ATC Technology Corp. Q3 2008 Earnings Call Transcript

ATC Technology Corp. (ATAC)

Q3 2008 Earnings Call Transcript

October 29, 2008, 10:00 am ET

Executives

Mary Ryan – VP, Communications and IR

Don Johnson – Chairman and CEO

Todd Peters – President and COO

John Pinkerton – Controller and Acting CFO

Analysts

Tom Osborne [ph] – CJS Securities

Bill Dezellem – Titan Capital Management

Gary Prestopino – Barrington Research

Craig Kennison – Robert W. Baird

John Clergy [ph] – Principal Global [ph]

Presentation

Operator

Ladies and gentlemen thank you for holding and welcome to the ATC Technology Corporation’s third quarter 2008 earnings conference call and web cast. (Operator instructions) At this time, I’d like to turn the conference call over to your host for today’s agenda, Mary Ryan.

Mary Ryan

Good morning. Thank you for joining us. With me today are Don Johnson, our Chairman and CEO; Todd Peters, our President and COO; and John Pinkerton, our Controller and Acting CFO. Please turn to Slide 2.

Our agenda for today includes a brief overview of the company’s third quarter results presented by Don, a report on each segment’s performance and growth opportunities presented by Todd, the financial review and guidance update presented by John, and finally, during his summary comments Don will adjudge the impact of the country’s current economic crisis on ATC and then provide a wrap up and outlook for the balance of the year. At the end of Don’s summary comments, we will open the floor to a pre-approved list of analysts, money managers, and institutional holders. Please turn to Slide 3.

Before we go to the substance of our call today, I would like to point out that many of our comments are considered to be forward-looking statements under the Federal Securities laws. These forward-looking statements generally include all statements other than statements of historical facts, including statements that are predictive that depend upon or refer to future events or conditions, or they concern future financial performance or position, including future revenues, expenses, earnings, growth rates or margins. You are reminded that forward-looking statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those stated or implied by our comments today. Those risks and uncertainties are fully described in our 2007 annual report on Form 10-K and our other SEC filings. Please turn to Slide 4.

For those of you who are unfamiliar with the ATC story, this slide presents a brief description of each of our businesses. Please turn to Slide 5.

At this time, I would like to turn the call over to our Chairman and CEO, Don Johnson.

Don Johnson

Thank you Mary. Good morning. I like to thank all of you who have joined us today and I like to begin with a summary of the company’s overall performance for the third quarter.

So to begin, please turn to Slide 6. For the third quarter total company revenue increased to a record $138.9 million, up 4.2% from $133.3 million during the same period of last year. Income from continuing operations decreased to $10.2 million for the third quarter of ’08 from $12.8 million in the third quarter of ‘07. This translates to income from continuing operations per diluted shares of $0.48 for the third quarter of this year compared $0.58 for the same period of in 2007. The quarter’s results benefited from our 18th consecutive quarter-over-quarter increase in the Logistics business revenues. The 25% increase in Logistics revenue quarter-over-quarter continues the company’s migration towards predominantly a fast growing, asset-light high-return Logistics business. Our Logistics business contributed 68% of the company’s revenues and 90% of the company’s operating income in the third quarter. To date our key Logistics customers specifically Wireless from AT&T and TomTom have demonstrated their market leadership with their growth resulting in increasing their volumes for us to handle which have contributed to the continued phenomenal growth in the Logistics business.

On the other hand, our Logistics business remained weak and from a quarter-over-quarter perspective was impacted by the demand related to the Honda Warranty Program. We also experienced greater than expected year-over-year declines in Ford and Chrysler legacy program volumes as Todd will explain in his segment reviews. We believe that we too are feeling the impact of the economic slowdown attributable to less miles driven and potentially delayed repair by consumers contributing to the rate of decline in our legacy programs and to the slower than expected volume ramp up from the six-speed programs launched in 2006 and 2007 due to reduced new vehicle sales.

So why is the six-speed ramp up been slow. Quite simply stated the overall reduction in new vehicle sales dampens the previously expected six-speed vehicle populations that our programs serve. We are disappointed with the performance of our Drivetrain business but be assured we have been and will continue to take actions to improve performance. We have been executing a multiple phase plan to reduce both variable costs. You saw us take severance charges primarily in the first quarter and fixed costs to improve Drivetrain performance. A third phase pending board approval of the finalized plan. We’re doing this prudently and in a planned manner so we do not interrupt supply to our customers and to maximize our success.

Also rest assured that we will continue to restructure the organization and we will ensure that we are protecting our capacity growth of new programs. Todd will provide more color on our actions and our plans and also our growth opportunities later in the call.

To round out the third quarter, we repurchased 7.6 million of our outstanding common stock. Year-to-date we have repurchased 42.5 million. Through the third quarter we are about 65% complete with the $50 million 2008 stock repurchase plan authorized by the ATC Board of Directors and year-to-date repurchased approximately 7% of the diluted shares outstanding. We ended the quarter in net cash position of $5.5 million with a year old debt against an excellent [ph] $150 million credit facility in place since early 2006.

During my summary comments later in the call today I will share with you from my perspective our business as it relates to our ability to weather the current economic conditions as we know them today.

At this time, I will turn the call over to Todd and he will highlight the quarter’s results by business segment and update our new business opportunities for you. Please turn to Slide 7.

Todd Peters

Thank you Don. My comments today will cover the following:

Our operating results of our Logistics and Drivetrain businesses for the three months ended September 30, 2008, and highlights of our business development opportunities for each segment. We will start with the Logistics segment. So, please turn to Slide 8.

Our Logistics segment continues its momentum and, again, delivered a record quarter with net sales of $94.3 million, up 25.1% from $75.4 million for the third quarter of 2007. This marked our 18th quarter-over-quarter increase in Logistics revenues. Logistics segment profits increased 15.4% to $14.2 million, compared to $12.3 million for the third quarter of 2007, with a segment margin of 15.1% versus 16.3% for the third quarter last year. The current quarter margin performance reflects a favorable mix of business and efficiency improvements. The third quarter of 2007 includes the benefits associated with an electronics upgrade program that substantially concluded in the first quarter of 2008. The third quarter margin performance is within our overall expectations for 2008 and above our long-term guidance range of 12% to 14%.

Our third quarter results reflect strong volumes of AT&T; up 29% quarter-over-quarter and other base business and significant growth in our business with TomTom. As you know, TomTom is ATC’s second largest customer with revenues of $19 million that grew 508% quarter-over-quarter. Our team has done a tremendous job of launching this business and other previously announced new business.

We continue to focus on cost reductions and operational efficiency improvements. Through the third quarter, our Logistics team is on track to deliver the cost reductions targeted for the year that are embedded in our 2008 guidance. During this quarter, we launched our first Logistics operation in (inaudible) Mexico. This operation is a further important step in expanding the North American reach of our Logistics business. At this site, we will be handling test and repair operations that allow for longer lead times and that are more labor intensive. We believe these expanded operational capabilities will provide future options for our current customers while also providing opportunities with new customers. Our focus is to continue to provide the highest quality, best value solution for our customers wherever they are located.

Now, let’s review performance for the Drivetrain business. So, let us turn to Slide 9.

This has been a disappointing quarter for the Drivetrain business. For the third quarter, revenue decreased to $44.6 million from $57.9 million, a 23% reduction from the third quarter of 2007. Segment profits were $1.5 million compared to $7.7 million for the third quarter of 2007.

The decrease in revenue was largely driven by the expected reduction of demand in the Honda remanufactured transmissions. During the third quarter of 2008, our volume with Honda was down $34 million from the third quarter of 2007. In addition, we experienced continued weakness in our business with Ford and Chrysler due to normal life cycle decay of legacy transmission platforms and general market softness, which is expected to continue through the balance of the year.

On the medium and heavy-duty front, our business with Allison is performing as expected. The reduction in segment revenue results in negative operating leverage.

At this point, I would like to shift focus and discuss our actions to improve Drivetrain’s performance. By way of background since the beginning of this year we have been aggressively cutting costs by both attacking variable costs and have reduced our work force by 28%. This compares to a 25% year-to-date reduction in Drivetrain revenues.

We initiated what I would characterize as phase two of our actions during the second quarter. This involved further leaning of our production processes to maximize asset utilization of our production equipment and to improve efficiency in concert with continued projected lower demand levels. I’m impressed with the progress that team has made thus far. These actions that are continuing better position us to continue operating without interruption as we begin a wider restructuring. The next phase will include the solidification of restructuring plans with our board. Following their review and approval we plan to rapidly streamline the business in light of current and anticipated market conditions resulting in a leaner organization.

We will share both the scope of the restructuring and related charges with you in the fourth quarter after finalization and approval. As we take these steps to restructure the Drivetrain business we’re concurrently maintaining our focus on rebuilding our revenue base both domestically and internationally.

Now to our sales opportunities pipelines for both segments, please turn to slide 10. These opportunities represent annual revenue for our new potential programs being quoted and they are in various stages of pre-quote, post-quote, customer evaluation, and some cases, final negotiation. Each quarter, these charts represent a snapshot of the deals that we are currently working on with current prospective customers and will naturally fluctuate. Historically, our run rates are running about 25-30% of the opportunities in Logistics and 10-20% of the opportunities in Drivetrain that’s cycled through these pipelines.

As you can see from the left-hand side of the slide for the Logistics business, we currently have approximately $130 million of annual revenue and sales opportunities across 37 unique customers. In the past few months, we have made significant progress in the qualification of new business opportunity, as evidenced by the growth on the pipeline in terms of value and number of unique customers.

Our opportunities pipeline continues to reflect a diverse range of customers and markets, with 22% of the opportunities are high-tech, 21% in the wireless carriers, 50% with the wireless OEMs, 6% in broadband and cable, and 1% in automotive. Our team is focused and is aggressively pursuing new opportunities.

Our business wins year-to-date totaled $32 million including $3 million won during the quarter. I believe we are well positioned to win additional new business based on our industry leading services and quality and our value proposition to both current and new customers.

Look at the right side of this slide for Drivetrain. We currently have approximately $168 million in opportunities across 15 unique customers. These opportunities are split 81% related to products in our remanufacturing businesses for light vehicles and 19% for medium and heavy-duty remanufacturing. While our growth over the past year has been disappointing, as we have said previously we will waiting for the volumes from the six-speed Ford and GM programs launched throughout 2007 to grow over time as these products increase in the vehicle population.

Admittedly, these programs are growing slower than anticipated due to reduced new vehicle sales. Our new business wins year-to-date remain at $9 million with no new wins during the quarter. We believe we are well-positioned to win new business both in Europe and in North America and we are continuing to focus resources to aggressively pursue new markets, products and services. Our strategic decision to establish a presence in the Czech Republic is garnering interest with existing and potential customers.

To add to that I am working on the Drivetrain chain to aggressively pursue some near-term opportunities that we should reach conclusion on by the end of 2008. And if successful, would expand our product offerings in North America and add new business in both North America and in Europe. We commit to update you when the time is right.

In summary, we remain confident about our chances of landing additional new business in 2008 as we continue to low the sales channel and pursue the new business revenue opportunities. Our teams are focused on continued growth and diversification of the markets, products, services, and customers that we serve. Importantly during the quarter Don and I met with every key customer spanning both segments. What we are hearing is the following. Our customers on relying on us to help them identify ways to cut their cost and increase their profitability. They are inviting us into more upstream deeper levels of their supply chain hierarchies. They essentially tell us that they want us to do more. I firmly believe these are not a few words. To this end, I expect to land new wins before year end.

I would now like to turn the call over to John Pinkerton for a review of our year-to-date cash flow performance and guidance for the balance of 2008. Please turn to Slide 11.

John Pinkerton

Thank you Todd. My comments today will cover the following:

Our consolidated cash flow and net debt highlights and updated financial guidance for 2008. Please turn to Slide 12.

As of September 30, 2008, we had total cash and cash equivalents on hand of $5.5 million with no borrowings on our $150 million revolving credit facility resulting in a net cash position of $5.5 million. Adjusted cash flow from operations was $23.3 million for the nine-month period then ended.

Year-to-date, we used $24.4 million of cash for our working capital accounts including $10 million for accounts receivable to support increased volume in our Logistics segment, $9.8 million for inventories primarily related to launch and ramp up of new programs in our Logistics segment and $2.9 million for accounts payable in accrued expenses which includes payments associated with our 2007 incentive compensation program.

Year-to-date capital spending of $9.9 million is primarily related to facilities, machine and equipment for new business initiatives, and capacity maintenance efforts in our Logistics segment.

Net cash used in financing activities of $32.9 million was primarily related to $32.5 million of open market repurchases of our common stock pursuant to the $50 million repurchase plan authorized by the Board of Directors. As of October 28, 2008, we have repurchased approximately 2,016,000 shares of our outstanding shares for $42.5 million, representing an average cost of $21.10 per share.

Our 2008 LTM EBITDA of $80.9 million is 8.5% lower than the prior year comparable period as the strength of our Logistics segment has not fully offset the negative operating leverage experienced by our Drivetrain segment.

We believe that cash on hand, cash flow from operations and our existing borrowing capacity will be sufficient to fund on-going operations, capital expenditures and other opportunities. Please turn to Slide 13.

With respect to updated guidance for 2008, please note that guidance does not include the potential for fourth quarter restructuring charges in our Drivetrain business. Based on our year-to-date performance and related developments, we now expect full year revenues of $540-548 million, which would representing a 2-4% net increase over revenues of $529 million in 2007. This range is based on the following:

Logistics segment revenues are expected to be $362 million to $368 million representing growth of 23% to 25%, and are based on current expectations for existing business. The growth of our Logistics business is expected to continue to drive improvements in ATC’s ROIC, given that the Logistics business ROIC historically has been nearly twice that of our Drivetrain business.

Our 2008 Drivetrain segment revenues are now expected to be $178 to $180 million, which would represent a year-over-year reduction of 23% to 24% and reflects the reductions in the Honda Warranty volumes and the continued softness in demand for base [ph] Ford and Chrysler programs, coupled with a slower than expected ramp up of recently launched new business programs. We continue to expect 2008 Honda revenue of approximately $50 million.

In terms of profitability, in the Logistics segment for 2008, we now expect segment profits of $55-59 million, which equates to segment margins of 14% to 16% for the balance of the year. Based on a favorable revenue mix expected for the fourth quarter these margins continue to slightly exceed our long-term target range of 12% to 14%. Full year segment margins continue to reflect the outstanding performance in the first quarter that benefited from certain programs not impacting the balance of the year.

In the Drivetrain business for 2008, we now expect segment profits of $7 million to $8 million. The reduction from previous guidance results from further negative operating leverage from reduced revenue expectations for 2008. Our Drivetrain team continues to evaluate alternatives to further reduce cost in light of current economic conditions.

Additionally, we now expect a full year effective tax rate of approximately 37.3% for continuing operations.

Our EPS calculations and projections assume an average of 21.2 million diluted shares. As a result of these factors, we expect to achieve income from continuing operations of $39 million to $41 million or $1.85 to $1.95 per diluted share from continuing operations.

In terms of cash flow, we expect EBITDA of $76 million to $82 million, capital spending of $11 million to $12 million, primarily reflecting the support of base business growth, new business capture, and cost reductions including our Mexico operations in our Logistics business, depreciation and amortization of $14 million to $15 million and free cash flow of $20 million to $23 million. Now, I’d like to return the presentation back to Don for closing comments.

Don Johnson

Thank you John and thank you Todd. Please turn to Slide 14 and I will provide our revised outlook for 2008 and my wrap up.

We’re now have 3 solid quarters behind us for 2008 and the performance of our Logistics business continues to exceed our expectations. Our stellar Logistics performance is allowing us to offset much of the current challenges in the Drivetrain segment where we are controlling cost while we continue to aggressively pursue growth in both segments as you heard from Todd today. I want to thank our entire team for their efforts so far this year.

As we head into the final 3 months of the year the outlook for the balance of the year is now more apparent to us. Therefore, we have updated and narrowed our 2008 earnings estimate for income from continuing operations to $1.85 to $1.95 per diluted share from our previous guidance of $1.80 to $2.00. This guidance does not contemplate the potential one time impacts costs or charges associated with the third phase of our cost reduction actions that we plan to take to restructure our Drivetrain operations.

As we said earlier, as we complete our plans to further increase efficiency with a more streamlined Drivetrain organization, we will inform you of our actions and our corresponding financial impact once we receive final board approval expected in the fourth quarter.

On the Logistics side, we continue to experience strong volume levels in support of our customers’ fourth quarter market initiatives.

I like to change topics lightly now and address niches that I know that you were interested in and that is to have a better understanding of how our business is positioned given the current economic crisis. As I have indicated earlier our Logistics business continues its dramatic growth but obviously we’re feeling some economic impact in our Drivetrain business and you have what we’re doing to date to address the costs in Drivetrain. But I want to share the reasons why I believe as a company we are as well positioned as any firm considering the uncertainties for the overall economy.

As Todd said during the last few months he and I met with every one of our major customers to understand the strength of our relationships, what they foresee in the future and to ensure we have a seamless transition of these executive level relationships as Todd steps into the CEO position at the first of the year.

Our relationship with all of our customers and particularly our key customers are very strong. Just to remind you our supplying agreements with our major Drivetrain customers extend out through ‘09 and our services agreements with our major Logistics customers extends through 2010 and 2011.

Now I will outline the several factors from my belief that we’re fairly well positioned for these economic times. What are our customers asking us to do? They’re asking us to do more on their behalf and this applies to customers in both segments. Given these tough and uncertain economic times customers are focused on reducing their costs and we play a key role in this regard. We have being asked to determine ways to help them further improve the performance of their supply chains and their cost structures which leads to more opportunities for our businesses. They are involving us as a key component in the development of their ongoing business strategies as they look for ways to navigate through these uncharted economic times.

We find ourselves moving upstream in more of a consultive role and this is a good place to be. We have the engineering and technical expertise to do so and our customers recognize it and we view it as an opportunity to drive further growth with our customers.

Second, in the logistics business, our largest customer AT&T is the best positioned company of any carrier in the wireless space as evidenced by their earnings release last week and we continue to add new pieces of business with them. For the second consecutive year our selection by AT&T as the recipient for the Supplier Excellence Award recognizes us this year for creative cost management across their supply chain, and our 29% quarter-over-quarter and year-to-date growth of 14.5% with AT&T, evidence how we work with AT&T to handle more and as a result we grow.

TomTom through expanding more services with them is now our second largest customer as Todd alluded to earlier. TomTom also continues to meet their internal expectations of volumes and they continue to gain significant market share in North America, which means more volumes for us. Clearly our quality and service and our commitment to improve performance of our customers’ businesses is resonating well and is driving our growth.

Third factor, on the Drivetrain side of the business we have been executing a multi phase plan to improve performance and as you’ve heard the third phase is teed up for board approval and immediate implementation in Q4. (inaudible) same merger news you do regarding a couple of our major customers GM and Chrysler. I want to assure you we have strong relationships with these major customer and I like our chances of additional growth with them individually or as a merged entity.

It is also important for me to remind you that our primary customers are in the service parts organizations of the OEMS and no matter what vehicles companies must stand behind servicing of their products in the market. Our remanufacturing offerings support servicing of their products at a much lower cost than using new parts, plus our overall cost of turning them to new are important as our OEM customer for looking for ways to increase sales and profits in the services parts business. Remember a depressed vehicle sales cycle, the service and parts organization carry the day at the dealerships and contribute profits to the OEMs.

Fourth factor, our European strategy to launch a Czech Republic facility in the first half of ’09 is opening up larger term opportunities for us as is our now established presence in both Canada and Mexico. And importantly our new presence in these locations was engineered with minimal capital investment and reduced risk by using established partners in these countries.

Fifth factor, from a liquidity point of view we are in an enviable position. We have zero debt, $5.5 million in cash, and we are generating solid cash flow from our two segments. Our customers are paying within terms and our excellent liquidity position allows us to maintain a level of flexibility to adapt to the changing environments and pursue several initiatives to improve shareholder value, such as our stock repurchase program, restructuring our Drivetrain operations, continued organic growth and the careful and diligent pursuit of solid acquisitions. Our $150 credit facilities put in place in ’06 with a term through ‘11 and is supported and led by Banc of America and JPMorgan Chase and (inaudible) with seven other banks, which we believe are best positioned to survive the current crisis.

At this time due to our continued strong cash flow we do not anticipate any significant need to draw on our credit facility to support normal day-to-day operations.

Sixth factor, we’re keeping very close to one customers and it relates to clearly understanding their forecast for the months ahead. And we’re referring to those demand levels ensuring prudent use of working capital. Yes, we have seen inventory increase but it is in support of seasonal surges required by our customers and we expect reduction through the balance of the year.

And my final point. We’re pursuing nearly $300 million in new business annual revenue opportunities that range across both segments and for both existing and new customers. As Todd indicated to you, we believe we will win our fair share of these opportunities some of which we consider as being close to the boat [ph] now. Admittedly on a macro level these are tough times for businesses on a global basis. No one is immune from the uncertainty that currently surrounds our economy and that includes ATC. But it is the job of our entire senior management team to meet the challenges head-on, make tough decisions today that’ll better position us for the long term and to stay focused on meeting our customers’ needs thereby ensuring our success.

I also want to say that the current state the economy is likely to impact our three year plan. The qualitative objectives of our long-term plans remain unchanged and we expect to continue our leadership in quality and service and to deliver value to our customers. We also expect to continue pursuit of our target markets in both segments for further growth and diversification of our revenues and cash flows. As we normally do at this time of the year we’re busy working with our teams and the board on our business plans for 2009 and beyond.

With that being said although I’m not quite ready to discuss ‘09 guidance at this juncture, it is fair to say with all we have explained to you about the Drivetrain business today, the margin profile in our Drivetrain business will no longer remain in the 12% to 14% range due to the continued soft volumes and economic uncertainty around the vehicle industry. Rest assured we will continue our efforts for operational excellence and improved ROIC, which will continue to benefit as revenue and profit mix is more heavily weighted towards our fast growing logistics business.

To conclude my remarks, we recognize the potential for changes that may lie ahead and our management team is diligent on being responsive to change and fulfilling our customers’ needs as we drive for continued business improvement. Thus during the remainder of the year our focus will be on one, further reducing costs by improving efficiencies through the leaning and restructuring of our Drivetrain operations while continuing to supply our customers and preserving opportunity for increased business. Two, aggressively pursing additional new business in both the segments to drive both growth and diversification. Three, continued successful execution on new business wins. Four, preserving strong cash flow from operations and maintaining good levels of liquidity; and fifth, continuing our efforts on the careful and diligent evaluation of tactical acquisitions.

What I would like to do now is open it up and we’re now available to answer your questions. So, please turn to slide 15.

Question-and-Answer Session

Operator

(Operator instructions) First up we will take a question from Arnie Ursaner at CJS Securities.

Tom Osborne – CJS Securities

Hi, good morning. This is actually Tom Osborne [ph] for Arnie.

Don Johnson

Hello.

John Pinkerton

Good morning.

Don Johnson

You answered a number of my questions already but as you mentioned AT&T is up significantly this quarter and TomTom is down. Should we expect that split to continue in Q4 or going forward?

Don Johnson

Well let’s make a factual correction first. Both AT&T is up 29% and TomTom is up 508%.

Tom Osborne – CJS Securities

Right, I meant quarter-over-quarter. I am sorry.

Don Johnson

And on quarter-over-quarter, that is what – those are the number for quarter-over-quarter. Are you saying it is down sequentially?

Tom Osborne – CJS Securities

Yes, TomTom is down sequentially.

Don Johnson

If you are saying it is down sequentially I just think that is just as normal variation getting ready for the retail season. If you think look at our logistics guidance. We’re still anticipating a solid Q4 at this point.

Tom Osborne – CJS Securities

Okay, can you provide any details on what drove the AT&T revenues this quarter?

Don Johnson

Well their continued growth, we helped them with the iPhone launch and as you know we announced earlier in the year that we won some broadband cable business with them on the DSL side and that businesses is continuing to launch throughout the year. So it is a number of factors.

John Pinkerton

Let me add to that a little bit you. As you read the AT&T release and the growth that is experienced in the wireless side of their business, the iPhone is certainly driving excitement upon volumes for iPhone alone in terms of the subscription additions and the corresponding iPhone sales, but I also explain to you that that iPhone is bringing a lot more traction to sell more than just iPhones. So, we are very excited about the success that our wireless customer is having and we are certainly parlaying some of that success through the volumes that we handle on behalf of AT&T.

Tom Osborne – CJS Securities

All right, thank you Don that is helpful. Do you have any sense of a sort of broad time frame for when you expect to see contributions from the six-speeds in Drivetrain?

Don Johnson

Well, obviously as we went into this year the answer was hopefully we would start to see further contribution in 2008 and that hasn’t happened. We’re in the process of working with our customers on just how many vehicles they have in the market and what that means for ‘09 and beyond and we’re not ready to give ’09 guidance at this point.

Tom Osborne – CJS Securities

All right and lastly at the beginning of the year your CapEx guidance was around $20 million and now in the Q it is down to around $10 million. What money isn’t going to be spent there?

John Pinkerton

It is associated with new business launches that have not occurred as soon as anticipated. So that differential was primarily related to growth opportunities.

Tom Osborne – CJS Securities

Okay, thank you.

John Pinkerton

Thank you.

Operator

Next up we have a question from Bill Dezellem at Titan Capital Management.

Bill Dezellem – Titan Capital Management

Thank you. We have a couple of questions and actually following up on the last answer given that the CapEx was planned for growth of new business that was has not yet launched I thought that John you had mentioned, does that imply that that business is still to launch going forward and we have that revenue growth to look forward to?

Todd Peters

Bill, this is Todd I will answer the question. If you look at the comments that I’ve made we said that we won an additional $3 million of the business in the quarter in Logistics. It remains unchanged in the Drivetrain segment. There are a couple of things that happened. Let me further clarify. We haven’t won any substantial new business in the back half of the year as of yet. We signal that we expect to get decisions on some outstanding pieces of business before the end of the year. And the second part of that is we expect, we announced the operation in Czech Republic as part of our initial capital assume that we’ll be spending more sooner and part of that can be pushed into 2009.

Don Johnson

So I think a lot of this was timing to kind of answer your question. We have continued to expect growth that just hasn’t happened as soon as we thought it terms of requiring capital expenditures.

Bill Dezellem – Titan Capital Management

That is helpful. And then kind of on that same path I believe at the beginning of this year you had reference. You had about $140 million of new Logistics that you had won in 2007 and January of 2008 combined. How much of that $140 million are you anticipating you’ll actually recognize in 2008 and would you please remind us again how much of that has simply gone away. If I remember it was one piece of business that left.

Don Johnson

Well right I think at the beginning of the year we said we’re at 140. Then we subsequently revised that to 125.

Bill Dezellem – Titan Capital Management

Right, okay. So of that 125 how much do you anticipate realizing in 2008?

Don Johnson

Basically we’re already up. We wish to be on full ramp up for that in 2009. There will be in parts of the year [ph] for 2008.

Bill Dezellem – Titan Capital Management

Exactly and that is what I am trying to grasp is how much in 2008 of the 125, which –

Don Johnson

I would say it is at least 80%.

Bill Dezellem – Titan Capital Management

All right. And for the remaining 20% to get us to the full 140 for 2009?

Don Johnson

Bill correction 125.

Bill Dezellem – Titan Capital Management

I am sorry. I did that and my apologies. And then relative to a comment that you made on the – in the opening remarks that your customers are asking you to move up the supply chain amongst other things. Given that you’re moving up their supply chain does that imply higher value-added services which would enable a higher margins to ATC?

John Pinkerton

We are not – when we have a look at our long-term mix of business and the opportunities that are in our pipeline and things we talked about we’re going to stick with it at this point Bill. The long-term target was in the range of 12% to 14% because the opportunities are a mixture of things.

Don Johnson

Basically what we mean by up the supply chain if we think about where we’re positioned we’re kind of towards the end of the supply chain in terms of final packaging, delivery, or fulfillment of orders to those customers and then also as you know on the Logistics heavily involved in the return side of the business right. For they’re asking us to do things more to how to you manage say transportation and flow of goods from their primary source of supply or on the Drivetrain side how do we do more than just remanufacturing. We have the capability of helping them on the new parts aside. So they’re asking us to do those types of things and that is really what we are characterizing as moving upstream.

Bill Dezellem – Titan Capital Management

Great. Thank you both.

Operator

Moving on now to a question from Gary Prestopino with Barrington Research.

Gary Prestopino – Barrington Research

Hi, good morning everyone.

Don Johnson

Hi, Gary.

Gary Prestopino – Barrington Research

Housekeeping question, Jon what was the D&A in the quarter?

John Pinkerton

About $3.6 million.

Gary Prestopino – Barrington Research

Okay and then getting back to the last question were you kind of addressed that your target margins are still 12% to 14% in Logistics. I mean if you look at the back half of the year with the projections you have given us, even if you take the low end, you are really at 15% plus and you know, you don’t have a full ramp on the business. You are spending money to get this business up and ramped. I mean is it safe to assume that there is a strong possibility that those targets would have to change as you got into ’09 and further?

Don Johnson

Gary, it is like we said in my final part of the wrap up. We are not in a position right now to give ’09 guidance. We are in the process of looking at ’09 right now with our teams which is finalized and with meetings with our board in December and January to not only reset ’09 in terms of our expectations as we look at the business but also as you know, we always look out additional two years. We will be looking out through ’11. Right now, we are not in a position to do that. So, we haven’t really updated our forecast out into the future?

Gary Prestopino – Barrington Research

Okay, I got it.

John Pinkerton

We are not going to plan to have low margins if that is not the case. Remember, the context of the 12% to 14% is over a 3-year horizon and along with a 20% growth rate with the mix of business that will come in.

Gary Prestopino – Barrington Research

Okay, let me ask the question another way then, similar to the fact that the operating margin was pretty high in Q1; you had that one time program you were finishing up. Was there anything of a one-time nature in this quarter and in Q4, similar to the (inaudible) program that drove the margins higher than normal?

John Pinkerton

Well you have just got different seasonal aspects of both of these businesses, but I think, here let me take you back to the end of the second quarter. And at the end of the second quarter, we guided that we expected operating margins of about 15% for the remainder of the year in the Logistics business and as it turned it we were at 15.1% for the third quarter. So, I think that the business in light of the mix of revenues, the cost reductions that we have implemented and some other initiatives that we are doing that he business is behaving like we anticipated.

Gary Prestopino – Barrington Research

Okay. That is good enough. And then could you just refresh my memory in terms of the contracts you have in Logistics. Are there minimums that your suppliers have to give you in terms of items when you strike contracts like this?

John Pinkerton

Well without giving too much detail as you know there is too much competition out there, I would say in general you will find in the Logistics business that your contracts with some items do contain minimum and also you have got volume banded pricing on the high side.

Gary Prestopino – Barrington Research

Okay. And then turning to Drivetrain, can you give us an idea of the cost structure there right now as a percentage of the cost. How much is fixed, how much is variable on a percentage basis?

John Pinkerton

It is difficult to say in the long run. There is obviously more as variable.

Don Johnson

But the way we look at it Gary is when we talk about negative operating leverage we are talking about contribution margins in the mid 30s to about 40%. And if you use that factor and apply it to the detriment [ph] in the revenues, it is almost one for one. And the reason why that works is because our team has been aggressive at pointing out the variable costs along the way, and that is why the contribution margin stayed, because we have been aggressive on our material savings, on our direct labor component and any variable spend items. But at the end of the day that is not enough, when the business is down 25%, there have to be additional actions taken to maintain an acceptable level of productivity. I want to remind everyone, we were still profitable in the third quarter despite being significantly down quarter-over-quarter and we are taking actions to kind of reset the fixed cost level and we will be pleased to get back with you once we get the board final review and approval of our plans.

Gary Prestopino – Barrington Research

Great. Thank you.

Operator

Moving on to Craig Kennison, Robert W. Baird.

Craig Kennison – Robert W. Baird

Hi, good morning and congratulations.

Don Johnson

Thank you Craig. How are you doing this morning?

Craig Kennison – Robert W. Baird

Doing well thank you. Don just wanted to get a clarification on what you said with respect to your thoughts on Drivetrain margins looking beyond 2008?

Don Johnson

Hi, what is your question?

John Pinkerton

Well, let me help with that Craig. What Don was saying in the market today like we just had some conversation about Logistics being 12 to 14? Our long-term Drivetrain expectations were 12 to 14, the last couple of times we have reviewed them. In light of the significant decline that we have experienced in ’08 and the anticipated market conditions in the vehicle industry leading into 2009 what we are going to do is reassess what target margins will be and there are likely to be less than 12 to 14.

Todd Peters

That is correct. I like to add a little bit. As Todd said earlier, the team has really been aggressive in attacking variable cost. We have done that very successfully in light of the continued decline in volumes and now what we are really focused on is the fixed side of the equation, but to do that you have to take a very prudent and planned approach in terms of further leaning the operations in preparation for a deeper restructuring and I really applaud the team’s efforts because they are able to do that kind of change the oil when the engine was running because we can’t set back from supplying our customers as we remake the organization. And is the final phase really it attacks the fixed costs once we have got that completed leaning done across all of our remanufacturing sites.

Craig Kennison – Robert W. Baird

And then I just missed it Don, did you indicate that that had implications for your current 3-year plan or it didn’t have implications for it?

Don Johnson

Yes, we think that does have implication on the Drivetrain side for the

3-year plan. I can say anything about the global company but additionally we want to understand where we think the vehicles markets are going and how that impacts the program that we launched as we said, the six-speed volumes that we were expected have not ramped up due to reduced vehicle sales that have those six-speed transmissions in them which then dampens the vehicles populations which we serve. So, yes, we have taken a very deep look not only of our cost structure but what does the future volumes looks like and also what can we add back in terms of growth. As Todd mentioned, he thinks there are some opportunities there for any close to the boat.

Craig Kennison – Robert W. Baird

Okay, thanks that is helpful, and relative to the opportunities that are close to the boat, you know one of the things we do we do is we look a the pipeline data that you provide to us and if I just look in Logistics your year-to-date new wins are about 32 million. Last year through nine months your year-to-date wins were $82 million. I do recognize that this tends to be a very lumpy metric, but we should read into anything the fact that the trend has slowed down in terms of your win rate.

John Pinkerton

No, I don’t think so. I think it is just timing and lead times to actually land the deal. When you go through a very dramatic period over about a nine month period when we won roughly $125 million of business, right. You then had to go back and reload the pipeline and it then takes the normal time, lead time to land a deal. Remember, lead times in Logistics they are anywhere from 6 to 18 months. I think if you get the average it will be 12. Lead times on the Drivetrain side on the other hand were more like 18 months or so on and we are seeing a slight lengthening of those lead times on the Drivetrain side.

Craig Kennison – Robert W. Baird

Anything close to the boat that would be of the potential size of a TomTom or AT&T or even half the size?

John Pinkerton

We really haven’t ever disclosed individual opportunities.

Craig Kennison – Robert W. Baird

Hi, thanks. And then last question, more of a macro question, but relative to your labor relations and how that could change if there is law change in terms of the secret ballots. Have you given any thought to that and as it may relate to your business?

John Pinkerton

One, we are in a very good location within the United States in terms of right to work. Secondly, we are very, very diligent in working very closely with our people to be in a situation where management can face off one on one with each worker and treat people like people. And we have done that all along even considering some of our downsizing we have done that. So, we really like our chances to continue this fine relationship between our management and our labor that actually puts together the transmissions on the Drivetrain side. On the Logistics side we are doing same thing. We are in great locations there. You know, we are predominantly down in South in Texas, but we are also opening up operations in Canada and Mexico. And we finally feel good about the relationships the management has with our workers to really deliver the secret sauce to please our customers.

Craig Kennison – Robert W. Baird

Right, thank you.

Operator

Moving on now to John Clergy [ph] at Principal Global [ph].

John Clergy – Principal Global

Good morning.

Don Johnson

Good morning.

John Clergy – Principal Global

With the likelihood now that going forward with the operating margins on the Drivetrain side will be below the 12% to 14% that you have been talking about for a while and probably revenue growth is going to be well below the logistics business and it is probably a more asset intensive business at what point as you downsize this business do you get to the point and say we will be better off redeploying the assets that we have in Drivetrain to continuing to grow the Logistics business in terms of an asset light business with faster growth, apparently margins that will be well above the Drivetrain and you know greater returns on assets, equity, et cetera.

Todd Peters

That is a great question and this is Todd. We continually evaluate where we deploy our capital. With respect to the Drivetrain, the business is still profitable and compared against, not to compare against Logistics but to compare it against other supplier automotive related assets, is still a premier return item. Now, yes, it does have sort of growth rates, but let me state this, it does not get in the way of our Logistics growth. We have got credit, we have got cash flow that we can invest in organic opportunities on the Logistics side and we have a credit facility where we can find broader organic growth on Logistics or targeted acquisitions. So, this is in an either or situation. We have got capital and liquidity the growth of Logistics at whatever rate we need to. The Drivetrain business still provides cash flow and margins. But having said all that, it is never – I can never say that it is off the table. It is just not in any current plan.

Don Johnson

The only thing I would like to remind you and we shared this with those that attended our Investor Day in New York City in June of this year. We explained what the ROIC was for the next dollar investment for Logistics and also for Drivetrain and there is no doubt that it is double for Logistics and let me tell you that a 25% of the Drivetrain is not the dog [ph].

John Clergy – Principal Global

What about though its impact on the valuation of the company and shareholder value, even though the returns as you indicate might be very, very strong, relative to everybody else in the automotive parts space?

Don Johnson

That comparison is (inaudible), I think we review that at the management team regularly with the Board of Directors with outside help for a number of parties that are qualified to give that type of advice and right now we think the best course of action is to get our Drivetrain business right sized and continue to go look at growth.

John Clergy – Principal Global

And then lastly with respect to acquisitions on the Logistics side, are you seeing anything there, more people looking to sell, valuations come down. Is there anything that looks interesting out there to you?

Don Johnson

I would say that earlier this year we hired a Director of M&A and we have had a more focused look. We are starting to see additional (inaudible) around that space, and all we can say is we are going to have disciplined focused approach on acquisitions, but it is something, again given our liquidity position it is clearly we are interested in.

John Pinkerton

I would say ironically so far at what we seen, is we haven’t seen any terrific drop in expected multiples of the owners. As this economic situation continues I would expect further dampening of that to open up opportunities for us on the right property and I stress that we are very diligent and careful in terms of our valuation of acquisitions.

John Clergy – Principal Global

All right. Thank you very much.

Operator

Before we move back to Gary Prestopino with Barrington, I would like to remind everyone that it is star one if you have any questions. Mr. Prestopino, your line is open?

Gary Prestopino – Barrington Research

Could you just remind us or talk about your facilities on the Drivetrain side. As I recall, do you have 3 facilities, two in the US and one in the Czech Republic, is that correct?

Don Johnson

Pretty close. You are right in the US, we have had a really 3 facilities in the US that do manufacturing and we have one in the UK and we are going to open one in the Czech Republic in ’09.

Gary Prestopino – Barrington Research

The Czech Republic is ’09 and of the 3 facilities in the US, are they – is there one just dedicated to heavy duty or is it just –

Don Johnson

All of our facilities, we have two in Oklahoma and one in Missouri and they are all in multi customer facility.

John Pinkerton

Including the ones in Europe.

Gary Prestopino – Barrington Research

Okay, thanks. And then any comments on – you know, you have talked about numerous times the medical market, Logistics, any comments on what is going on there and where you are in terms of putting an initial foray into that market. As some of these new opportunities get there, there are outlined here, it doesn’t say medical. But could you talk a little bit about that?

Don Johnson

Yes, we are continuing our business development. We are continuing to starting to get some meetings. We don’t have anything. We are having an interest in this space both from an organic growth and potentially an acquisition point of view and I would say our business development of people is working leads. We have been taking meetings, but in terms of the way we present our pipeline we don’t have anything yet that is reached a pipeline status.

Gary Prestopino – Barrington Research

Okay and then just a bigger picture question. I mean Don you have been in the Logistics business all your career. In terms of when you go into a slowdown in the economy or a recession whatever we are in, does that more or less heighten the awareness of companies that, okay we are doing non-core competency work within our structure and we should really start considering outsourcing of functions like logistics.

Don Johnson

Yes, Gary. It has been my experience that over the years as we get into these economic slowdown period of times, the companies start reassessing what they do and how they can shift fixed costs out of their operations and where maybe they can hand it over to someone that can do a better and certainly when you talk to our customers. You know, Todd and I have made the rounds now in light of the pending transition and our customers are asking us to do more .So, I think we are continuing to see that process happening in the marketplace. So, I think it is opening up opportunity not only with existing customers but also new customers that we have met today.

Gary Prestopino – Barrington Research

Thank you.

Operator

With that Ladies and gentlemen we will conclude the question and answer Session and I will turn things back to Don Johnson for additional comments.

Don Johnson

Thank you very much. First of all, I would like to thank all of you that have joined us today to listen to what we had to say. We think we had a very significant and solid first 3 quarters different from our guidance. We expect a continuation of that through the end of the year, but I really want to thank all of you for your continued support and interest in ATC. Although the economy is very challenging and we all know that sitting around the phone, I sincerely believe that we are better positioned than most to ride out the storm. I have shared the factors with you today in support of that belief.

I am confident that our experience and strong management team and our Board of Directors will continue to make the right prudent and balanced decisions to continue the company’s success. And with my pending transition it has allowed us to really go back and check on those relationships with the key executives of our customers to understand where their headset [ph] is and where they are trying to drive the organization and you have heard us. They are asking for more, not less.

So, I am excited about the opportunities that we share with you today and what our customers are talking to us about. So, based on all those factors that we share with your today and where we are at with the business. I remain – continue to remain very exited about lies ahead for ATC. So, at this time I want to thank you for your time today and wish you a good day. Thank you. Bye.

Operator

Ladies and gentlemen, that will conclude the conference call and web cast again. Have a good day.

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