Exhibit 99.2
TECUMSEH PRODUCTS COMPANY
Third Quarter 2008 Earnings Conference Call
Thursday, November 6, 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: Third Quarter 2008 Operational Overview
4. Jim Nicholson: Third 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
third 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. This
conference call is being recorded at the request of Tecumseh
Products. If anyone has any objections, you may disconnect
at this time.
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 HESS: INTRODUCTIONS AND SAFE HARBOR STATEMENT
Section 2.1 Thank you Katy. Good morning and welcome to Tecumseh
Products' third quarter 2008 conference call.
Section 2.2 On the call today are:
- Ed Buker, President and CEO - and
- Jim Nicholson, Vice President, Treasurer and Chief
Financial Officer
Section 2.3 Yesterday afternoon, we announced the Company's third
quarter 2008 results for the period ended September 30,
2008.
Section 2.4 If you did not yet receive a copy of the press release,
please contact Amanda Passage at 616-233-0500 to have one
sent to you.
Section 2.5 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
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Section 2.6 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 2.7 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 2.8 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 2.9 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 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 2.10 Risk factors exist and new risk factors emerge from time to
time that may cause actual results to differ materially from
those contained in the forward-looking statements.
Section 2.11 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
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discussed in the Company's most recently filed Annual Report
on Form 10-K and other SEC filings, under the titles "Risk
Factors" or "Cautionary Statements Related to
Forward-Looking Statements" 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 2.12 With that said, I would now like to turn the call over to Ed
Buker, President and CEO of Tecumseh Products.
SECTION 3 ED BUKER - THIRD QUARTER 2008 OPERATIONAL OVERVIEW
Section 3.1 Thank you, Teresa. Good morning and welcome to our third
quarter 2008 conference call.
Section 3.2 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 3.3 Today I will provide you with an update on our business from
several perspectives. First, I will provide some context for
our third quarter results as well as the broader markets and
their impact on those results. Then I'll turn the call over
to our CFO, Jim Nicholson, to go over our financial results
for the quarter and nine months in greater detail. Then
update you on our initiative to transform our Company into a
world class compressor manufacturer. Finally, we will open
the call up to your questions.
Section 3.4 It's been a very busy year so far, and we've made a lot of
progress; unfortunately, the condition of the global economy
has served to mask some results of our efforts. The recent
global slowdown has a detrimental effect on our sales
volumes. The current decline has been marked by lack of
credit availability for our customers, increased borrowing
rates for those who are able
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to secure lines of credit, slowdowns in the housing market,
and double-digit inflation rates in some countries where we
have key business operations. Any one of these factors,
taken independently, would have had an adverse impact on our
sales volumes; combined, the impact has been significant.
Section 3.5 We are a global business, and under normal circumstances,
declines in economic activity that affect one regional
market would be balanced against greater growth in other
parts of the globe. Unfortunately, the current slowdown is
affecting all of our global markets with nearly equal
severity with the declines in the third quarter and expected
declines in the fourth quarter greatly exceeding our
previous expectations. In response, many of our customers
quickly reduced production volumes and cancelled or delayed
orders in an effort to reduce inventory levels. Although we
responded quickly to the slowdown, including reducing our
global headcount by 1,200 people over the course of the
third quarter, instituting temporary shutdowns at many
facilities, and aggressively consolidating our manufacturing
footprint, the impact on our financial results was
significant. Beyond the broad economic slowdown, many of our
customers and suppliers were adversely impacted by the
freezing of the credit markets. As a result, we saw
increased pressure to pay our suppliers earlier, and it
became prudent to use cash to eliminate receivables sales
which became less attractive due to the spike in rates that
accompanied the global financial crisis. In a nutshell, we
used significant cash in the quarter to minimize financing
costs.
Section 3.6 The global financial crisis that became acute in the third
quarter also resulted in dramatic changes and increased
volatility of commodity and foreign currency exchange
markets. With respect to currency, the increasing volatility
and the unprecedented speed of increase in the value of the
U.S. dollar relative to the euro, real and rupee had
significant adverse impact on our bottom-line results in the
quarter. While the weakening of these currencies is a
positive development for our results in the long term, the
extremely rapid devaluation of the real and
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rupee in the quarter caused balance sheet re-measurement
losses and mark-to-market losses to adversely affect our
operating profit.
Section 3.7 Volatility in commodity prices also had an impact during the
quarter. Copper and steel remain the most significant
commodity exposure we have in our manufacturing process, and
both have been extremely volatile. Copper rose more than 30%
through July, and subsequently fell 22% in the last two
months of the third quarter. We've already hedged over 80%
of our copper needs for the fourth quarter of this year, and
lesser amounts into 2009, so the benefit of these price
decreases is felt gradually by our business, as many of our
hedges are at substantially higher prices than the current
spot rate. Prices for the specific type of electrical steel
used in our manufacturing process rose nearly 80% in the
first nine months of 2008, we do expect them to stabilize at
current high levels, but there is increasing evidence that
steel will decline in a manner consistent with other
commodities. Since there is currently no well-established
market for hedging steel prices, we could benefit more
quickly from any such decline.
Section 3.8 Although we continue to make strides in accomplishing our
strategic goals, in the third quarter we faced unprecedented
upheaval in our markets around the globe. Despite these
challenges, we believe we navigated these issues as well as
could be expected due in large part to the many actions
we've taken to streamline operations and generate cash over
the last year. As a result of our efforts, all the
fundamentals of managing in a crisis like this are in place,
and as soon as volumes begin to recover we are confident
that our operating results will begin to more fully reflect
the improvements we've enacted. Unfortunately, we do not
anticipate any meaningful improvements in these external
market conditions before mid-2009, so we must continue to be
vigilant in managing our costs, while conserving our
financial resources.
Section 3.9 Jim will you elaborate on our financial results?
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SECTION 4 JIM NICHOLSON - THIRD QUARTER 2008 FINANCIAL OVERVIEW
Section 4.1 Yes, thank you, Ed.
Section 4.2 On the bottom line, we reported a net loss of $13.2 million,
or $0.71 per share for the third quarter of 2008, versus a
net loss of $77.2 million, or $3.89 per share in the
year-ago quarter. Income from continuing operations for the
third quarter 2008 amounted to a net loss of $36.5 million,
or $1.98 per fully diluted share, compared to a profit from
continuing operations of $2.2 million, or $0.11 per fully
diluted share a year ago.
Section 4.3 Operating loss was $32.4 million for the current quarter,
compared with an operating profit of $5.3 million last year.
Operating results included impairments, restructuring and
other charges of $16.2 million, which were mostly non-cash
versus $100,000 in 2007. Excluding impairments,
restructuring and other charges the decline amounted to
$21.6 million, which was caused by much lower unit volumes
and the associated unfavorable overhead absorption, the
effect of foreign currency exchange rates and higher SG&A
costs.
Section 4.4 During the third quarter, we had a number of shifts on the
sales front. Consolidated net sales for the quarter fell
$22.2 million to $256.2 million from $278.4 million in the
third quarter of 2007. Excluding the impact of currency
translation, consolidated net sales would have declined by
$42.3 million in the quarter. Breaking down the total, $22.2
million decline in net sales, sales for refrigeration and
freezer applications fell by $9.6 million, which equates to
a decline of 14% in unit volumes. There was a distinct
pullback in volumes from our R&F customers around the entire
globe as they took actions to adjust inventories in response
to the dramatic slowdown in consumer demand in the regions
where our customers operate. Sales of compressors for air
conditioning and other applications declined by $13.6
million, representing a 49% decline in unit volumes due to
softer economic conditions, higher customer inventory
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levels and cooler-than-normal weather in many markets. While
this is a substantial decline, air conditioning applications
represent only about 15% of our overall business. The
decline in these sales was partially offset by sales of
compressors used in commercial and aftermarket applications,
which increased by $1 million. Unit sales for these
applications fell by 27% during the quarter, however the
impact of price increases and currency effects helped to
offset the unit volumes.
Section 4.5 Cost of sales was $238.7 million in the third quarter of
2008, compared with $244.4 million in the prior year's third
quarter. As a percentage of net sales, cost of sales
increased to 93.2% in the quarter, from 87.8% last year. In
dollar terms, gross margin declined $16.5 million to $17.5
million, from $34.0 million in the third quarter of 2007. By
far the biggest negative impact on gross profit was the
level of un-absorbed overhead resulting from the decline in
unit volumes during the quarter which amounted to $11.1
million, followed by unfavorable foreign currency movements
which had an unfavorable impact of $8.6 million. This
included $3.7 million of losses recognized in our income
statement for the mark-to-market of currency forward
contracts in India and balance sheet re-measurement losses
in Brazil. On the positive side, selling price increases
exceeded increases in commodity costs by $3.3 million.
Section 4.6 Selling, general and administrative expenses increased by
$4.9 million to $33.7 million in the third quarter. The
Company spent $5.1 million in the quarter for one-time
professional fees, mostly for unplanned professional fees,
including legal fees for corporate governance matters.
Section 4.7 We recorded expenses of $16.2 million in impairment,
restructuring charges, and other items in the third quarter
of 2008. The majority of these expenses were a result of the
consolidation and relocation of global manufacturing
operations, and included expenses recognized at our
Brazilian, North American,
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and Indian locations, which accounted for $11.8 million,
$3.6 million and $600,000, respectively, during the quarter.
Section 4.8 With regard to cash flow, during the third quarter, cash
used by operations amounted to $55.6 million. The most
significant uses of cash during the quarter involved working
capital requirements, particularly accounts receivable and
accounts payable. With regard to accounts receivable, we
reduced the amount of discounted receivables by $31 million
during the period, which increased the net receivables
recorded on our balance sheet but allowed us to avoid
unnecessary interest expense. In the case of payables, we
accelerated payments to cash- and credit-constrained
suppliers during the period. The remaining cash was, use was
primarily attributable to cash net losses, which were a
result of the economic downturn adversely affecting our
sales volumes. In each of these instances, our favorable
cash position allowed us to address unfavorable market
conditions without incurring the cost of escalating interest
rates or drawing upon lines of credit. These uses of cash
were somewhat offset by our aggressive efforts to reduce
inventory balances, which provided cash of $16.5 million
during the quarter. At the end of the third quarter, our
cash balance was $126.1 million, providing additional
security for our operations amid these uncertain economic
conditions.
Section 4.9 The extreme volatility in certain commodity prices and in
foreign currency exchange had substantial impacts on our
business in the third quarter. We are actively engaged in
forward purchase contracts and futures contracts, to lock in
prices and reduce the risk of commodity volatility on the
majority of our forecasted copper use over the next several
months. While these hedge positions protect us from
increases in price, they also delay the benefit we see from
price decreases, such as the one we've recently experienced.
We've seen significant volatility in copper, as prices
surged throughout the first seven months of the year, and
subsequently have declined precipitously since July. Aside
from copper, our most significant remaining commodity
exposure is steel,
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simply because there are no well-established effective
hedging vehicles available for steel. Unlike most
commodities, steel prices for the specific type of
electrical steel employed in our production has remained
high throughout this year, although we are beginning to see
opportunities to participate in falling prices. Considering
our hedge positions, we project that our full year commodity
cost will exceed the prior year by approximately $50
million. To address this, we previously implemented price
increases ranging from 4-8%, the last of which went into
effect at the start of the fourth quarter. With the recent
sizeable downward movement in commodity costs and growing
excess capacity we believe there will be a significant
pressure on prices until normal economic activity resumes.
Section 4.10 Turning to foreign exchange exposure, the recent
unprecedented volatility in currency markets driven by the
credit crisis has had a significant adverse impact on our
results. From January 1 to July 31, 2008, the Brazilian real
strengthened by 11.6% against the dollar, and in the
following two months the real weakened by 19.6%. Similarly,
for the first nine months of the year, the euro weakened
against the dollar by 3.7%, while the rupee weakened 18.8%.
While the weakening in these key currencies has a favorable
impact on our business over the long term, the rapid and
significant weakening in the third quarter caused balance
sheet re-measurement losses to out-weigh the benefit of
transaction gains during the period. In addition, due to the
fact that we had entered into foreign currency forward
exchange contracts in India when the rupee was stronger
against the dollar, These foreign currency effects were $3.7
million unfavorable to third quarter results when compared
to the same period in 2007.
Section 4.11 Let me spend a moment on interest expense, as well. In the
third quarter, our interest expense increased by
approximately $400,000, from $6.6 million in the third
quarter of 2007 to $7.0 million this year, due mainly to
higher interest rates on our short-term borrowings in
Brazil. We expect our borrowings in Brazil to decline
significantly in the fourth quarter, as we apply the cash
we've received
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from refunds of non-income taxes in Brazil against that
debt. On the positive side, given our sizable cash balance,
our interest income for the third quarter more than doubled
when compared to last year, to $2.7 million.
Section 4.12 I will now turn the call back over to Ed for some additional
remarks.
SECTION 5 ED BUKER - STRATEGIC PLAN DISCUSSION AND SUMMARY
Section 5.1 Thanks, Jim. In the third quarter, despite severe economic
headwinds, we continue to make progress in achieving our
operational objectives while moving forward with our
long-term strategic plan. I'd like to share some of that,
those strategic objectives with you in greater detail.
Section 5.2 For more than a year, our management team has focused on
improving our Company through the development and
implementation of a sound, long-term strategic plan.
Throughout this process, we've taken a number of tactical
steps to modernize every aspect of our business, including
our products and processes, our operations and manufacturing
footprint, and our corporate governance and capital
structure, all with the view of establishing Tecumseh as a
world-class competitor in our core compressor condensing
unit business.
Section 5.3 One of the first steps the Company undertook to move in this
direction was the divestiture of non-core businesses. We've
also successfully completed the reversion of one of our
vastly over-funded pension plans. These important
initiatives strengthen our balance sheet have not only given
us the solid financial position needed to withstand the
current economic contraction, it also provides us with the
flexibility to shift our operational footprint.
Section 5.4 During the year, we've been engaged in an exhaustive process
to determine the optimal strategic direction for Tecumseh as
we move forward to world-class status. As we see it, being a
world class competitor means a variety of things,
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but most importantly it means striving to be the best
manufacturer of compressors condensing units, designed and
developed to be exact products that our customers demand,
producing them with high quality and delivering them when
our customers want them at a price that reflects the value
we provide. In this global economy, it also means
establishing an operational footprint that utilizes best
cost sources of production.
Section 5.5 As part of this process, we've engaged the assistance of
independent financial and strategic professionals from
Rothschild and Charles River Associates (CRA) to review our
business in detail and make strategic recommendations to our
Board and management team. During this time, our Board has
been fully engaged in the process, and we've spent weeks and
months to carefully evaluate every reasonable strategic
option, from selling the company, in whole or in parts, to
engaging with a strategic partner, to keeping our business
exactly as it is, as it once was. No options were left off
the table.
Section 5.6 This intensive and iterative process has supported our
vision of how to best serve our customers across the globe.
In the past, Tecumseh's prior management believed the best
approach to each market was to establish complete standalone
entities in these markets. While this approach might have
made sense at the time, we realize now that it created a
series of redundant cost structures, and parallel product
development efforts that prevented us from operating
efficiently on a global basis. We believe we can more
effectively serve our customers and meet their needs by
leveraging the power of our global organization across
selected local markets. We can be more competitive, achieve
greater operating leverage by shifting high-cost
manufacturing to locations with the most advantageous
overall cost structure. These products can then be shipped
globally where local teams can complete the process of
customization to best meet the demands of our local markets
and customers.
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Section 5.7 Similarly, we've realized the limitations of vertical
integration in our business and pursued steps to optimize
our level of vertical integration. In our view, in-house
production capability only makes sense for products and
processes that are essential to meeting the customer demand
and where there is no viable and economic alternative from
local supply. We need to focus our operations on what we do
best, and leave the rest to our supply partners. A good
example of this "old school" approach to vertical
integration is our manufacturing operation in Brazil. That
operation was set up by prior management in a way
reminiscent of Henry Ford's Rouge River plant, with iron ore
coming in one door and Model T's going out the other. In
2008, with the Brazilian economy more modernized than it was
when our plants were originally built, this is a process
that no longer makes sense for our business. We're currently
evaluating the best alternative to ensure supply of critical
components.
Section 5.8 We've already implemented substantial improvements to our
manufacturing process on a global basis. For example, we've
completed thirty-seven Kaizen training events. These events
combined with other operational initiatives have yielded
significant improvements in productivity and efficiency,
including a 13% reduction in the size of our manufacturing
footprint. We also expect to reduce our headcount by 25% in
2008, which reflects greater operational efficiency as well
as right-sizing efforts reflecting current economic
conditions.
Section 5.9 Over the longer term, we see the potential to better
optimize our product offerings, identifying and successfully
penetrating those markets that offer the greatest
opportunities for our products. Our Engineering team, over a
short timeframe, has identified and is developing a globally
consistent New Product Development process, and established
clear product platforms with an objective of eliminating
overlap in product offerings.
Section 5.10 All these efforts have been undertaken in light of our
ultimate goal of reaching pre-tax margins of 3 to 5 percent
or better over the next three years. We have
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developed a staged plan over this time period to achieve
these results and believe that the plan can mostly be funded
by cash generated by ongoing operations. There is no big
bang, cash depleting approach to our plan.
Section 5.11 Looking beyond our operations, manufacturing footprint and
quality initiatives, our Board and management team are
looking to make improvements across our entire business,
including Tecumseh's corporate governance and capital
structure. As part of this process, we are actively
reviewing potential options for bringing our governance and
capital structures up to date and in line with industry best
practices. Over the past year, we've made significant
strides in improving our corporate governance, including
strengthening the independence of our Board as well as
updating our board committee charters and governance
guidelines. With regard to our capital structure, based on
our own benchmarking data and conversations with a large
number of shareholders, we remain convinced that our current
dual-class structure must be changed. We believe that our
Class A and Class B shares should be consolidated into a
single class of voting stock and we are committed to doing
just that in the near term.
Section 5.12 As many of you are no doubt aware, we are currently involved
in preparing for a special meeting of the shareholders to be
held on November 21st. I encourage all of you to read
through the proxy statement we filed with the SEC on October
24, as well as the supplemental materials filed subsequent
to our proxy to become more familiar with the governance
issues we face and the important steps your Board and
management team are taking to modernize our corporate
governance and to increase the value of the business for all
shareholders.
Section 5.13 While we've made progress in improving our operation, the
dramatic slowdown in virtually all of our markets has more
than offset that progress in the short term. Although we
continue to closely control costs, our biggest challenge now
is the top line. As softening demand - particularly in
emerging markets - depresses our revenues, we must make
every effort to work closely with our
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suppliers and customers to weather this storm. Fortunately,
significant challenges like those we currently face often
present opportunities, and the Board and management team
will continue to evaluate potential actions that might be
taken in this environment to further adjust our operational
footprint. While we don't expect the current economic
conditions to change the actions we'll take to execute our
strategic plan, they could affect their timing; continued
adverse trends in sales volumes could accelerate the timing
and amounts of severance costs we'll incur to appropriately
size the business to current levels demand. We will continue
to exercise prudence with regard to use of our cash,
including investments in capital expenditures and working
capital, keeping in mind that our sizable cash balance will
be a critical asset for us as we work through this slowdown.
Section 5.14 This concludes our prepared comments for this morning.
Operator, Katy, we are now ready to take questions.
SECTION 6 QUESTION AND ANSWER SESSION
SECTION 7 BUKER - FINAL REMARKS
Section 7.1 Okay, Katy thank you very much. I'd like to thank everybody
for participating in the call and we'll talk with you again
at the end of the fourth quarter and end of the year as soon
as we're back at it and we'll try to keep you up to speed
with the other things going on in our lives. Thank you.
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