Tsakos Energy Navigation Ltd (TEN) 2011 Q2 法說會逐字稿

Good morning, and welcome to Tenneco's second quarter and full-year 2011 earnings release conference call. At this time, all participants are on a listen-only mode. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn today's call over to Ms. Jane Ostrander, Vice President of Global Communications. Thank you, ma'am. You may begin.

Good morning. Earlier today, we issued our press release and related financial information. In a minute, I will turn the call over to Gregg Sherrill, Tenneco's Chairman and CEO, Hari Nair, our Chief Operating Officer, and Ken Trammell, our Chief Financial Officer. They will spend the first half of the call taking you through a detailed explanation of our second quarter performance. Slides related to their prepared comments are available on the Financial section of our website at www.Tenneco.com. We will then open up the call for questions. The conference operator will explain the process for asking a question at that time.

Please note that our discussion today will include information on non-GAAP financial measures, all of which are reconciled with GAAP numbers as shown in our press release attachment. The press release and attachments are also posted on our website.

In addition, some of our comments today will include forward-looking statements. Please keep in mind that our actual results could differ materially from those projected in any of our forward-looking statements. With that, I will turn the call over to Gregg.

Thank you, Jane. Good morning, everyone, and thank you for joining us. Let me start off by stating that the record results we released today indicate that as a Company we are doing an excellent job executing our growth initiatives, driving both top-line improvement and solid earnings.

On slide 4, you'll see that we reported revenue this quarter of $1.9 billion, up 26% from last year. This was the highest revenue we have ever recorded in a quarter and reflects strong performances in both our global OE and aftermarket businesses. Although Tenneco had no supply chain disruptions in the aftermath of the Japan earthquake, our revenue was reduced by about $60 million in the second quarter due to industry supply chain disruptions. According to industry forecast, it appears that any lost OE production will be made up by the end of the year.

We are at the midpoint of 2011, and I am pleased with how we are leveraging the improving global OE production environment. Tenneco is broadly balanced across customers and vehicle platforms. We supply 252 platforms globally, and our products are key components on some of the best-selling vehicles in the world. As such we are well positioned and continue to outpace the positive upward trends in OE production.

We are in the midst of launching a number of significant new light and commercial vehicle programs, and I want to emphasize that these launches are on track and delivering results. In the quarter, revenue generated from our OE commercial and specialty vehicle business was $167 million, up 64% from last year. This increase was the direct result of the launch and ramp-up of our diesel after treatment programs. In the second quarter, commercial vehicle revenue represented about 11% of total OE revenue. Additionally our aftermarket continues to provide market balance to our revenue stream as we continue to see solid contributions albeit growing at a slower pace than our OE business.

I would also highlight the tremendous growth we're seeing in emerging markets and particularly China. Our Asia revenues, excluding substrate sales and currency, were up 32%, driven by China's strong performance. We are very well positioned with nearly all the major OEMs in China, and we continue to expand our footprint to service new customers and new programs.

Turning to our earnings performance on slide 5, we reported record high EBIT of $113 million, up 22% from a year ago. This reflects the OE volume strength we're seeing, the positive impact from our light and commercial vehicle launches, as well as the benefit from higher North America aftermarket sales. EBIT this quarter included the previously announced investment in our North America aftermarket business to cover product changeovers with new customers.

Now I'd like to make just a few overall comments on our margin performance, and Hari will provide more detail in his operations review. I would first highlight on slide 6 our strong performance in North America where we're seeing the benefit from new commercial vehicle launches flow through this positive volume impact from key light vehicle platforms and the continuing strong contribution from the aftermarket. Similarly in the Europe, South America, and India segment, this performance from our Europe OE businesses, driven by stronger light vehicle volumes and a good platform mix, contributed positively to margins.

In the Europe aftermarket, we had a shift in mix with a greater percentage of ride control sales coming from Eastern European markets where the margins tend to be lower. Additionally, we had some delayed timing on price recoveries in Europe aftermarket and in South America which were headwinds.

Turning to our Asia Pacific segment, the excellent growth we're seeing in China was partially offset by industry production volume declines in Australia. We expect our margins for this region to improve as we ramp up production at our new China facilities and continue implementing our strategy for the Southeast Asia and Australia region.

And finally, I'll conclude by saying that the excellent progress we're making rests on the shoulders of our employees around the world. Their customer focus and can-do attitude is driving our results, and I thank them for their dedication and hard work. And now with that, I will turn the call over to Hari.

Thanks, Gregg. As Gregg mentioned, we had very positive results in a number of our businesses, strong improvement in others, and a few areas that represent opportunities for improvement.

Turning first to North America starting on slide 9 -- OE revenue was up 15%, excluding substrate sales and currency. Our strong position on some of the best-selling vehicles helped us outpace industry light vehicle production which was down 3%. Revenue also reflects the continued ramp-up of our commercial vehicle diesel after-treatment business. Revenue in the quarter was reduced by about $53 million due to the Japan crisis. In the aftermarket, we had solid increases in both product lines resulting in a 6% year-over-year increase in total aftermarket revenue excluding currency.

Now on slide 11, our North American operations generated $62 million in EBIT, up 24% year-over-year. All of our revenue drivers -- volume recovery, incremental commercial vehicle revenue, and higher aftermarket sales drove this performance. The improvement also includes the impact of higher year-over-year aftermarket changeover costs. In addition, we had some higher manufacturing and freight costs in certain businesses which we expect will improve as we fully complete the consolidation of our North America ride control business. Finally, there was also an EBIT impact from the Japan crisis revenue decline.

In summary, let me emphasize that North America had a very positive quarter. Not only was EBIT up, but EBIT as a percent of value-add revenue increased almost a full percentage point to 9.9%.

Now turning to slide 12, you will see the results for Europe, South America, and India segment. We had very strong performances by both our OE businesses in Europe. Similar to North America, our OE revenue increased on strong volumes and a favorable platform mix. Excluding substrate sales and currency, OE revenue was up 17%, compared with a 4% increase in industry light vehicle production. In the Europe aftermarket, revenue was up slightly after excluding currency. Increase in ride control sales were almost fully offset by the decline in emission control sales. Additionally, we had a mix shift in the aftermarket with most of the ride control sales growth occurring in Eastern European markets. In both South America and India, our revenue continues to grow as volumes remains strong, and we are well positioned in those regions.

On slide 15, you will see that EBIT for Europe, South America, and India increased 23% to $37 million on the strength of OE ride and emission control businesses. We are very pleased that our top-line growth, driven by higher volumes and key platforms, is converting to strong EBIT.

With regard to margins, we did have a few areas that worked against us this quarter. First, the growth in aftermarket sales in Eastern Europe had a negative effect since the margins in those areas are typically lower than what we see in our Western European business. We also had some timing issues in fully implementing some of our aftermarket pricing actions to completely recover material economics within the quarter.

Timing on recoveries also impacted us in South America where we continue to take advantage of the healthy industry environment but are experiencing inflation-related cost increases in materials and wages. As a result of these items, our EBIT as a percent of value-add revenue for this segment declined by 0.2 of a percentage point to 5.6%. We are addressing these issues in both the Europe aftermarket and South America with plans in place to continue implementing pricing actions going forward aimed at fully recovering the effects of inflation and other economics on our cost structure as we have historically done very well.

Finally, turning to Asia Pacific and our revenue results on slide 16. As Gregg mentioned upfront, we are seeing tremendous growth in our China operations. The 32% increase in Asia revenue, excluding substrate sales and currency, was driven by China. We are moving quickly in this dynamic market to establish new manufacturing facilities and enhance our engineering capabilities in preparation for the new business we are winning and a very active launch schedule going forward.

Since the second quarter of last year, we have established 5 new facilities that are either newly added or existing plants that we have expanded significantly to support our growth. We are pleased with the execution on the launches and ramp-up at these facilities. In addition, we are finalizing plans for relocating and expanding 2 more plants later this year.

Conversely in Australia, we had an 11% year-over-year revenue decline, excluding substrate sales and currency, versus an industry light vehicle production decline of 15%. The vehicle production environment in Australia appears to be stabilizing, but well below historical levels.

On slide 19, you will see that EBIT for our Asia Pacific operations increased 8% to $14 million. It is important to note that the strong volumes and operating performance in China were partially offset by the impact of investments we are making in China to support our growth plans. In addition, the low production levels in Australia had a negative effect. As a result, EBIT as a percent of value-add revenue declined 2 percentage points to 8.2%. With regard to our expansion in China, we are very confident that the fixed cost absorption at our new plants will improve as we continue ramping up production at these locations.

Finally, we are also well underway in implementing our actions to address the industry environment in Australia in the context of our overall strategy for all of Southeast Asia where we are positioning Tenneco for further growth. As you may recall, we opened a new emission control manufacturing plant in Thailand early last year. We also shifted some ride control capacity from Australia to a new ride control plant there. Our plan is to match our operations footprint in Australia to current and future market demand while further sharing assets and manufacturing capacity within the entire region as we continue to win new business.

In summary, the takeaway is that we are winning significant new business, investing for growth, successfully launching new programs, and staying focused on opportunities to improve margins and drive greater profitability. With that, I will turn the call over to Ken.

Thanks, Hari. First, let me take you through the 2 adjustments affecting year-over-year comparability for the quarter on slide 20. We had $2 million pretax, or $0.02 per share, of restructuring and related expenses that's primarily due to the closure of the North American ride control plant and some head count reductions in Europe. Our tax adjustment related to a net benefit of $1 million, or $0.02 per share, for the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions and adjustments to tax estimates. And this was more than offset by the benefit of our US taxable income with no related tax expense due to our net operating loss carryforward in the US.

The net operating loss carryforward has a valuation allowance recorded against it. As our US businesses continue to improve with the recovery of the light and the commercial vehicle production environments and the ramp-up of our new commercial vehicle business, we are benefiting from this asset that is not currently reflected on our balance sheet. Based on our strong year-to-date taxable income in the US, I continue to believe that we should be able to meet the accounting requirements to reverse this valuation allowance by some time next year.

As detailed on slide 21, in the quarter, SGA&E expense was at $153 million versus $131 million a year ago. The higher level of expense is attributable to currency rates, growth in emerging markets, and the impact of aftermarket customer changeover activity. SGA&E expense as a percent of sales improved to 8.1% in the quarter as we leveraged the higher revenues compared to 8.7% a year ago.

As we previously announced, we added 7 new customers to our North America aftermarket customer list during the second quarter. The largest of these was AutoZone. To remove our competitors' inventory, we incurred $12 million in changeovers, primarily in the form of customer credits, for the initial shipments of our products. Now as a reminder, in last year's second quarter, we added NAPA Canada as a major new customer, and we incurred changeovers of $5 million, all of which was recorded in SGA&E expense. Because of how this year's changeovers are structured, only a portion of the current year's cost is recorded in SGA&E expense. As a result, SGA&E expense is $4 million higher than a year ago related to the changeovers.

Now, as shown on slide 22, interest expense this quarter was $26 million. That is down 19% from $32 million last year. The significant reduction in our interest expense is primarily due to lower rates that we achieved, and our successful refinancing actions last year, and the $1 million of refinancing cost related to extending the maturity of our senior credit facility and term loan that we incurred in the prior quarter. We continue to expect annual interest expense of approximately $105 million in 2011.

On slide 23, cash taxes for the quarter were $23 million, compared to $16 million a year ago. For the year, we estimate cash tax payments will be at the upper end of our estimated range, or about $90 million. For tax expense, until we were able to reverse the valuation allowance on our US net operating loss, we will continue to normalize our tax rate of 35% by calling out and explaining any variances from that rate each quarter.

Cash flow details are on slide 24. We generated cash from operations of $67 million in the second quarter, compared to $104 million in the year-ago quarter. A $30 million year-over-year increase in the demand for working capital was the primary driver of the change in cash generated in the quarter.

On slide 25, we show our year-over-year working capital metric performance calculated on a last 3 months' basis. Days receivable outstanding adjusted for factoring was 61 days this quarter. That is up from 57 days a year ago. This change is mostly due to the timing of accounts receivable collections. Several payments arrived in early July rather than by June 30. Inventory days on hand increased slightly by 1 day to 36 days in the current quarter. Our days payable outstanding was 69 days this quarter compared to 70 days a year ago.

Capital spending was $47 million in the quarter as shown on slide 26, up from $30 million last year. The increase in capital expenditures reflects timing on investments to support our future growth, including the new manufacturing facilities in China and preparing for new customer programs, particularly launching commercial vehicle emission control business later this year in Europe and South America. We still expect capital expenditures for the year to be in the range of $190 million to $210 million.

Now on slide 27. In May, we announced our plans to repurchase up to 400,000 shares of our common stock to offset the dilution from restricted stock and stock options that were issued to our employees in 2011. At quarter-end, we had repurchased 270,500 shares on the open market for $10.5 million. As of the close of business yesterday, we have repurchased a total of 381,000 shares for $15.2 million. Now let's go over debt and available liquidity starting on slide 28.

At the end of the quarter, debt net of cash balances was $1.133 billion; that's compared to $1.108 billion a year ago. Our total debt was $1.294 billion, including revolver borrowings of $85 million at quarter-end versus $1.254 billion a year ago. Cash balances were $161 million, compared to $146 million at June 30, 2010. Our leverage ratio was 2.0 times at the end of the second quarter, and that is down from 2.3 times last year.

At the quarter-end, $53 million in letters of credit were outstanding, and we had $614 million in unused borrowing capacity under our revolving credit facilities. With the global economic uncertainty that is grabbing so many headlines these days, I think it is important to point out the strong balance sheet improvements that the Company has achieved in the last 2 years.

From a liquidity perspective in addition to the revolver availability, we have $161 million in cash on our balance sheet at the end of the second quarter. We have successfully refinanced much of our debt, and we now have a very favorable maturity profile as well. You can take a look at slide 29 for an overview of how we simplified our debt structure, lowered our interest costs, and extended our maturities during 2010.

Now on slide 30, you will see that under our European factoring programs, we had sold $136 million in receivables at quarter-end versus $105 million last year. With no receivables factored in North America at quarter-end, we had another $114 million in liquidity available under the senior credit facility factoring limit at quarter-end. And with that, I will turn the call back to Gregg.

Thank you, Ken. As we move into the third quarter, I am optimistic for the remainder of the year, though somewhat guarded given today's political and economic landscape with government debt issues and fiscal policy uncertainties. But putting external factors aside that could change our outlook, industry light vehicle production estimates are very positive for the remainder of the year.

According to IHS Automotive production forecasts on slide 31, OE light vehicle production is expected to rise in every region were Tenneco operates, and the industry is on track to end 2011 with full-year light vehicle production up 7% globally. Our strategies for capturing growth in this environment remain consistent. We are staying the course and won't let up on continuing to leverage volume recovery with our global platform strength, successfully launching and ramping up new commercial vehicle business, and continuing to benefit from our global aftermarket business.

To further highlight one of our growth drivers, we're seeing the results of executing our strategy in the commercial vehicle emissions control market. As you can see on slide 32, we're adding new customers and building our position in this market on the strength of our full suite of diesel after treatment technologies and the capabilities to adapt these technologies to different regions, markets, vehicles, and engine management strategies. Today we are announcing that in Brazil, Tenneco will be supplying MWM, a subsidiary of Navistar. This business also extends our reach to South Korea where MWM engines will be used in a bus application.

I would also point out that in addition to business previously awarded in Brazil, one of our commercial vehicle customers has now awarded Tenneco new business in Europe. While we aren't at liberty to announce the customer yet, it is important to note that this award, and the MWM business, not only supports our overall growth trajectory, but also extends our geographic balance.

Another important pillar of our strategy is driving profitable growth with operational excellence. We never take our eyes off our customers. They expect competitive cost, high quality, and on-time delivery, and as an organization, we're aligned to meet that expectation.

Finally in closing, I want to reiterate that we are making great progress in growing our business on our strong technology foundation as we expand in new markets and with new customers. With that, we can open up the call for questions.

Thank you. (Operator Instructions) Our first question comes will come from Brian Johnson. Your line is open. Please state your company name.

Good morning. Brian Johnson, Barclays Capital Autos.

Good morning.

Gregg and Hari and Ken, just wanted to go in, and I know you don't disclose specifically commercial by segment. But just give some sense of where, particularly in North America, we ought to be looking in the OE numbers for the mix of commercial? Give any color on what kind of percent commercial is in revenue in each of the key segments.

And secondly, it seems like a lot of us have been focused on the Tier 4 -- Tier 4A, Tier 4B off-highway US, but a lot of your new business seems to be coming from Europe, Brazil, and China. Maybe some sense of is that pretty much what you expected? Or are you seeing more emerging market growth in commercial vehicle emissions control and more European growth than you might have thought at the beginning of the year?

I don't know that it is more than we thought, Brian. And don't confuse the launches we are experiencing right now are primarily in North America. So from a revenue point of view, it is more there at the moment than anywhere else in the world. The Brazilian launches, and Hari can help me here, I believe kick in late this year or early next year from a timing point of view. And Europe to a certain degree is late this year, early next year, and then some of it is even further out than that -- that we're announcing. So don't confuse my announcement of winning new business, which I just did, with an immediate revenue impact. The launches are primarily in North America right now. Primarily. We are shipping some in Europe and we're certainly shipping some in China. But the bulk would be here.

Most of the revenue increase that we saw for the emission control business was in North America and in this quarter. We did see some nice increase in Europe, but it is on volumes that we already had. It is just the market recovery over there. That's ride control business.

Couple follow-ups. Any rough percent of how much North America's OE is commercial now?

It is probably a little bit more heavily weighted than the 11% for the total, but again we already had pretty good business in Europe as well.

And secondly, given the -- I should have said new business wins, not launches in Brazil, China, and Europe. Does that change your thinking on the overall mix of commercial? Or would those wins sort of contemplated in your 25% ramp-up.

They are a part of that growth trajectory that we have disclosed with our guidance beginning in the year.

Okay. Thanks.

Our next question will come from Patrick Archambault.

Yes. Pat Archambault from Goldman Sachs. I guess I had a question on incremental margins. Ex-currency and substrate, it looks like they were for the whole about 11% down a bit from the first quarter. It sounds like there were a number of good reasons for that including some Japan issues, and I guess some of the mix issues you highlighted in Europe. Can you tell us a little bit about how quickly some of the fixes you are putting in place -- clearly, Japan should get better right away. But in some of the other fixes that you are putting in place should help and what the trajectory of that should be going into the second half?

Pat, let me start with addressing what the impact of those items were. Hari talked about several things. He talked about the mix shift in Europe, which is as the European business in Eastern Europe improves, we are happy with that. It is just that our premium product mix is not as high in Europe. We are working right now, [busy] on the pricing recovery items.

China fixed cost -- as that volume continues to ramp-up, that will improve. That will take a few quarters. That will take a little bit of time for the volume to ramp in.

We're working on Australia which we told you about, and then certainly the aftermarket changeovers are behind us once we get past the quarter. But if I add all those items up, they had about a 1% impact on our value-add EBIT margin in the quarter. That gives you an idea of what the total is. It's in the neighborhood of around $15 million. Then in terms of the recovery, I think we walked through those items. Does that answer your question?

Yes, it does. It looks like -- it sounds like you are in a position on the back of sort of leverage, and some of these items, obviously, a mix headwind is longer-term to see a back-end improvement.

Pat, when you look at the mix thing, that is within the European aftermarket. It is the reason you are balanced around the world, right, because you're going to have these mix shifts occur on you here and there. You have got some planned things in there with the Australian restructuring and certainly the China growth expansion, and all those mature out over the next several quarters. They are there. They're planned. Our arms are around those things. And then the pricing things are things that you know we'll fight our way through those over the next couple of quarters.

Okay, great. And then, my other question was just on the -- can you tell us a little bit more about what is going on in the European aftermarket? I might have missed this part, but why was emission control there down year-on-year? Because it seemed like that had been a market that was doing fairly well.

Primarily, macro drivers in Western Europe would be the single biggest reason. If you look at the overall market that Europe supports, Western Europe, Eastern Europe, Africa, Middle East if you break it into 3 big segments. And most of our exhaust business is driven by Western European markets. And generally the environment in Western Europe, with the exception of Germany and to a lesser extent France, it is pretty weak. So Eastern Europe is showing positive signs of recovery, but that is primarily a ride control market for us, and frankly, Africa-Middle East is doing okay, too.

But Western Europe is a little bit of a drag. So if you look at emission by itself that would be the single biggest factor for why the sales are relatively weak. I don't know if that answers your question.

It does. Thank you very much.

Our next question will come from Ravi Shanker.

Thank you. Morgan Stanley. Good morning, everyone. Just a quick question on a little more color in the back half. Can you help us understand what the production environment looks like? There is some talk about excess inventories of trucks for GM. Is that something that pressures you in the back half versus is there a ramp in commercial vehicles that comes on as well?

Commercial vehicles will continue to ramp in the back half. We have been saying that all along, and that is all the indications that will continue. Any mix shifts -- we are not looking in our view right now at anything major. They are going to be what they're going to be. But, GM, as you pointed out, has a little bit of a different inventory situation, I think, from some of the other truck makers. But overall, we are not seeing any big [action]. We are seeing just a steady improvement.

Again, given that we don't have some macroeconomic related things going on with everything that everybody is reading in the newspaper right now unless we sit up front we are setting those aside for the purpose of this conversation. We are seeing exactly what you see on that one slide which I forget what the number of it is. And our production schedules would indicate that in the near-term that is what it looks like right now.

Understood. And the cash flow items that you mentioned in the quarter, is that something that reverses in 3Q or the back half? Or does that take longer?

Ravi, remember that we have a pretty much a seasonal working capital usage anyway. It tends to peak in the second quarter, and then comes back to us as we get through the rest of the year. And certainly the particular items that I talked about in terms of timing of receipts, those came in within the first couple days in July. That is obviously a very temporary issue.

Very good. Thank you.

Our next question will come from Peter Nesvold.

It's Jefferies.

Good morning.

I think you addressed this in Patrick's question, but I wanted to make sure I did understand it correctly. So it sounds like the value-added EBIT margins flat year over year. As we look into the second half of the year, you expect that to be higher year over year in the back half. Is that right?

With the one caveat that generally speaking our aftermarket obviously is at its peak in the second quarter. And so as the aftermarket seasonally begins to decline that will be a little bit of a sequential challenge, if you will. Does that make sense?

So yes, seasonal. But year over year, you expect that margin to increase?

Yes. We've still got, obviously, a lot of things to work on in terms of pricing recovery, the fixed cost absorption in China, but we're still working very hard on showing year-over-year improvements.

Great. Gregg, I think you were out recently on the wires talking about a new era of cash usages at Tenneco. Can you elaborate a little bit on what you think the cash flow generation looks like going forward? Or at least what the leverage looks like going forward? And sort of help to rank prioritize how you anticipate using the cash?

We didn't elaborate any further than what we have talked to you guys about. Clearly, our cash flows are improving. I think everybody sees that. We're forecasting they should continue to improve. We've got our balance sheet getting in pretty good shape, although a strong balance sheet is something that is absolutely critical to us. It is one of our top priorities. We will continue to work there as we've said.

And beyond that, there are several opportunities out in the future that we can evaluate for uses of cash, one of which we already started this year which was the buybacks to offset dilution. But we will always keep ourselves flexible to look at strategic opportunities and the option somewhere in the future of even further buybacks or dividends. But we haven't really changed anything that we've been talking about there.

And then very last quick one. I think there are some very well publicized supply chain disruptions in commercial in North America. Did you encounter any of that? Did it result in any kind of revenue or friction costs? Or was that all outside of your delivery and cost structure?

I think it was pretty much outside of ours.

Thank you.

Our next question will come from Chris Russell.

Thanks. Credit Suisse. Couple of items. Is there any rule of thumb for how much working capital you have to put into the business? For every dollar of revenue growth, it is $0.05 that has to go into working capital. So as we think about all this revenue growth over the next few years in commercial, how much working capital is that going to absorb?

Great question, Chris. If you look at our history over the last several years, we've been somewhere between 5% and 5.5% of revenue every year. So that $0.05 to maybe a $0.055 that you talked about is probably a good estimate.

And then can you put some numbers around the receipts that you picked up in early July so we know what to add here for the Q3 working capital?

I don't know the exact number. It was worth -- most of those. We lost about 4 days. It was probably worth one 50% to 75% of that. So I don't have the number at the top of my head, but that would be probably $30 million or $40 million, I would say.

Okay, that makes sense. Are you seeing any changes in the competitive landscape for some of this diesel after-treatment business? And in particular, any discussions that you have had with OEMs that are thinking about maybe taking this in-house?

No. Not since we've last talked. I don't think the competitive landscape has really changed all that much. In the commercial vehicle segment, you have got some of the global players -- ourselves, I think first and foremost, aggressively moving into it. And there are still some regional players that have traditional business in there, particularly in Europe. There has been no change really there.

Okay. And then just one last one. What is the status of the enforcement on some of the new emissions rules in China? I think we talked some time ago about how you had dialed in some slippage in the enforcement there. Maybe just get us caught up on the expected timing of the enforcement of the emission rules in China.

I think the latest official position is now January 1, 2012. But we have had official positions before. And we are not hanging our hat on any given date out there. We have been talking about that. We are not trying to be wishy-washy on it. It's just one of those things that isn't clear so we have not factored in a high level of ramp-up in China. We are certainly shipping some product in China right now. I have said before, right now China in the commercial vehicles after-treatment market is where China has been in other markets in years past.

We know it's coming. We cannot say when. We have to be well positioned, and we think we are very well positioned. And as we get any more color on that ourselves, we will certainly share it. But no change to what we said in the past on that. And not a great deal of it factored into our revenue projections.

You've got a long list here on page 32 of customers in China for the commercial aftertreatment business. Do these have start dates? Or when will those ramp-up? Or when are you expecting those to ramp up?

I will just repeat -- currently, the official government position in China would be January of 2012. Whether that holds or not like other dates have not held in the past. We have had other dates before. But that list of customers is exactly what I mean when I say that we are very well positioned. And it is not the customers that are going to make that decision, it is going to be the regulators on the enforcement.

And as I've said in the past, this is not going to be a switch that will be thrown that will go country-wide. It is very likely to be regional. It could even be by certain cities, we could well imagine. And so that ramp will be slower than what you would see in a western country, but we've always known that. We've been very consistent on that. Again, we see this as a great market both in the mid-term and in the long run. And we are absolutely -- again, as I would give you evidence of that list of customers -- well-positioned there.

So I'm sorry. Will these customers go forward with or without the enforcement? Or are they going to wait for the signal that --.

They will wait because it is a cost issue to them. Anybody -- it would put them at a competitive disadvantage. One thing a regulation does when it is consistently enforced, it may add cost to product line, but it does that consistently and doesn't really affect the competitiveness of anyone because everyone has to comply. So I don't see any of these guys, to be perfectly honest with you, jumping out there ahead of required enforcement dates. Other than to test the systems and ship some product which we are seeing. Okay. Probably with all of these guys. But not in any significant material way really at the moment.

Okay, thank you so much.

Our next question comes from Rich Kwas.

Good morning, everyone. Wells Fargo Securities. Quick question on the Japanese revenues -- I think, the $60 million in the quarter. Gregg, you talked about that recovery before year-end. Some others have discussed maybe that gets pushed out into next year. What are you seeing from your Japanese customers right now in terms of build-out schedules.

What we're seeing is improvements in their forecasts of bringing their plants back up. And I'm not talking about Japan, domestically, obviously here. That really doesn't affect us. I'm talking about their transplants here in North America or Europe or China where we would be affected. So the way we interpret the latest production build forecasts, okay. They are still at 7% growth, basically, and you can see it region by region. I don't have the slide right in front of me. But it would imply that it is still forecasting that they are going to pick that production back up by the end of the year because we had some lost in the first half. The total production for the year is pretty much staying the same, and we're seeing that shift into the back half. And you couple that with the way these guys have moved heaven and earth to get production back up and supply chains back in place. I give them an enormous amount of credit for that. We still feel okay about it.

Okay. And then, in Europe --.

And that is not to say that there wouldn't be some models with some particular parts or something like that doesn't shift around, Rich. I'm not trying to be that detailed. I'm just talking in the macro -- overall, we are seeing the production schedules come back pretty much by the end of the year.

Okay. And then in terms of Europe, can you just remind us your mix over there with the German OEMs under-inventoried, taking less downtime in Q3 -- does that -- I think benefits you, but could you just remind us on the mix over there with maybe the CD&E segments and how that plays out?

Yes, especially on the emission control business, Rich, our business on that side is more heavily weighted toward the C, the D, the E segments, and we have got some pretty good business with the German OEMs. We are seeing some shrink, and we even saw it in the second quarter on the ride control side, for example, on take rates on computerized electronic shocks with those customers. So there is probably some benefit coming on the ride control side as well.

Okay. And then lastly, Ken, just on the share repurchases, do you have any restriction with the new debt profile and some of the new tranches in place -- do you have any restriction in terms of upping the share repurchase?

How about if I say yes and no. There is certainly a restriction, but the restricted payments covenant is pretty big. I don't remember how big it is. It is over $200 million. So not a real restriction, just something that sits there.

So you have got some flexibility above where we are right now.

Yes, but just to be sure I'm clear, we have said that our intention for the time being is to offset the dilution.

Okay. Thank you.

Our next question will come from Himanshu Patel. Your line is open.

JPMorgan. Good morning. I wanted to go back to Ken's earlier comment. Ken, I think you said some of the transitory issues in the quarter were worth about $15 million. Was that a year-over-year reference?

Right.

So the aftermarket inventory change impact year over year was $7 million, worst. So that implies all the other issues were collectively kind of $8 million or so? So that would be China and pricing recoveries in Europe, Australia -- all that merged together?

Right.

Can you just kind of walk us through -- I think we understand that the aftermarket inventory changeover stuff is going to fall way, but what is the timeframe for the other $8 million pressure to fade away? Some of these issues seem like they are maybe under your control trying to get better pricing on European aftermarket. But some of the other issues like China fixed cost absorption and all that. Should we think about that as sort of a multi-quarter improvement?

Yes. Even kind of what we said earlier. Certainly the pricing we work on very intently, and I think Gregg said the next quarter or 2 we should be able to get that back under -- in the position in the direction we want to go. The Europe aftermarket -- the mix shift is a mix shift. And as that works out through the market in the next few quarters, like you said, it is sort of beyond our direct control. But like Gregg said, one of the reasons we are geographically balanced is hopefully we get some offsets elsewhere in the world.

China fixed cost absorption -- intentional investments. It will take a few quarters for us to fully absorb that, but it will improve quarter by quarter as the volume continues to ramp up. Australia, like Hari said, we are working very intently on our manufacturing footprint for the whole region, including the [Asian] region -- our Thailand and Australia footprint. So that will also take a few quarters. But stay tuned, as we get some more details there we will keep you up-to-date.

I think last quarter you had indicated that Australia -- you were going to see some sequential improvement Q1 to Q2 as the Thailand facilities came on stream. Did you see that this quarter?

We said Asia-Pacific segment, we'd see sequential improvement. We would be back on a year-over-year improvement trend, which did happen in the second quarter. And that is, Himanshu -- that is the strength of China. I want to make sure that is clear. Australia is still a difficult market just because its production level is now down around 300,000 units, and it wasn't that long ago it was 0.5 million units.

Okay. You mentioned on the last call commodities would be a wash for the full year when you incorporate customer recoveries and some Tenneco-specific internal cost actions. Do you still feel comfortable with that view?

Yes, we do.

Okay, and then lastly, we had spoken on the last call about just the rate of growth in the aftermarket business. It had been seeing double-digit growth for a few quarters, previously. I think the view was there was some catch-up repair. But I think you had indicated that prospectively perhaps in the next couple quarters or second half, you'd expect that business to go back to a more single-digit growth rate. Is that still your view at this stage?

Yes, it is. And remember, I think now we are beginning to lap some pretty strong quarters that had those high growth rates. So to me, it is still remarkably strong. But I do think that single-digit thing is what you should look for more.

Okay, great. Thanks.

Next question will come from Patrick Nolan.

Deutsche Bank. Good morning, everyone. Most of my questions have been answered. So just a couple of quick follow-ups. Can you discuss first what you are seeing as far as European mix as far as diesels and some of the higher end vehicles? And how that is going to impact you in the back half versus the first half?

We don't see any significant changes in diesel mix in Europe. Diesel -- as you know, most of you are aware, quite strong penetration across Europe. Around the 50% mark, if you will, overall with significant variations by country. I believe Belgium and France extremely high, and then some of the other southern European countries lower levels. But the overall mix, we don't see any significant changes going on. We are very well positioned on the diesel side, including on diesel particular filter segment across the industry. So we are in good position, but we don't see any major changes in diesel mix going on there.

And then just a follow-up on the commercial vehicle business. So your guidance implies something close to $800 million of revenue for the full year. That would imply a pretty good ramp in the second half versus the first half. How back-half loaded is that going to be? Should we think about it that -- is it half-and-half between the third and fourth quarter? Or is it two thirds-one third?

And just secondly on that business -- when that business first comes on, I know your target is for the commercial vehicle business to be higher margin, but is that the case when this business initially launches? Or is there actually a lot of start-up costs that go along with it?

Well it's certainly not in at a full margin because of the absorption right now. That would occur in any launch, okay. In our view, it is still positive. You can see our North American margins overall look really good as we are in the middle of launching this. As far as the ramp-up is concerned, my own view, and we don't have the schedules out certainly into the fourth quarter at this point, is that it will continue to build. It is not going to split itself really between the third and the fourth quarter. That it will certainly continue to grow in the third quarter over what we've seen in the first half, and then I would expect the fourth quarter would grow as well as we approach those 2012 dates. And then more launches begin occurring as we move into the first quarter of next year as well.

Year-to-date, we're at about $300 million if you count the first 2 quarters that we've talked about already. So that implies there is somewhere in the neighborhood of $500 million still yet to come in.

Yes. And we never expected it to be split evenly by quarter. It certainly builds through the year.

Got it. And just on the start-up costs -- are they more significant for some of these international business because I assume that North American business is going through existing capacity? And is part of that Chinese overhead that you cited building out capacity ahead of these possible Chinese commercial vehicles?

China would be, as a percent, a little bit higher from a start-up cost because we are building plants. Hari mentioned, we've added 5, seems like, in the last month (laughter). It hasn't been that quick, but we are -- it's fairly rapid. And the 5 includes some new plants as well as relocation of existing facilities that we had simply outgrown, and we're adding a couple of more over the course of the next year or so. That certainly as a percent would be a little bit higher start-up cost, if you will, than the launches that we will incur in North America or Europe or likely South America. China is still a little bit unique because of the overall growth that is going on out there.

In China, we are adding capacity not specifically for commercial vehicle, but just for the growth in total which includes still some pretty rapid light vehicle growth.

Right. In fact, most of it is for light vehicle.

Right.

But one of the things in China including -- the numbers look big putting in 5 plants, including some relocations, et cetera. But we are still being very, very careful about adding that capacity as close to when we need it as possible. That we are not going way out there with future-year forecasts of growth. We will put that capacity in as close as we can to when we need it, but the cost always leads the volume a little bit. It simply has to.

That is helpful, thank you.

(Operator Instructions) Our next question will come from Richard Hilgert. Your line is open.

Good morning. Morningstar.

Good morning.

Ken, the factoring program that you have got over in Europe. What's -- is any of that under 1-year commitments? Or is that all stuff that is cancelable on a 30-day notice?

It is a series of programs with individual banks. For the most part, Richard, they are usually 1-year. There might be a few that are cancelable on a shorter term. But we have had those in place for the last 10 years including through the financial crisis. So I'm not too concerned about those at this point.

Correct. What is the -- I am just asking to get a picture of the liquidity situation. I like to factor -- I like to include in the factoring programs that are committed. What is the total amount that's committed? Over in Europe?

Richard, I don't have that number in my head. I think it is in the 10-K.

Yes. It seemed to me like -- the reason why I'm asking is it seemed to me like it was a little difficult to dig it out last time.

If you would like, let's -- why don't you give Linae a call, and we'll take a look in the 10-K and see if we can get you a more direct answer. I just don't have the number committed.

Yes. No problem. Who is the competitors that you run into down in Australia?

In Australia, we have KATCON on the emission control side, and then we have Zedef that supplies a certain suspension modules. And also frankly in the last few years, many of our competitors are regional which include Japan and Southeast Asian exporters into Australia.

As far as building on the continent.

Building on the continent. On ride control, we're pretty much the only players, and on emission control, as I said, we have KATCON and Tenneco, essentially.

Okay. Now that [Foracio] and [MCon] have been together now for a little bit more than a year. Just curious to know, have you seen any kind of changes with respect to market shares especially in the outlying years that you're bidding on? Or are things still pretty sticky?

We've definitely won some business just like we said. We believed that there would be some business that would be sourced to better balance, and we've seen a handful of platforms -- I don't know how many off the top of my head -- but a handful platforms that have come our way.

So you think that it is balancing out a little bit more on your end in the outlying years?

Pretty much as we've said all along.

That is a customer by customer sort of discussion. It's not a back row thing. And yes, where there were some customers that went out of balance, I think we're seeing some balance come back now.

Good. All right. Thank you.

And at this time, this is our last question for today.

Thank you. This concludes our call this morning. An audio replay will be available on our website at www.Tenneco.com in just about an hour. You can also access a recording by phone. In North America, you may reach the playback at 866-485-6429. For those outside North America, the dial-in number is 203-369-1628. This call-in information is also found in our press release.

If you are an analyst or investor with additional questions, please contact Linae Golla, our Executive Director of Investor Relations at 847-482-5162. Reporters with additional questions can follow up with me at 847-482-5607. Thanks, everyone, for joining us today.

Thank you. That does conclude today's conference call. Thank you for participating, and you may disconnect at this time.