How would you characterize Tenneco Automotive's performance in 2000?
It was a tough year for the entire sector, and I know our people worked very hard to offset some of the toughest industry conditions we've seen in years. But when profits fall despite slightly higher revenues, the only description for that type of performance is disappointing. Now the key question going forward is, "What are we doing to address the industry challenges and internal problems?" Personally, I am proud of our quick responce. We are implementing aggressive but necessary cost-cutting actions in order to help counter another year of tough industry conditions
You grew revenue, yet income from continuing operations and EPS were down significantly year-over-year. What caused this?
It's true we saw an increase in revenue, fueled by a record build year in North America and the inclusion, for the first time, of pass-through catalytic converter sales; however, a number of factors converged on us to influence our profitability and slow our progress. In North America, a change in our original equipment exhaust mix due to the launch of lower margin platforms in the first half of 2000 impacted profits, as did higher costs associated with the delayed closing of our Culver, Indiana, exhaust plant. In addition, we saw higher manufacturing costs associated with more complex mini-converter production. Profits for our North American original equipment unit also declined due
to heavy-duty and light vehicle production slowdowns beginning in the third and fourth quarters, respectively.
On the aftermarket side of our business, our margins suffered from depressed industry conditions worldwide. For instance, in North America, the exhaust replacement market was down 11 percent and ride control declined 15 percent. Costs associated with new product launches and promotions compounded this problem.
Internally, we have also been impacted since the spin-off of our packaging business in 1999 by higher than industry average selling, general, administrative, and engineering (SGA&E) costs.
To what extent did the decline in the value of the euro versus the dollar impact the company in 2000?
The euro had an impact on our earnings last year. For the full year, revenue was down
by $131 million and operating income by
$7 million as a result of the devaluation of the euro against the U.S. dollar. Our operating plans were made assuming a much better exchange rate on the euro of $1.05 versus the mid-$0.80s to low $0.90s where the euro hovered throughout the year. We are always subject to currency fluctuations worldwide given our global operations, and are particularly impacted by the euro since 35 percent of our revenue was generated
in Europe in 2000.
What actions have you taken in response to difficult industry and market conditions?
We responded quickly to the industry slowdown in both the aftermarket and original equipment businesses by aggressively cutting costs, sharply reducing spending, and focusing intensely on improving productivity to realize cost savings. We reduced SGA&E expenses as a percent of sales to 14 percent in 2000, and plan to reduce it even more in 2001. We instituted a headcount freeze and began two cost reduction initiatives, which we anticipate will eliminate approximately 1,100 salaried positions worldwide when fully implemented. We reduced capital spending 5 percent from 1999 levels to $146 million in 2000, and plan to maintain this level in 2001. We also made dramatic cuts in discretionary spending across our organization during the second half of 2000 and will continue this effort throughout 2001.
Finally, we are being relentless in implementing and executing our business processes - EVA®, Total Value Management, and Business Operating Systems - that will continue to produce savings through more efficient operations. For example, we are improving productivity by using lean manufacturing processes and implementing Six Sigma. In 2001, we expect to save $20 million through Six Sigma initiatives that use
statistical tools to identify the causes of defects and waste. While we are addressing the immediate issues facing us, we are not deviating from our strategic plan and our
efforts to achieve long-term objectives in business processes, customer satisfaction, and technology.
How quickly will you realize savings from these cost reduction initiatives?
We are moving quickly to implement these programs, and estimate that the annual savings will be approximately $72 million beginning in 2002 when the two cost reduction initiatives are complete. More than half of the 1,100 positions were eliminated by the end of 2000. Most of the remaining
positions will be eliminated in the first and second quarters of 2001. As a result, we anticipate that the annual savings in 2001 from position reductions and other activities will be approximately $66 million.
|
 |
Are you concerned that you are cutting too deep?
We planned the reductions in our work force
so as to have the least impact on our
customers. We evaluated all our operations
in order to use our resources in the
best possible way in light of current
and future market opportunities.
We were very selective in eliminating
positions and identified work, particularly
engineering programs, that didn't advance our long-term growth strategies and didn't
have the potential to deliver acceptable returns on investment. The bottom line is
we are reducing our costs and focusing our resources on what customers are willing to support with the ultimate goal of being even more responsive to their needs.
Speaking of your customers, how are you countering the increasing pricing pressure from vehicle manufacturers as the industry enters a cyclical downturn?
Pricing concessions from some of our largest original equipment customers have been a part of doing business for a long time, and recently it has intensified with a few customers. We continue to negotiate very hard on these issues with the goal of reaching
a mutually beneficial solution. We also work with our suppliers to share price reductions across the entire supply chain. In addition, we continuously look for opportunities to increase manufacturing efficiency and reduce costs to help offset pricing givebacks.
There were some bright spots, financially and operationally, in 2000. what were they?
Our European original equipment ride control and emission control businesses delivered strong results in 2000 and are expected to sustain this upward performance in 2001. The same is true for our Australian business unit, which met its plan despite currency and production volume issues. Our businesses
in the emerging markets of Asia and South America also delivered strong results in 2000, and we expect this growth to continue. We were also very pleased
to finalize a strategic alliance with Futaba, Japan's leading exhaust manufacturer, and look forward to positive growth as we leverage that relationship.
Financially, despite facing very tough industry conditions and internal issues, we were able to generate a $23 million improvement in EVA. In addition to EVA improvement, through better management of working capital and our receivables factoring program, we were able to pay down $107 million on our debt.
Looking ahead, what is the outlook for your markets over the next 12 months?
Overall, in the aftermarket, we expect soft industry conditions to prevail well into 2002. A number of factors are plaguing this market including longer lasting parts, excess capacity, large inventories and the growth of vehicle leasing. In addition, in North America there are fewer cars currently in the prime parts replacement age of six to 10 years compared to 1995. Fortunately, according to industry forecasts, the growing number of vehicles making up the zero to five-year age segment will begin to move into the key replacement range beginning in the second half of 2002.
We have been working to resize our organization to reflect these changes. We've reduced the size of our sales force, cut promotional spending, reduced inventories, and are making our manufacturing and distribution operations more efficient. We will continue
to fundamentally alter our operations to maximize our opportunities in this changing market.
On the original equipment side of the business, we are encouraged by our fourth quarter 2000 performance in Europe, particularly in the exhaust business, and hope to see a more robust market throughout the year. Vehicle production in North America will likely remain volatile, and we don't expect
to see an upswing until at least the third or fourth quarter of 2001.
What are the opportunities for Tenneco Automotive in 2001?
We expect to face another difficult year in 2001 with continuing softness in the global aftermarket, and lower light vehicle and heavy-duty truck production in North America. Our biggest challenge in the short term is to successfully attack the things that we can control - SGA&E costs, discretionary spending, capital spending, and manufacturing efficiency. And we must act aggressively to make sure we can service our high debt level.
Despite the immediate problems facing the auto supply sector, we also see some opportunities in the year ahead. There are
a number of key trends in the auto industry today that are driving growth for our businesses. On the exhaust side, we see potential for increased content with the implementation of stricter global emission regulations requiring the use of more sophisticated exhaust components. We're already seeing this increase in content in our growing original equipment book of business.
|
