EXHIBIT 99.2
TECUMSEH PRODUCTS COMPANY
First Quarter 2008 Earnings Conference Call
Thursday, May 8, 2008 -- 11:00 a.m. ET
APPROXIMATE TIMING
20 minutes of presentation
30 minutes of Q&A
CALL OUTLINE
1. Operator: Call Opening
2. Teresa Hess: Safe Harbor Statement
3. Ed Buker: First Quarter 2008 Operational Overview
4. Jim Nicholson: First Quarter 2008 Financial Overview
5. Ed Buker: Summary & Conclusion
Turn call over to Operator for Q&A
6. Operator: Question and Answer Introduction
7. Management: Question and Answer Session
8. Ed Buker: Final Remarks
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Section 1 OPERATOR: CALL OPENING
Section 1.1 Good morning and welcome to Tecumseh Products Company's first
quarter 2008 earnings conference call.
Section 1.2 All participants will be in a listen-only mode until the
question-and-answer session of the conference call. This call is being
recorded at the request of Tecumseh Products.
Section 1.3 I would now like to introduce Ms. Teresa Hess, Director of
Financial Reporting and Investor Relations at Tecumseh Products. Ms.
Hess, you may proceed.
SECTION 2 TERESA: WELCOME
Section 2.1 Thank you Cecelia. Good morning and welcome to Tecumseh
Products' first quarter 2008 conference call.
Section 3 TERESA: INTRODUCTIONS AND SAFE HARBOR STATEMENT
Section 3.1 On the call today are:
- Ed Buker, Chairman, President and CEO - and
- Jim Nicholson, Vice President, Treasurer and Chief Financial
Officer
Section 3.2 Yesterday afternoon, we announced the Company's first quarter
2008 results for the period ended March 31, 2008.
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Section 3.3 If you have not yet received a copy of the press release,
please contact me at 517-423-8455 to have one sent to you.
Section 3.4 Please note that the release is also available on many news
sites, and it can be viewed on our corporate web site at
www.Tecumseh.com
Section 3.5 Before I turn the call over to Ed and Jim to comment on our
results, I would like to remind you that this conference call contains
certain statements regarding the Company's plans and expectations,
which are forward-looking statements and are made pursuant to the Safe
Harbor provision of the Securities Litigation Reform Act of 1995.
Section 3.6 These forward-looking statements reflect the Company's views at
the time such statements are made, with respect to the Company's
future plans, objectives, events and financial results such as
revenues, expenses, income, earnings per share, operating margins,
financial position, expected results of operation and other financial
items, as well as industry trends and observations.
Section 3.7 In addition, words such as estimate, expect, intend, should,
could, will and variations of such words and similar expressions are
intended to identify forward-looking statements.
Section 3.8 These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are
difficult to predict with regard to timing, extent, likelihood and
degree of
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occurrence. There are a number of factors, many of which are beyond
the Company's control, which could cause actual results and outcomes
to differ materially from those described in the forward-looking
statements.
Section 3.9 Risk factors exist and new risk factors emerge from time to
time that may cause actual results to differ materially from those
contained in any forward-looking statements.
Section 3.10 Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements as a prediction of
actual results. Furthermore, the Company expressly disclaims any
obligation to update, amend or clarify forward-looking statements. In
addition to the foregoing, several risk factors are discussed in the
Company's most recently filed Annual Report on Form 10-K and other SEC
filings, under the titles "Risk Factors" or "Forward-Looking
Statements" (or similar caption) and those discussions regarding risk
factors as well as the discussion of forward-looking statements in
such sections are incorporated by reference in this call.
Section 3.11 With that said, I would now like to turn the call over to Ed
Buker, Chairman, President and CEO of Tecumseh Products.
SECTION 4 BUKER -- FIRST QUARTER 2008 OPERATIONAL OVERVIEW
Section 4.1 Thank you, Teresa. Good morning and welcome to our first
quarter 2008 conference call.
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Section 4.2 This call is being simultaneously broadcast on the Internet and
will also be archived for replay starting this afternoon. The replay
can be accessed at our web site, www.Tecumseh.com.
Section 4.3 This morning, I will begin our discussion with some
introductory remarks regarding the status of our business and our
ongoing plans for improvement. Next, I will provide some commentary
regarding the first quarter operating achievements, followed by some
commentary from Jim Nicholson, our CFO, regarding our financial
results for the period. Lastly, we will share our perspectives and
expectations for the future. Following these opening remarks, we will
open the call for your questions.
Section 4.4 The last time we spoke, I described the Company's ongoing
transformation process in three phases. For the purposes of today's
call, and the discussions which pertain to the ongoing reengineering
of the Company, I intend to use these "three phases" to help frame our
dialogue.
Section 4.5 As I mentioned on our fourth quarter and year-end call this
past March, the first phase, which is substantially complete, related
to the disposition of certain non-core businesses, the intent of which
was to help clean up our balance sheet, improve our liquidity and help
us to focus our attentions on the core compressor business - a market
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where we continue to maintain a number of strategic and competitive
advantages.
Section 4.6 The second phase of our action plan consists of multiple
near-term tactical objectives which are intended to improve our
efficiency, profitability and ability to compete successfully in the
marketplace. These initiatives include:
- Rationalization of our production facilities and manufacturing
lines,
- New sourcing and procurement strategies, and
- Implementation of lean manufacturing techniques throughout the
business
Section 4.7 At present, we anticipate these operational initiatives will
begin to show initial benefits beginning in 2008 and 2009.
Section 4.8 The third phase of our action plan is expected to set the
foundation for achieving sustained levels of revenue growth and
profitability. In recent months, our team has been working closely
with a strategy consultant to more accurately define the markets upon
which we should focus and the steps necessary to capture profitable
growth in those areas. Although many of these plans remain in
development, one of the key areas of focus included within this phase
is the formulation of product and service solutions that address those
markets and customers that best fit our strengths. More specifically,
this focus involves introducing revised product offerings that:
- Have been engineered for reduced material costs,
- Are produced utilizing a more effective supply chain,
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- And deliver superior performance and quality characteristics.
Section 4.9 As I have indicated on prior calls, our expectation is that
these operational initiatives will help to restore profitability to
between 3% and 5% EBIT over the next two to three years.
Section 4.10 Since we last spoke, our senior leadership team has been
looking diligently at the alternatives to achieve this end, without
the distractions of past years. So far, the outcomes of these efforts
are two-fold: First, the opportunity to achieve and exceed our stated
financial targets is encouraging, as there is now a clear and distinct
plan in place to help us achieve our objectives and, second, we
continue to refine the scope of those alternatives under
consideration, resulting in a further narrowing of our focus on
several attractive options.
Section 4.11 While its premature to share the plans that are currently in
development, the reason I wanted to remind you of our overall
three-staged approach is because I don't intend to reference it again
for the time being. In this and future calls, our primary discussion
will focus on reporting our progress towards our stated plans.
Section 4.12 Along these lines, we have not wasted any time in identifying,
planning and initiating profit improvement activities. Hopefully, you
will agree that we are already seeing the benefits of these actions as
evidenced by reported financial results for the quarter, which include
a return to profitability and greatly improved liquidity.
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Section 4.13 Previously, we had shared with you some of the ongoing
organizational restructuring which had been on top of the mind for us,
including:
- The further restructuring of our North American operations, which
included the consolidation of the Tecumseh and Dundee, Michigan
facilities into other facilities,
- The consolidation of the manufacturing activities in La Verpilliere,
France into Cessieu and
- Headcount reductions within our Brazilian operations
Section 4.14 Today, I have the opportunity to report that we have made
substantial progress in successfully executing on each of these
initiatives. As planned, all manufacturing activities in our Tecumseh
facility have now been successfully relocated, and we continue to
remain on track to consolidate the Dundee facility by the end of the
third quarter. Our plans in France also remain on track for a
cessation of manufacturing activities in La Verpilliere by the end of
the second quarter. In Brazil, we completed a headcount reduction
action that reduced employment by 200 people during the first quarter,
at a cost of $1.2 million. This cost is reflected in our restructuring
charge line item. In addition, we continue to monitor for any softness
in global market volumes and will consider taking further quick action
to adjust headcounts further if volumes weaken from current
expectation.
Section 4.15 Our lean manufacturing efforts are also off to a good start.
During the first quarter, we completed Kaizen events across all global
regions with impressive results. A few examples:
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- In Tupelo, Mississippi a review of our condensing unit line -- focus
on changeover time improvements -- resulted in a 30% improvement in
productivity, a 50% reduction in space and a 50% reduction in WIP
inventory levels;
- In France, a study of the same condensing unit line yielded similar
improvements;
- In Brazil, a review of our line changeover procedures in one area
resulted in a 76% reduction in down time related to changeover. This
reduction adds additional units of production to a sold out product
line.
- India has kicked off a similar event this week.
Section 4.16 These examples demonstrate that our new leadership team is
fully engaged in the task at hand, and we are rapidly producing the
kinds of results that we expect. Moreover, the consistency of our
efforts to execute on our stated objectives provides me with growing
confidence that the operating and financial goals we've established
are within reach. In summary, I am pleased by the initial progress our
team has made - a team comprised of capable, experienced leaders who
are on board with our efforts to position Tecumseh as a world-class
industry leader.
Section 4.17 Now, lets turn our attention to results for the first quarter
of 2008. As Jim will discuss shortly, we continued to improve on a
number of operational and financial metrics in the first quarter 2008
when compared to the year-ago period. Although we started the year
knowing that higher commodity costs and unfavorable movement in
currency values could negatively impact earnings for the year, we have
instituted favorable pricing arrangements, made changes to our
targeted sales mix and introduced sourcing initiatives which, in sum,
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helped us to offset the impact of the commodity and foreign exchange
related factors, thereby contributing to the positive results for the
quarter.
Section 4.18 Jim will you elaborate on the financial results?
SECTION 5 NICHOLSON - FIRST QUARTER 2008 FINANCIAL OVERVIEW
Section 5.1 Yes, thank you, Ed.
Section 5.2 Income from continuing operations for the first quarter 2008
amounted to $7.8 million dollars, or $0.42 cents per basic share and
$0.39 cents per fully diluted share, compared to a net loss from
continuing operations of $2 million dollars or $0.11 cents per fully
diluted share a year ago. First quarter results were bolstered by
gains totaling $4.2 million dollars from the sale of aviation assets,
which is reflected in cost of sales, and offset by a net $0.5 million
dollars in restructuring charges. Generally, the $9.8 million dollar
improvement in net operating results from continuing operations can be
broken down between a $13 million dollar improvement in operating
income, of which $3.7 was attributable to the net one-time gains I
just mentioned, offset by higher net interest costs of $1.5 million
dollars and a $1.8 million dollar unfavorable change in the tax
provision.
Section 5.3 If we focus on the improvement in operating income, excluding
the $3.7 million dollars of one-time items, results on a pro-forma
basis
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improved by $9.3 million dollars. Pricing improvements of $8.1 million
dollars and cost reduction actions of $7.5 million dollars helped to
more than offset unfavorable currency effects of $5.4 million dollars
and higher commodity costs of $2.5 million dollars. While the change
in commodity costs was unfavorable, it was better than our previous
expectation for the quarter due to the successful efforts of our
purchasing group, which was able to defer some of our expected
increases to later in the year. That said, we believe that with the
possibility of further inflationary pressures on steel and copper, we
could be more negatively affected in the back half of the year than
originally expected. We had previously indicated that we expected our
material costs for the full year 2008 to be $23 million dollars higher
than 2007; we now believe, based on current cost pressures, that we
are at risk for seeing these costs rise by an additional $12 million
dollars.
Section 5.4 Operating income also improved by $1.6 million dollars as a
result of a more favorable sales mix despite overall volume declines.
Section 5.5 During the first quarter, we had several notable swings on the
sales front. First, our sales of compressors used in commercial
applications were up by $15.1 million dollars, or 12.2%, while our
sales of compressors used in residential refrigerator and freezer
applications were down by $21.2 million, or 19.4%. Within sales for
R&F, we also saw a shift from sales into the Northern Hemisphere to
sales into the Southern Hemisphere. This is a positive trend because
we are less affected by unfavorable exchange rates with this sales
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mix. The net volume decline in sales of compressors for R&F
applications was mostly attributed to lower market sales
levels in North America and Europe, as well as planned losses of share
where profitability was unacceptable due to the current value of the
Brazilian Real.
Section 5.6 And now, a few words on foreign exchange and its impact on our
business in the first quarter. Including the effects of our hedging
activities, our average realized rate for the Real was 1.92 Real to
the Dollar in the first quarter of 2008, versus 2.23 for the same
period in 2007. Our current expectation is that our average realized
rate will be 1.85 for 2008 versus 2.10 for 2007, respectively.
However, our changing mix of product deliveries from North America to
South America is serving to lessen the negative effects of the changes
in the value of the Real. We had previously indicated that we expected
the impact of currency on the full year to be negative by $35 million
dollars. However, due to our redirection of Brazilian production,
better than expected rates for the Indian Rupee and additional hedging
opportunities taken, we now estimate the full year effect to be
approximately $19 million dollars unfavorable.
Section 5.7 It is probably worth spending a couple of minutes on interest
and taxes, as well. As we have indicated, the elimination of our U.S.
debt has resulted in an approximate $20 million reduction in annual
interest expense, although that isn't readily apparent in our
financial statements where the interest expense line item for the
quarter shows an increase of $1.5 million from $5.8 million to $7.3
million dollars.
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First, due to accounting rules, most of the domestic interest expense
in the prior period has been allocated to discontinued operations.
Accordingly, the interest expense lines in both the 2007 and 2008
period are primarily indicative of interest costs we incur outside of
the United States. The increase for the first quarter represents the
write-off of debt origination costs due to the termination of our old
credit facility, as we have entered into a new $50-million facility,
which we expect to remain un-drawn given our substantial cash
balances.
Section 5.8 With respect to taxes, you have heard me lament in the past
about the inability to accurately predict the provision due to the
accounting rules and our unique tax position. Fortunately, this
quarter represents a fairly straight-forward tax accrual. The
provision represents the taxes we would expect to pay in foreign
jurisdictions where we do not currently have NOL's to offset taxable
income. Otherwise, tax liabilities generated on results in the U.S.,
Brazil and India, including the taxable income generated from our
salaried pension plan reversion, were all offset by NOL's which had
valuation allowances against them previously. Accordingly, there is no
associated net income tax expense reflected in the income statement
for these tax jurisdictions. As we have noted, however, we have
accrued $20 million in excise taxes related to the reversion of our
salaried retirement plan, an expense which is included in the
restructuring charge line and has resulted in a cash outlay in the
second quarter.
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Section 5.9 Now I'd like to turn the call over to Ed for some closing
remarks.
SECTION 6 BUKER - SUMMARY AND CONCLUSION
Section 6.1 Thanks, Jim. We are off to as good a start to the year as could
be expected. Notably, our cost reduction efforts continued to gain
traction in the period, while our deliberate management of sales mix
and sourcing activities helped to more than offset the commodity and
currency-related headwinds prevalent in the market. Should we continue
to face elevated commodity and currency related costs throughout the
remainder of 2008 - which we believe we will - rest assured that our
team will continue to make all actions necessary to mitigate the
impact of such costs, while continuing down a path toward renewed
growth. While currency will have a negative effect on our 2008
operating results, we believe existing efforts to hedge against
foreign exchange volatility does protect us in part. However, the more
apparent challenge lies in the cost of purchased materials, including
commodities such as steel and copper, which continue to trade at
elevated levels.
Section 6.2 With respect to copper, we have a great deal of forward cover
to help reduce our exposure, we have less coverage in the second half
of the year versus the first half, and our spend could ultimately be
higher than expected if copper remains at current or higher levels.
Steel and other purchased materials represent an even greater
variable, as they cannot effectively be hedged at this point in time
given the lack of a developed forward market. While we've budgeted a
6% increase in
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steel costs, and we performed better than that level in the first
quarter, recent news suggests that significant cost pressures in
steel, the magnitude of which could have a substantial impact on our
expected results in the absence of pricing relief.
Section 6.3 With respect to sales, the first quarter was consistent with
our expectations in the aggregate. While we had originally anticipated
full year volumes to be down by 7 to 8 percent, we are now expecting
volumes to be down 13 to 14 percent, as we are starting to see a slow
down in orders and some customers have indicated they expect end
consumer demand to be down 15 to 20 percent in 2008 versus 2007. If a
greater than expected decline occurs in our key markets, this could
adversely affect our current outlook.
Section 6.4 That concludes our prepared comments for this morning. Cecelia,
we are now ready to take questions.
SECTION 7 QUESTION AND ANSWER SESSION
SECTION 8 BUKER -- FINAL REMARKS
Section 8.1 With that, this concludes our conference call today. Thank you
for your interest in Tecumseh Products and we look forward to speaking
with you next quarter.
Section 8.2 Thank you and good day.
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