87 million in the 2003 first quarter.

North American aftermarket revenues for the first quarter 2003 were $108 million, a decline of 15% from the year earlier period but an increase of 23% over the fourth quarter 2002. We're cautiously optimistic that sales in the aftermarket are stabilizing in North America. In addition to general economic weakness, there was an incremental impact of $6 million from opening orders in the 2002 first quarter that adversely affects the year over year comparison. Additionally, in February and March, we lost a number of shipping days during the inclement weather on the East Coast when bay traffic virtually ground to a halt. First quarter EBIT for total North American operations increased to $28 million from $19 million in the first quarter a year earlier. Significantly better OE volumes and manufacturing efficiencies and tighter cost controls in both the OE and aftermarket business units offset the decline in aftermarket volumes. First quarter 2003 results include restructuring and restructuring related expenses of $3 million and included in 2002's first quarter results were non-accruable restructuring expenses of $1 million and $1 million in costs associated with amending our senior credit facility.

In Europe, we reported first quarter 2003 OE revenues of $269 million, 30% higher than the $207 million reported a year ago. Higher currency exchange rates benefited total OE revenues by $43 million. Excluding currency and higher pass-though sales, total European revenues were up 5%. OE exhaust revenues, excluding pass-through sales and currency, were up 1% which is basically in line with industry production levels. Pass-through catalytic converter sales net of currency effects were up 23% to $58 million. Ride control revenues, excluding currency, rose 17%, substantially exceeding the market rate as a result of stronger sales on existing platforms with Volkswagen, Ford and PSA.

First quarter European aftermarket revenues were $76 million, a 17% increase from the $65 million reported a year ago. Excluding currency, however, total revenues were down 4%. Ride control aftermarket revenues excluding currency were up 4% reflecting the continued positive impact of the Reflex introduction. However, this was more than offset by lower exhaust after market revenues which, excluding currency, were down 11%. Higher sales of catalytic converters were not enough to offset the overall exhaust aftermarket decline due to the now standard use of stainless steel by OEMs. In total, Europe lost $1 million of EBIT in the first quarter compared with positive EBIT of $5 million last year. The largest single driver of this decline was higher depreciation expense of $4 million. Before depreciation, EBITDA for Europe in the first quarter of 2003 was $13 million, compared with $15 million in the first quarter of 2002.

Higher promotional spending in the aftermarket related to our safety triangle marketing campaign, lower aftermarket exhaust volumes, and restructuring related costs of $2 million this quarter, exceeded the EBIT benefit from higher OE sales and the partial benefits we're already realizing from our Genesis restructuring program. Currency did not help us at the EBIT line this quarter because the positive impact of the depreciating Euro against the U.S. dollar, was basically offset by quarter over quarter movements in the South African rand against the Euro. As you know, South Africa is a major supply source for exhaust components to our European operations.

With our Genesis program coming to a close, OE volumes basically restored, currency stabilizing and our safety triangle campaign well underway, we're expecting Europe's year over year comparisons to significantly improve in the coming quarters. Finally, to the rest of the world, our South American operations reported revenues of $26 million during the first quarter of 2003, unchanged from the year earlier quarter. Excluding unfavorable currency exchange rate changes, revenues would have increased 27%. First quarter revenues for the company's Australian operations rose 27% to $33 million. Excluding the impact of currency, revenues would have increased 11%. The strength of the OE market coupled with increased per unit revenues on new Ford, GM and Toyota models released during the 2002 third quarter, resulted in stronger first quarter sales in Australia. And finally, our Asian operations reported revenues of $36 million during the first quarter of 2003, 100% increase from the year earlier period as a result of increased OE volumes and higher pass-through sales in our Chinese exhaust operation.

EBIT for the rest of the world, which includes South America, Australia and Asia combined, was up 17% to $4 million. For the company in total, currency favorably impacted our first quarter year over year revenue comparisons by $54 million. Stronger currency in Europe and Australia more than offset the weak South American currencies. However, currency impacted EBIT by only $1 million. Depreciation and amortization was $39 million for the quarter, compared with $34 million in the prior year quarter. The increase was primarily related to the stronger Euro as well as the depreciation on our new plant in Poland. Interest expense for the first quarter 2003 was $31 million. This was down $5 million compared with the year earlier due to lower interest rates and the termination of our three year floating to fixed rate swap agreement that expired on February 4, 2003.

We had a tax benefit of $2 million for the first quarter of 2003 resulting from the resolution of several audit issues. This compares to a benefit of $8 million last year. Included in the prior year was a $4 million benefit from lower than expected costs for repatriating earnings from foreign subsidiaries. Cash taxes were an $11 million outflow in the latest three months compared with a $9 million outflow for last year's first quarter. Now let's talk about cash and debt. Cash on hand was $58 million at March 31st. On an overall basis, we completed the quarter with $141 million drawn on our $450 million revolving line of credit. Including letters of credit issued under this facility, we had $244 million available on the revolver at the end of the quarter. Our total borrowing level decreased during the quarter by $2 million to $1,443,000,000. This is $64 million lower than at March 31, 2002. The senior term loans were $765 million at March 31st. As you may recall, the senior secured debt amortizes by just over $34 million a quarter and we made one senior debt principal amortization payment in the first quarter on March 31st. The company generated cash before financing activities of $10 million in the first quarter of 2003, a decrease of $4 million from the first quarter of 2002. We typically use cash in the first three months of the year in preparation for OE platform launches and seasonal inventory build up in the aftermarket. In light of this and the tenuous near term market outlook we were very proactive during the quarter in managing cash flow to preserve liquidity. In working with our customers and suppliers, we aggressively managed the collection of receivables and the time of accounts payable last quarter to safeguard our position. Our worldwide factored receivables were $122 million at March 31st, 2003, compared with $101 million at the end of the fourth quarter 2002 and $112 million a year ago. Of the $122 million outstanding this quarter, $50 million was from the U.S. accounts receivable securitization program with Bank One and the balance from programs with regional institutions in Europe. In our previous calls, we mentioned that the U.S. program was reduced in size to $50 million as part of its extension to 2 years into January, 2005. We've been able to offset the reduced size of the U.S. program by increasing the size of some of the European factoring programs which have grown to $72 million at March 31, 2003 from $41 million a year ago.

Our accelerated payment programs, where we collect General Motors and Daimler Chrysler receivables early in exchange for discounts that are favorable versus our cost of borrowing, increased $18 million in the first quarter of 2003 to $58 million. Capital spending was $26 million for the first quarter compared with $23 million spent a year earlier, but we still expect to spend about $145 million for all of 2003. As Mark said earlier, we are significantly outperforming our bank covenant test ratios to improve performance and a reduction in borrowings, giving us additional breathing room in these calculations which are based on the last 2 months' results. At March 31st, our leverage ratio was 4.35. It could be no more than 5.75. The fixed charge coverage ratio was 1.31 and it must be at least .8. The third covenant, the interest coverage ratio, was 2.31 and we needed to maintain this ratio above 1.65. It should be noted that our ratios, as of March 31, 2003 are in compliance with the increasingly more restrictive limits required to be maintained under the senior credit agreement all the way out to the second quarter of 2004. Now I'll turn the call back to Mark Frissora.

Okay, thanks, Mark. Industry analysts are projecting a production decrease of about 8% in North America for the second quarter. We're cautiously optimistic that we won't see as dramatic a decline. The visibility that we have, which is about 6 to 8 weeks out, seems to be in line with our planned levels for the second quarter. Through April, we haven't seen a significant drop-off in volume and we believe that's because our platform mix is holding up better than the industry as a whole. In addition, our 65% variable cost structure should help us with standard production downturn as well as any supplier.

In Europe, we are encouraged by the strength of our OE ride control platforms and how they have performed in the first four months of the year. We believe this will continue. On the emission control side, we expect to see both revenues and earning improvement over last year's second quarter which is when we first experienced the volume timing issues of old models winding down while the launch of the replacement models was being delayed. Over the longer term, we expect to benefit from environmental regulations that should drive higher margin hot end exhaust content. We have several new technologies in the product pipeline that address the environmental concerns for light vehicle, diesel and heavy duty trucks that should favorably position us to capitalize on the new mandates.

In the aftermarket, it's a macro issue we're struggling with. Once the economy begins to show signs of recovery, we would expect the positive fundamentals of the aftermarket to stimulate growth. Our biggest opportunity to expand aftermarket sales is to increase the frequency of inspection rates for shops. Globally, the ride control aftermarket is an extremely profitable business and we're working very hard to expand it. As we move into the spring and summer selling seasons, we're focused on strategic marketing and education campaigns targeted towards ride control installers and consumers alike. We're also in the process of developing new ride control products and testing systems that should further support growth. Before closing, I want to assure you that although the automotive market does not currently appear to be as bad as many were predicting, we're not losing our focus on aggressive cost reduction. We will continue to execute our plan for reducing SGA&E, cutting raw material costs, improving quality and optimizing our manufacturing and distribution scope and increasing efficiencies. These are all things we can control. As we move forward, we may capitalize on additional opportunities to fine-tune our operations by closing unprofitable facilities, improving plant process flows and reducing staff to insure our continued profitability and cash flow. With that, we'll open up the call for Q and A. Mike?

Thank you, Sir. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star one on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, you may press star two. Once again, if you would like to ask a question, please press star one on your touchtone phone. Our first question comes from Jeff Skoglund. Mr. Skoglund, please state your company name.

UBS Warburg. Good morning. Hey, can you help me understand what's going on in Europe a little bit more? You've been basically break even for four consecutive quarters on an EBIT basis but you seem to be suggesting, obviously, that the OE business is doing well you have some easy comps coming up in the middle of the year, I believe. But how well - - how much improvement are you seeing in the OE market and how much, I guess on the other side, how much deterioration are you seeing in the aftermarket?

Okay, Jeff, let me - - good question. In terms of the overall European operations, you know there are three business units - - OE ride control, OE exhaust and aftermarket. The OE exhaust is the biggest of those three, roughly around $700 million in sales of the $1.2 billion. These are rough numbers, but in general, the first quarter was a good quarter for us. We hit all of our internal projections, our internal operating plan - - each one of those business units hit or exceeded their AOP, annual operating plan. So there were no surprises for us. The one thing that you should note is that there were $8.5 million of EBIT hits that were extraordinary items. $2.5 million was promo spending increase to support the safety triangle campaign early in the season this year there. $4 million in depreciation due to currency, primarily, and then $2 million in Genesis restructuring charges which is winding down now. So that's $8.5 million on a year over year basis that obviously didn't end up in the income column for European operations. Then the last thing I'll say is the OE emission control business unit is, in fact, this is the third quarter in a row of gross expansion there and we can expect it to continue. And we talked about a significant improvement in operational earnings going forward in Europe. So we're pretty much on track. We'd like it to be more "always" but there were no surprises. It ended up performing exactly where we thought it would be and we feel like there's big opportunity in Europe and if the management team is up to that challenge, it will perform well this year.

Could you put numbers behind the profitability of the OE business versus the aftermarket and how has that changed over the last four quarters? Then, you talked about - - you expect profits to improve in the balance of the year and I was wondering if you can put some numbers on what that is.

You know, I can't put numbers on different business units. We don't report results that way. But I can tell you that in the North American aftermarket, the exhaust business is a duplicate model of what our European exhaust business is. And suffice to say that the actual EBIT margin in North America is double what the emission control business is in Europe. So we think that the margin expansion there on EBIT margin could, in fact, double. And that could occur in a reasonable period of time. You know, I say reasonable period - - within the next four quarters or so. We're hopeful to get those margins up to almost equal levels. So we feel, like I said, pretty good about the emission control business. In the aftermarket, you know, the exhaust aftermarket in Europe is the big drag right now. Ride control is doing fairly well and our mix is improving so we feel bullish on the ride control business, especially with the signing of Quick-Fit which is a huge U.K. based retailer. It's a $5 million piece of shock business that, for us, carries gross margins that are typical in the gross margins of the aftermarket, which are much higher margins than our normal OE business. So that's a boost, if you will, so we're gaining, we feel like we're gaining market share in Europe in the aftermarket. So we feel pretty good about that. So that's about the most - - Mark, I don't know if there's anything else you want to add to that.

I think that's right, and obviously, you know, the currencies continue to be strong. On a quarter over quarter basis, we really didn't see the benefit from stronger currencies there because the rand itself had moved against the Euro quite dramatically, you know, in the quarter over quarter comparison. Those currencies are basically stabilizing now, and so you know, we expect as we move forward that we'll see some more of that currency benefit coming our way.

The other piece I failed to mention, Jeff, was the OE ride control business. Two years in a row of every quarter hitting or beating their plans, so there's been a gradual margin expansion in the OE ride control. What's going to drive the improvement this year is going to be increased volume levels from new platforms they've launched. We expect to have a unit increase this year and next of over 30% in production units in OE ride control Europe. That's rough numbers, but that improvement over the next two years will, in fact, help us on margin expansion. So it's one of the reasons why we have a new plant that we actually opened up there in Poland over a year ago. That plant is now launching up to full volumes and it's really been a plant in OE ride control that has had very little volume in it for the last 12 months. And now the platforms are launching in that plant.

Can you talk - - in the North American aftermarket, can you talk about the month to month trends through the quarter? And then, how is April shaping up?

Well, we can't talk about April. As you know, we don't give guidance. In general, I can tell you that we feel pretty good about the aftermarket and what's happening in the quarter. We think buyings are holding up to the expected levels. I've got Dave Gabriel here in the room. Dave, do you want to comment on that?

Jeff, we topped January - - fairly topped like we had the fourth quarter but the business picked up in February and March. So part of that, obviously, is seasonality, but our numbers were considerable better than the fourth quarter. And so, frankly, we think you know, the market is firming a bit, but we're cautious. So I would tell you that's how the first quarter shaped up.

The other thing that Dave didn't say is that we were encouraged by our performance on profitability. Even with the 15% volume drop, we maintained profit on a year over year basis at exact same profit levels. Last year's first quarter was a great quarter for us in the aftermarket. And the one thing that, you know, I guess if we were to size that volume issue, Dave, do you think it was what - -$8 million of sales in that Northeast quadrant with weather conditions?

Yeah. There's no question, like Mark said, you know, four to five selling days. We had two big storms, both in the East and then in the Southeast, that basically shut down the business. And so we would tell you that on a run rate basis, that clearly, we lost probably $6 million to $8 million in sales in the quarter. And those are sales that don't come back to us because the business came to a screeching halt. So, you know, if we actually added those back in and then we also backed out - - last year was a big quarter with new business for us - - you wouldn't see our revenue numbers knocked down 15%. You'd see them down closer to the mid to high single digit numbers. So the revenue number, in terms of the decrease, is somewhat misleading based on two what we would call one-time events - - new business year over year from a comparison standpoint and the weather related that I just described.

Last question, for Mark A. McCollum. Mark, are you giving any consideration to using the sale leaseback provision in your credit agreement to take care of some of the amortization that you had this year?

You know, we continue to look at a number of different alternatives to address the amortization. Obviously we are still very bullish that we can generate cash flow to address it. I haven't seen a deal, or Paul Novas, our treasurer, yet that sort of crossed our desk that we believe is economically feasible for us to do on a sale leaseback side because the typical demands in that market for returns, as well as cushion amounts, to sort of, you know, hold backs and things of that nature, just really are more than we're willing to pay. And we think that there may be other alternatives that are available to us in the current market to address that. So, it's there, we're glad that we have the opportunity to use it, but there's nothing in the works right now.

Great. Thank you.

Thank you. Our next question comes from Monica Keany. Ms. Keany, please state your company name.

Morgan Stanley. Good morning. I was wondering, just to back up a little bit on Europe again, I understand you have these one time SG&A depreciation, you talked about restructuring. But would you anticipate that going through the year that SG&A might roll off and we should see improved profitability coming out of Europe? Because the top line was fairly strong given the OE performance.

Yeah, I think that's an accurate statement. I think that you'll see SG&A going down actually due to the shared services centers that we've put together and implemented. Part of that is from Genesis and the other piece, Monica, is that we spent a fair chunk of change last year in rearranging our aftermarket footprint and closing facilities, aftermarket depots and a few plants. We spent almost $20 million doing that, a little bit over that actually, just in Europe. That's just in Europe on Genesis. As a result, those improvements that we made are actually - - you know, you'll see those drop through to the bottom line this year. We'll get the full benefit of all of last year's actions this year. A lot of those occurred in the second half of last year when we finalized them. So we expect to see significant improvement going forward.

So how much savings should we see in FY '03 for Europe and also for the U.S. then, once these cost savings issues that are incremental to '02?

Well, in Genesis, overall, incremental savings this year should generate $15 million.

$15 million?

$15 million incremental to last year. Last year, benefits were around 12, so this year, you know, total we'll get $27 million of benefits from Genesis. $15 million of that $27 will be incremental.

Of the last year's benefit, Monica, about half of that was in Europe and they really ramp up the remainder of their initiatives on Genesis at the end of this quarter. So you'll sort of see that ramp up in their incremental savings toward the back part of the year.

Can you talk a little bit about Europe, that aftermarket? It looks like excluding FX, you were down in that business. I would imagine that the aftermarket EBIT margins are clearly not as strong as the OE margins. So given the cost savings that you've taken out and the strong performance of the OE business - - how should we be thinking about whether there are structural changes that are going on in the aftermarket in Europe that are contributing to the lower top line and therefore making it probably more difficult to be profitable in the aftermarket in Europe?

Gross margins are, you know, much higher than the OE margins, just so you know. So that business follows a similar profile to North America business and the problem has been the exhaust piece which has been dragging on profitability. We've been halfway encouraged with some new business opportunities that we have going forward, we think, in the exhaust aftermarket that could, in fact, void the volume levels. Our aftermarket ride control mix, premium mix, continues to go up so that will improve our profitability on the year over year basis in that business. And the business plan - - I told you we hit our AOP, our annual operating plan - - this plan going forward shows a significant improvement in profit. I mean, that's about as much as I can say to you without giving you guidance. So it's following the model that we had in North America. They have a big opportunity on improving the inspection rate of shocks. There's also the block exemption that is beginning to come into play probably at the end of this year and next year, so all the fundamentals for that business on the ride control side are positive for us. We believe that the OE confidence in the consumer as well as the exhaust stainless steel issue is the only drag on the business and we're hoping to offset that significantly this year with the improvement in the cost structure that was executed with Genesis savings last year.

So the overall market, though, in Europe, sort of in local terms is down?

I've got Hari Nair on the call Hari's our managing director of Europe. Hari, do you want to talk about the overall aftermarket?

Yeah, Mark. The aftermarket, you know, is different depending on exhaust and ride control. Ride control is relatively stable. We're seeing the industry down, estimated to be about down in the 2%, 3% range. But the big problem, as Mark mentioned, is exhaust and we're seeing exhaust industry volumes estimated to be down as much as 10% to 12%. So the real problem continues to be in exhaust with industry over capacity and continued decline in the volumes related to stainless steel.

Now do you expect that trend to continue for the rest of the year? Or how much longer in the 10-12%?

Yeah, the exhaust - - we're projecting in our baseline assumptions, the trend to continue in the 8 to 10% range for the rest of this year. That was built into our plan and all the restructuring initiatives that we undertook assumed that kind of rate. Now having said, that, you know, we're going after a lot of new business to try and offset that to some extent as far as our volumes go, but yeah, we are projecting the industry to continue that trend.

Okay, and then a question for Mark A. McCollum. On the accounts payable, in terms of the days - - I think it was 75 or 76 days for accounts payable in the quarter? Do you think you've sort of maxed that number out? Do you see that maybe potentially coming down as you get inventories, get more cash out of inventory?

That's exactly right. I mean, we tried to articulate that, you know, we were fairly aggressive toward the end of the first quarter, you know, when I think things - - sort of the market outlook became sort of cloudy for us - - to be aggressive in managing our payables. We basically lagged in the incremental week and as our payables typically average 65 to 69 days outstanding, just under 70 for the last year or so. So we basically pushed another week in order to sort of make sure that we countered any kind of concerns that might pop up from us being lagged by our customers, or we knew that we were also spending capital at a little bit faster rate because we had a number of second quarter launches that were ramping up. Clearly, our cash flow plan is all really focused on inventory so if you come inside, and receivables, so if you come inside our company and you know, people will talk about the blue chips particularly being inventory and we've got a specific plan that laid out in our manufacturing team to go after 10 days. Plant by plant, business by business, that they're pushing. So that's where we believe that the long term sustainable cash will come at this point and we'll continue to work with our suppliers to - - and even when we did a little lagging, I mean, everybody who needed to be paid, we paid, and there was no issues. And we'll probably bring that back down to our sort of average level which is around 70 days as we get that inventory driven out.

Do you have that break out of Europe versus the U.S. payables?

No, I don't.

Okay, and then the last question is - - if the second quarter obviously is going to be more challenging in North America, particularly potentially in the OE side of the business, and there's not a lot of visibility in the aftermarket, do you think that the inventory situation is going to be more difficult to manage in that kind of environment or are you optimistic on that front?

No, I think we're more optimistic. I mean, I think, you know, we've done a lot of planning around what kinds of things need to be done. We typically ramp up in getting ready for the aftermarket. There's some bills there and Dave's team did a really good job of managing to keep that down in the first quarter, so that puts us at a very good point to run into the second quarter as well. We have a number of launches that are happening in the second quarter. Once those go, some of the initial safety stocks and things that are built will come down. So I really think that we'll be able to show some progress. The other side. too, of course, is inventories, if you sort of look at it between North America and Europe, a big piece of the build up was actually in Europe, not so much in North America. Not only because they were using safety stocks to make sure that they didn't have any business disruption as we were closing these depots for the Genesis restructuring. As those get completed, those safety stocks will be worked down and then the OE - - we have a number, a huge number of OE platform launches in Europe that will also allow our inventories to work down.

Okay, thank you.

Thank you. Our next question comes from David Bitterman. Mr. Bitterman, please state your company name.

Hi. David Bitterman from Deutsche. A couple of things. Obviously, a lot of my questions have been answered. One - - let me just table them and then answer them however you see fit. One is, maybe Dave, you could comment on sort of the business as you're leaving it and opportunities that you guys, maybe Mark, can comment on, you know, opportunities that may exist to fill Dave's shoes. Second question is - - it looks like by my calculation, gross margin slipped a little bit from last year. I just want again, a sort of recap on that because I think, if I remember, Mark Frissora, I think your goal is to kind of keep the gross margin up north of 20%. And then the last question for Mark A. McCollum is - - if you would, obviously, just sort of recap for us your debt goals, where you think you can get the debt down to by year end and if you could recap the off balance sheet debt? I think I got the European number, but I didn't get the North American number.

Okay, David, I will go first. I honestly will tell you that we hit our operating plan in the first quarter, we feel good about that. Clearly, we would love the demand to be higher on the exhaust side in North America. Hari gave you some numbers in terms of the impact of stainless in terms of the broad market and we have similar trends in the U.S., but we also have means to offset those. We've just launched our DNX product line which is targeted against the import market and the exhaust side of the 125 SKUs. We have sold out our first two production orders on that and are excited about that launch and very favorable response from our customer base. So you'll see more innovation from the team in terms of that segment of the market place. On the ride control side of the business, again, I think our position has never been stronger. We're certainly recognized for our creative marketing programs, our ride and drive campaigns, and our ride safe tours are receiving a lot of publicity from not only the media but from our customers as well and they are spending advertising dollars to build events around those. And so, you know, the Monroe brand certainly has a lot of momentum behind it and we feel real good about that. The other piece, I will tell you, is we're working very hard on innovating products not only in the category of ride and exhaust, but in some other categories and we reviewed those with our customer base and have gotten a very favorable response. So net net, I think the business is in real solid shape and it has a good year in front of it. The other thing is, I've got a terrific team, all of whom have been in place for quite awhile and they do a terrific job, so I think that they're really geared up the remainder of this year.

Great. Thanks, Dave, and obviously, good luck with your next life.

Thank you.

Just tagging on to that, I mean, the management team is excited for Dave. The good news is we've been together for three years now and I've always preached to the investment community how good our management team is and it's a good example of the great promotion opportunity for Dave. But the other piece of the news is that because we have a good management team, we'll fill this position internally. We have a host of candidates, a slate that I'm interviewing through and we'll make the decision in the next couple of weeks. So the good news is we've got a lot of strong players in the organization and we feel good about being able to backfill in a way that will not prevent us from continuing to perform any aftermarket. And kudos to Dave for being able to build a management team that he left that really is a good team, that allows itself to run itself well after he exits. So we'll miss him and good luck to him. I think that was put in the press release and we're really excited for his opportunity going forward.

Talking about gross margin for a minute, you know, when you look at the gross margin line and you try to calculate, okay, why isn't it higher? You know, our goal is to get to 22 this year. It was mix on aftermarket versus OE when you look at it on a year over year basis. So it was really a mix issue. Again, what you're going to see, we hope, and that we think, is improvement in Europe versus last year on the gross margin line. Significant improvement. And we're seeing it in the biggest business unit there. So where is it going to come from? You'll see that the gross margins in the OE North American business are very strong and they improved last year and now where the big opportunity for us is in Europe and I think that's where the expansion will come from. Okay? Anything for Mark? I think Mark - -

Yeah. Also, you wanted to know about the off balance sheet. Our factor receivables at the end of March this year were $122 million and that was $50 in North America on the Bank One program and $72 million in Europe. That compares to a year ago March where we had $112 million of factor receivables, 71 of which was in the U.S. under the Bank One program and $41 million was in Europe. Okay? So we've expanded our European programs to offset or counter the reduction in the North American program.

Very good. And, Mark, I know Mark Frissora talks about his goals on gross margin. What are your goals on the debt side? I mean, is there a bogey, is there a leverage bogey that you're aiming toward? Is it an absolute debt number? What is it?

Well, I mean, I think obviously, for the long pull, we would like to get our debt down to the billion dollar range. I mean, obviously, we think that getting it down to around that range, to get our debt to total cap ratio in line - - maybe it's slightly higher than others because we're an EBA company. We're not necessarily uncomfortable with debt but I think getting something so that we make sure we have appropriate full access to the capital markets is where we want to go. And whatever that number is, you know, it moves around over time. For the short term, obviously, we have a $93-$94 million nut to crack this year on our amortization and our goal always, as an internal goal, is to try to do that out of free cash flow. We build our plans, not only from the earnings side, but also from a cash standpoint, to try to maximize our opportunities to do that. We have told the investment community that we expect to get $50 million of working capital so the plan would be that $50 million ultimately could be applied to the debt. That's kind of what we put out there.

That's exactly right. You know, and then obviously, as you can see this quarter, we have plans and we are trying to execute on plans to improve our year over year results at the EBITDA line so that we can also, on a sustainable basis, achieve a better cash flow position. So that's where we're aiming. Obviously, we believe that we have a lot of good plans. We're driving toward that. That's the goal that everyone inside recognizes. But we also recognize that we have plenty of liquidity in the event that we don't get there with the revolver.

Very good. Thanks, guys.

Thank you. Mr. Mike Kinder, you may ask your question. Please state your company name.

Yeah, Solomon Smith Barney. Just a couple of clean ups. On the - - you mentioned the interest rate swap and the impact on interest rates. How much on an annualized basis year over year do you expect to see in terms of interest reduction?

Last year, toward the end, it was costing us abut $16 million on an annualized basis, you know, because we had a couple of months this year, it's going to be $14.5 to $15 million impact, now it's at 3.

Okay, so that's 14 to 15 that '03 interest will be below '02?

That will be a lower interest expense because the swap rolled off.

Okay, great. And can you talk about raw materials, particularly steel? Pricing went up, it was a hit to cost of goods sold. I guess really two questions - - one was how much of a hit was it in the first quarter on a year over year basis and the second question is, what are you seeing in terms of pricing trends looking forward?

Well, in steel, we're pretty much protected in 2003 on 94% of the steel we purchase in North America so we have no issues there. When you look at steel for Europe, which is really the bigger issue for us, we've been able to buy steel and actually offset some of these issues in China and some Asian countries. We've done collaborative buying as well, in some cases with some other sources, some other people, some other manufacturers in Europe. So the impact is really minimal and we've been able to offset it. Our overall material prices have actually, we believe, been reduced, as the result of low cost country sourcing that we've been moving a lot of our raw materials to. So we feel pretty bullish on our ability to control material price increases and we'll continue to have firm pricing contracts in North American through 2003 and in Europe, while the steel process have been increasing, we've minimized those increases with this global buying leveraging, with North American steel mills as well as the Asian ones.

Okay. And I think that's it. Thank you.

Thank you. Our next question comes from Kirk Ludtke. Mr. Ludtke, please state your company name.

J.P. Morgan. Hello guys and Leslie. A couple of topics. One is - - I think the comment was made earlier that you're very bullish about fixing the bank amortization schedule. I'd like to double back on that one. And then also, a follow up on Europe. With respect to the amortization schedule, I know there's a $200 million carve-out to the bank deal and I was curious - - how much do you think you can raise? Pricing aside. I know you don't like the pricing you're being offered, but how much do you think you could raise in a sale leaseback?

Well, two things. Number one, I don't know that I used the words that we're bullish about making it. I think that what I said is that we have plans that everybody internally is driving toward. You know, that everybody understands what we need to do to get there and so we - -

The market place will ultimately determine what's successful.

That's exactly right.

If we were to continue with these volume levels and straight-line it through the rest of the year, we'd be in great shape, but as you know, the world is a very volatile place right now so it's hard to determine what production rates are going to be and what consumer confidence is going to be, so that's one issue. So we're cautiously optimistic in terms of our revenues based on being on top selling platforms. We feel good about that. The other question I'm not sure I understand, Kirk. You want to explain it a little bit more?

Well, I know you've got a $200 million carve out and you're a big company, you've got a lot of fixed assets. I'm just curious - - could you raise $200 million in a sale leaseback, in sale leaseback proceeds if you wanted to?

The answer is no and the reason is, while we have the carve out for assets of $200 million, what typically happens in these deals is that the guys want a holdback of cash from the proceeds that ends up pulling out a substantial portion of that to sort of hold as collateral against the lease. And so what happens is, while you can pull $200 million of assets, the best that you can get is maybe $125 million of that in cash to apply to anything you do. And that's just too high of a price to pay for us.

If things change, it's something we might look at, but right now - -

That's right.

But right now the current environment would be such that we wouldn't want to take advantage of that.

Okay. And you mentioned other alternatives. Do you want to elaborate on that?

Well, I don't know that I can. I mean, obviously, I think we continue to watch the market and look at a lot of different alternatives. As most of you know, there's always a steady stream of investment bankers that are coming through our offices to try to help us take a look at what those opportunities might be. And so we're just trying to keep our finger on the market and we'll be opportunistic.

Okay, and then with respect to Europe, I think earlier on the call you said that you thought you could get your European margins to the level of your North American business which, by my math, suggests an improvement in Europe of 65 to 75 million at the EBIT level. And I'm curious if, one, so many companies are struggling in Europe and I'm just curious why you think you'll be able to get those margins to that level and what kind of timing are we looking at?

Well, I don't want to comment on your margin expansion because obviously that gets into doing things that we don't do which is providing data in a way that gets you some forecasts and we're not giving guidance. But the issue for Europe has been that we've had a year now of really what we consider to be lackluster results as we've gone through a transition there. Basically, most of Genesis was aimed at fixing Europe. We've been able to over deliver on every Genesis project. We've been able to under spend every Genesis project and we feel real good about the projections of Genesis benefits that we have going forward. So we've been working on Europe now for a good two years in terms of restructuring projects, lowering the cost structure, beefing up if you will, aftermarket marketing plans and new product offerings. All of that, really a lot of that, comes home this year for us. So relative to the market place - - I don't know what everyone else is doing, but we've been working on this for two years and we feel this is the year where a lot of hay is delivered, if you will, to the bottom line as a result of the hard work.

Great Thank you.

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

CSFB. Good morning. Just two questions left. When you look at the aftermarket - - maybe you could just remind me -- is there any sell-through through the service parts organizations of the dealerships for the OEMs? And if so, is any part of your safety advertising initiative going to be in conjunction, maybe, with the dealerships promoting those safety checks?

Yeah, we have OEM customers today in North America. They - - we are not running the safety triangle, per se, with those customer through their base, but it becomes their choice on their side. It's not because - - we certainly would not run the campaign with them. So to answer your question, we do participate in the OES service channel today in North America. Certainly they're open to all our programs and our opportunities.

What you should note, I guess, is that a lot of that OE Service bay business is filled through our traditional aftermarket customers. As you know, if you're a dealer, a lot of times you need the part now and we have, obviously, a huge traditional distribution network, you know, high market share. So we get a lot of that OE Service business indirectly through what we call our traditional customer base. We focus and our customers focus very hard on that. So it's something that we ultimately do good at, but in terms of running up a campaign, we've never done that because of the intricacies of the relationships at the OE level. It's very complicated and hard to do business in some cases on any kind of marketing, per se, within the dealer network. It's not to say that we haven't tried or won't continue to try, but there's some issues around doing it. Okay?

Sure. There happens to be some rationalization going on in that distribution channel. Particularly, I think, with GM Service Parts Organization. Is that impacting you at all as some of the traditional WDs that you sell through to them are being affected by that? Is it something that - -

No, we haven't seen an impact on that, no. It hasn't been used, even with our customer reviews as a reason if there's a sales problem. That's not one of the things that our traditional distribution is explaining as a problem.

Okay, and then just in terms of some of your out performance n the OE side, obviously dealing with some of the top selling platforms that you referred to and you talked a little bit about April the leases looked a little more favorable than what the overall indications are for second quarter production. But at the end of the day when you look at it actually - - do you do sort of an inventory analysis of your top selling platforms and despite maybe some of the sell-throughs that we've seen that have been favorable, are there any inventory levels of your particular platform concentrations that have you worried about the second quarter?

No. The thing in general, if I could just give you one general blanket statement, the big issue for us on being on top selling platforms in passenger car, the more important thing - - about 65 to 70% of our platforms are in what we call heavy truck SUVs or light truck SUVs and because of that mix, if you look at those vehicles across the board, they're selling fairly well right now. It's more the passenger car category that's showing some of the weaknesses. So we feel, like I said, pretty good about the platform mix right now and with the inventory levels of those vehicles that we're on.

Okay, great. Thanks, gentlemen.

I'd like to remind all parties, if you would like to ask a question, please press star one on your touchtone phone. Kathy Nowland, you may ask your question. Please state your company name.

Yes, Kathy Nowland, Solomon Asset Management. Could you name the top three launches in terms of importance that you're currently engaged in in the second quarter?

In the second quarter? I don't know if we've got that information by quarter what we're launching.

Well, currently. You mentioned that there was a bit of a working capital build to accommodate launches that you were going to be executing in the current quarter.

Well, I guess Ford C1 is a big launch in Europe. Also PSA, the 407, Ford Focus which is, you know, the C1, and then the Volvo CES, computerized electronic shock, I think that's the V70. Those are all launches in Europe that are fairly significant for us.

Are you on the F150?

Yes, we are. Yes, on the F150, absolutely.

Okay. So that would be something that's also an important launch in the current quarter?

Yeah, but for us it's a rollover. I mean, we're the incumbent and we continue to maintain the business and the technology. It is a launch so I don't mean to underestimate it, but the product change on that was not significant as related to our products. Okay?

Thank you. At this time, we are showing no questions.

Okay, thank you very much, Mike. And this does conclude our call. As a reminder, an audio replay of this is available on our website at www.tenneco-automotive.com. You can also access a taped playback over the telephone. If you're located in North America, you can reach the playback by dialing 800-454-0157. Internationally, you can call at 402-220-2123. The pass code is 8400. The taped playback should be available by 1:00 Eastern today. The playback will be available through 5:00 p.m. Eastern on Tuesday, April 29th. This call-in information can also be found at the bottom of our news release. Now should you have any additional questions, please feel free to follow-up with Leslie Huntsinger, our Director of Investor Relations, or Jane Ostrander, our Director of External Communications. Leslie can be reached at 847-482-5042. Jane can be reached at 847-482-5607. Thank you again and have a good day.