Tecumseh Products Company's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Tecumseh Products (TECU)

Tecumseh Products Company (TECUA) Q4 2012 Earnings Conference Call March 8, 2013 11:00 AM ET


Christine Saurini - Director of Treasury

James J. Connor - President and CEO

Janice E. Stipp - EVP, CFO and Treasurer


Tim Stobaugh - Stonegate Securities


Good morning and welcome to Tecumseh Products Company's full year 2012 results conference call. All participants will be in a listen-only mode until the question-and-answer portion of the call. This conference call is being recorded at the request of Tecumseh Products. If anyone has any objections, you may disconnect at this time.

I would now like to introduce Ms. Christine Saurini from Tecumseh Products Company. Ms. Saurini, you may proceed.

Christine Saurini

Thank you, Matt. Good morning, and welcome to our call. I am joined today by Jim Connor, our President and Chief Executive Officer; and Janice Stipp, our Executive Vice President, Chief Financial Officer and Treasurer.

Before we begin, I would like to remind you that during the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our estimates for 2013 financial results as well as our estimates, plans and assumptions regarding our future revenue growth, profitability, operating results, liquidity, operations and products. And while it goes without saying that we intend to provide reasonable projections, there are many factors that could cause actual results to differ from these projections.

Forward-looking statements can be identified by the use of terms such as estimate, expect, intend, believe, anticipate, should, may, could, will and other future tense and forward-looking terminology. These statements are predictions not guarantees that reflect the company's current views as of the time of this call and that are subject to risks and uncertainties that may cause actual results to differ materially from our projections and other forward-looking statements.

By providing this information, we undertake no obligation to update or revise any projections or forward-looking statements whether as a result of new information, new development or otherwise. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. You should review the cautionary statements and discussion of risk factors included in our press release issued yesterday, our Form 10-K for the year-ended December 31, 2012 filed yesterday as well as our other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statements for additional discussion of risks factors that could cause actual results to differ materials from our current expectations and those discussions regarding risks factors as well as the discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on our website at www.tecumseh.com.

In addition, during our call today, we may discuss EBITDA and EBITDAR from continuing operations which are not measures of performance calculated in accordance with U.S. GAAP. However, we believe that when taken together with the corresponding GAAP measure, they provide incremental insight into the underlying factors and trends affecting our performance. We have included the reconciliation from net income or loss to EBITDA and EBITDAR from continuing operations in our press release issued yesterday. Again, all this information is readily available and can be accessed on the Investor Relations page of our website at www.tecumseh.com.

With that said, I would now like to turn the call over to Jim Connor, Tecumseh's President and Chief Executive Officer.

James J. Connor

Thanks, Christine. Good morning, everyone, and welcome to today's call. We filed a number of documents last night and not the least of which was our Annual Report on the 10-K and our earnings release and also a number of other 8-Ks and press releases as well. We'll talk about all those, but I would like to just kind of start with the review of full year results and things that we're doing in the marketplace as well as going through the financial results which Janice will cover and then I'll come back again and kind of talk about those other items going forward.

Full year sales excluding the effect of changes in foreign currency which was $63.1 million increased overall by 6.2% from 2011 on a year-over-year including the effect of those foreign currency translations to 9.7 or about 1.1% over that same period. Gross margin improved in 2012 to 7.6% of sales compared to 4.4% last year. And we recorded positive cash flows from operations of $8.8 million for the full year, December 31, 2012. So good news I think on all three of those lines.

2012 was a step in the right direction for Tecumseh. We increased volume of goods sold, we improved profitability, we achieved positive cash flows from operating activities even in difficult challenging economic conditions. Regulatory activities and continuing competition in an industry quite honestly that generally has too much capacity were factors that we're confronted with every single day. Let me touch upon a few of those things. Then we'll talk about the sales by markets.

Our focus and our key strength of our strategy is our product roadmap. You've heard this repeatedly on these calls. Continuing reevaluation of that product line, improving our competitive position and aligning our global manufacturing capacity with demand is still a large part of our mission and we work on that every day. Cost containment efforts which include lien concepts and manufacturing, our goal of zero PPM and quality which is really taking hold, and our TOPS initiative that the company optimized production system which we've now introduced to every plant, every country of the world are taking hold and has now become part of our daily life.

We're proud of the progress we've made in those areas and we're proud of our products initiatives in 2012 including what I would now conclude is a full launch of the AE2 and Mini Compressor lineup which we now send to all major global customers. A New TA Mini Compressor which we talk about a little on these calls and not too much, we've continued to gain a lot of traction there. We are selling our products in the marketplace. There are enough customers. It's really a smaller compressor to the R&F market. We've launched that around that world. We've launched several other new product platforms as well.

Including newer higher capacity models of our larger, more popular AG compressor which we introduced at Chillventa in Germany over at Nuremberg last November. Likewise, we saw some of our new specialty air conditioning products and some customer acceptance in India and into the Middle East. Design work continues on the new median platform compressor that we'll be announcing hopefully soon by our engineers and we'll continue to make progress and working with our major OEM customers on placement of the AE2 compressors and conducting units and the green environmentally friendly R290 refrigerant, as we place that into more and more new commercial equipment.

Many of these advances are being made possible by our new global technology centers, not really new anymore. We opened it in May of 2012. This facility is one of the few U.S. certified labs with hydrocarbon refrigeration capacity and we continue to use those qualifications going forward. Recently, the sales and marketing team led our participation in two large trade shows here in North America, the HRI Expo in Dallas and the North American Food Equipment Manufactures or NAFEM Show in Orlando.

We've got customers and potential customers displaying our newest products including the AE2 hydrocarbon refrigerating compressors and our conducting units. At NAFEM, we teamed up with one of our top OEM customers and we displayed a beverage cooler, bottle cooler that was running our R290, the green refrigerant, which drew significant attendee interest.

Let's take a look at the full year sales results by market. At year-ended December 31, 2012, net sales were $854.7 million, down 9.7 million or 1.7% versus 2011. Sales were negatively impacted by $63.1 million due to currency translation, just the effect of translating from local currencies into the U.S. dollar for honestly the convenience of accountants to add them up in one currency. Adjusted to exclude that impact, our sales increased 6.2% as compared to 2011. This was driven primarily by net increases in volume, mix and pricing.

Looking at more detail by market, our three major markets; the commercial market, the household refrigeration or R&F market and air conditioning. Commercial first, by far our largest in terms of net revenue of $503.6 million or just under 60% of total sales in 2012. That represents a 0.2% increase when compared to 2011. However, after adjusting for currency, sales increased by 5.1% on a global basis. This increase was primarily driven by higher volumes and favorable mix of $20.1 million as well as price increases of $5.6 million, both of which are being offset by unfavorable charges in currency exchange rates of $24.5 million.

The commercial market consists of OEM, aftermarket and distribution customers. A slight decline was noted in the OEM market. However, on a year-over-year basis, increased distribution volumes more than offset this. We experienced strong regional demand in India and in Brazil along with some of the improvements in volumes in Europe, as a result of one of our European competitors ceasing production early in 2012. That competitor has now restarted production and is attempting to recapture their market share, although admittedly they're having a difficult time.

Next, let's review the household refrigeration and freezer market, the R&F market. The R&F market is our second largest market in 2012, accounting for 21.8% of our total sales of $186 million. Sales in this market were up 1.9% as compared to 2011. However, after adjusting for currency again, the year-over-year sales increased to 13.9%. The increase is due to higher volumes and favorable mix of $30.5 million which is partially offset by unfavorable changes in currency exchange rates to 21.8 million as well as price decreases now of $5.2 million. During 2012, volumes primarily benefitted from business with one major customer at our Indian operations along with some increased regional demand in Latin America.

Finally, let's review air conditioning and our other applications market. This market represented 19.3% of total sales in 2012 or $165.1 million, down 8% in 2011. While our currency neutral sales showed a slight increase of 1.3% on a year-over-year basis, this 8% decrease, the overall decrease is primarily due to unfavorable changes in currency exchange rates of $16.8 million along with lower volumes and unfavorable changes in sales mix of 0.5 million which is only partially offset by price increases of $2.9 million.

The main underlying factors contributed to the lower volumes in this market during 2012 as really the temporary six-month shutdown of plant in the Brazil region which really was caused by certain tariff changes which temporary caused Brazilian production to cease and imports to increase over a short period of time in 2012. I think all of you remember that from our second quarter earnings call.

The continued competition from our Asia supply sources as well as decreased volume in North America due to soft market conditions also contributed to some of that. The lower volumes were however mitigated by the price increases achieved in 2012, and to some extent, stronger sales in our Middle East area coming out of our Indian facility.

The net impact was not enough to overcome the decline resulting from the unfavorable impact of the currency exchange rates, however. Despite the challenging environment in Europe, the U.S. and to a large extent around the world, we are pleased with the 6.2% currency neutral sales increase in 2012 as compared to 2011. Our results were solid with increased volumes in two of the three markets we participate in. And I think we can point to that third market, the air conditioning market, as really a one-time anomaly that saw plant shutdowns in the Brazil market.

This is also encouraging and we believe it is a result of our ongoing efforts to drive increased revenue by delivering high quality, efficient and an environmentally compliant as well as our new products to our customers.

Let's go to Janice now who's the CFO to comment further on 2012 financial results.

Janice E. Stipp

Thank you, Jim. Good morning, everyone. Since Jim just had reviewed our sales, I will discuss the financial results. 2012 showed improved performance over the 2011 financial results. These improvements are being delivered through low commodity costs as well as the disciplined execution of our teams in the areas of operational performance, product portfolio innovation and other cost rationalization efforts.

Gross profit in 2012 came in at 64.7 million which represents an increase of 26.8 million over 2011. Gross profit margin also increased to 7.6% of net sales as compared to 4.4% of the prior year. The main factors contributing to the increased gross profit level in 2012 were 11.6 million favorable changes in other material and manufacturing costs, 9.1 million favorable changes in the cost of our commodities, 4.5 million favorable changes in currency and 3.3 million of net price increases. These favorable impacts are partially offset by unfavorable changes in volume and mix of $1 million as well as an increase in other expenses of 0.7 million.

Turning now to selling and administrative expenses. We saw a decrease of 0.4 million in 2012 as compared with 2011. This net decrease is driven by three main factors. Reduced employee costs of 2.1 million which is a result of our continuing restructuring efforts. Overall, lower expenses of 2.1 million which are partially offset by increased expense related to our annual incentive plan and engagement of strategic advisors.

Other income was 22.3 million in 2012 compared with 14.7 million in 2011, an increase of $7.6 million. The main components of this increase include 3.6 million due to an increase of net amortization of gains resulting for the curtailment of our postretirement benefits, 2.9 million of income resulting from the sale of our rights to receive proceeds from the future potential Brazilian lawsuit settlement, 2.4 million from various Indian government incentives and 2.4 million favorable changes in miscellaneous other items. Partially offsetting these increases is a non-reoccurrence of a prior year's gain related to the sale of these assets of $3.7 million.

Moving to impairments, restructure and other items, we reported 40.6 million of income in 2012. This income is predominantly a result of a postretirement curtailment gain of 45 million. Partially offsetting this gain is 3.8 million of severance expense associated with a reduction in our report and 46 million for additional estimated environmental costs.

Net income from continuing operation was 23.1 million in 2012 compared to a net loss of 71.3 million in 2011. The company's EBITDA from continuing operations for 2012 was 56.3 million as compared to a 2011 loss of 23.5 million. This is an $80 million improvement on a year-over-year basis. After excluding OPEB and curtailment and restructuring or EBITDA from continuing operations for 2012 were 15.7 million as compared to a 2011 loss of $15 million. This is also an improvement of $30.7 million, so a significant improvement year-over-year.

As stated earlier, this improvement is a combination of many initiatives taken place today with a goal of returning Tecumseh to profitability. I'd also like to quickly remind you that EBITDA and EBITDAR from continuing operations are not measures of performance calculated in accordance with U.S. GAAP. And you can find the reconciliations of net income and our press release issued yesterday.

Now let's move to the balance sheet and take a look at the December 31, 2012 cash position. We ended 2012 with 55.3 million of unrestricted cash and cash equivalents. That compares to 49.6 million at the end of 2011 or 5.7 million increase in cash and cash equivalents in 2012. Components of this positive cash generation are 8.8 million of cash flow from operating activities, 5.7 million used for cash and investing activities, 3.1 million of cash provided by financing activities and a negative impact from exchange rate changes of 0.5 million.

Let's review each of these components now in further detail. As previously stated, cash provided by operation was 8.8 million as compared to a use of cash of 5.3 million in 2011. Significant elements driving this positive cash flow from operational activities in 2012 were net income of 22.6 million, adjustment for significant non-cash items are a postretirement curtailment gain of 45 million, depreciation and amortization of 36.4 million, a non-cash employee retirement benefits gain of 8.9 million and an increase in deferred tax assets of 3.5 million. 9.4 million was provided by reduced inventory levels which translate into an improvement of 19 days.

Payables and accrued expenses generated 12.4 million of cash with days payable outstanding remaining flat at 63 days. Increased accounts receivable levels resulted in a use of cash of 50.4 million primarily due to increased sales in the fourth quarter of 2012 as compared with the prior year. Recoverable non-income taxes provided cash of 1.1 million. This is mainly the result of cash received in Brazil and India partially offset by growth.

Cash used in investing activities was 5.7 million. During 2012, our capital investments were 13.8 million or 1.6% of sales. In addition, we entered into capital lease arrangements during 2012 for approximately $2 million. Therefore, our total capital investments for the year was just under $60 million.

Partially offsetting the cash used for capital investments with the release of restricted cash of 7.1 million and proceeds from the sale of our Grafton facility of approximately $1 million. Lastly, cash provided by financing activity was 3.1 million mainly due to the finance we utilized for facility and regional operating needs.

Now that we've reviewed our 2012 results, I will share with you our outlook for 2013. We anticipate sales demand to be challenged during the first half of 2013 given the continued uncertainty surrounding the economic environment particularly in Europe and the U.S. and current events around the world. However, we are currently expecting full year net sales to increase in the range of 3% to 8% over 2012 levels.

This potential improvement is based on our internal projections about the market and related economic conditions, expected price increases to our customers and estimate foreign currency exchange rate impact as well as our continued sales and marketing efforts. In addition, we expect that the full year change in our average cost of our purchased products including the impact of our hedging activities will have a slightly favorable impact when compared to 2012.

Furthermore, we believe that changes in foreign currency exchange rates after giving consideration to our hedging contracts and an impact of the realized gain or losses to have minimal impact of the net income for 2013 in relation to 2012. If we successfully achieve all our initiatives in 2013, we estimate that full year operating profits could improve compared to 2012, exclusive of the $45 million curtailment gain on the postretirement benefits recognized in 2012.

Operating cash flow for 2013 is anticipated to be sufficient to maintain current cash balances and for ongoing business requirements if we reach the improved operating level discussed above. This also requires that tax authorities not significantly change their pattern of payments or past practices for the expected outstanding refundable Brazilian and Indian non-income taxes. Finally, we expect capital expense in 2013 to be in the range of $20 million to $25 million.

In summary, 2012 was a year of focus and reinvestment for Tecumseh. Our concerns still remain regarding global economic growth in 2013. We believe the commitment and the discipline of our team are focused on continuing reevaluation of our product line, improving our competitive position and aligning the growth of manufacturing capacity with demand will serve us well as we build upon our goal of becoming the industry leading business for the long term.

Now, I'd like to turn the call back over to Jim. Jim?

James J. Connor

Thanks, Janice. I talked a little bit early about progress we made in 2012 in the product designs, sales and the marketing areas. Although we're not resting on our laurels certainly in 2013, there's lot more to do and we continue forward. We just are finishing up a project in our Tupelo facility to modernize that facility and really bring it to world-class on a manufacturing environment. We're a little ways to go, but we're certainly making great progress in that area.

The facility has put in a new compressor family line that will assemble all six compressors that we make in Tupelo all on one line, greatly utilizing efficiencies. We've put in robotic welders there. We run everything through the same processes now and it's really brought that whole facility up considerably in terms of quality and manufacturing efficiency. We're partnering there with the state of Mississippi to identifying incentives. They've been real good with us as far as training facilities, providing some financing and working with us on grants in areas for tax reduction. So it's really worked out well.

They were up here in Ann Arbor a month ago and we're anxious to formalize more and more in a way of agreements to work with the state in that area. We also made some moves as well including relocating our headquarters out of the lease space that we had here in Ann Arbor, into the building that I currently sit in right now which is the global technical center. We had half of that – a little less than half of that facility was set up for our offices. So we were able to work our way out of a lease of a building in Ann Arbor and we moved over here as a global tech center.

So we've consolidated our own administrative staff into one facility. We're in place now. We're done, and we moved about 100 people in mid February and everybody's settling pretty nicely into our new home here. Additionally, we've recently made some functional reporting changes in North America and Europe to help us more sharply focus on the commercial refrigeration market in those areas. We now have all departments in these two regions including sales, marketing, operations, finance, procurement, engineering, human resources, all reporting to Corporate Vice Presidents in each area.

I'll note that Mike Noelke, our former Executive Vice President for Global Sales and Marketing who has been with us since January 2010 has resigned and Bill Merritt, who has moved into that role of Vice President Sales and Marketing for Tecumseh. Bill will have direct responsibility for sales and marketing organizations in North America, Europe and Asia. That's a little different where they would report to an MD in those areas or a Vice President in North America. Bill will also have the indirect function responsibility for the sales and marketing activities in India and Brazil.

We're very pleased with Bill. He had roles in North America previously and we're very pleased that he moved in there. He knows the market well. He knows the international market well. He's a longtime veteran in this industry not just in HVAC but in the compressor business as well. So he comes to us with a lot of knowledge in that area and we're going to greatly use that as his new role.

I'm sure many of you know that in addition to announcing our 2012 full year results, we issued other press releases regarding potential changes to our Board of Directors and our two share class consolidation. Two of our largest shareholders, Roumell Asset Management and Aegis Financial had recently made recommendations to our Board of Directors. Our shareholders' views are important to us and as a result, we announced certain actions. We have been exploring an expansion of our Board with a search process commenced our governance and nominating committee.

Our Board of Directors agreed to the position to expand the size of our current five-member Board to seven members, which we believe will further enhance the overall skill set and support a stronger governance structure. This expansion to seven members is subject certainly to finding two qualified experienced and independent individuals consistent with the current compensation structure of the Board.

After completion of this process, we intend to address the appointment of a Director to fill our Chairman of the Board vacancies. In addition, our Board has determined that it would be beneficial for our company to reorganize our Class A and our Class B shares into one class of stock. We currently expect to have a proposal ready for presentation to shareholders for approval at the 2014 annual meeting of shareholders. Such a consolidation would require shareholder approval.

Lastly, we also previously announced we've engaged in an advisor and are exploring strategic alternatives in many areas. As you can imagine there's a lot of work to do on all these fronts. However, we believe that these are the right actions to take and the right time to take them. In conclusion, we believe 2012 results are starting to demonstrate that our commitment and focus of this business has begun to take hold, we feel energized and excited to move into 2013 and the prospects for the future. I cannot be more bullish on Tecumseh at any time and as of right now.

That concludes our prepared comments for this earnings call. Now Janice and I, if there are any questions, would like to take those questions that you may have. Matt.

Question-and-Answer Session


Thank you. (Operator Instructions). We do have a question. It comes from the line of Timothy Stobaugh. Please proceed, sir.

Tim Stobaugh - Stonegate Securities

I was getting worried. What happened, Matt? Hello, everyone. Good morning.

Janice E. Stipp

Good morning.

James J. Connor

Hi, Tim. How are you?

Tim Stobaugh - Stonegate Securities

Good. As you know, me and the small group I represent also supported the addition of two new Board members, so we're pleased to see management come out with a statement about that. Appreciate the responsiveness. My question about that process is, do we have any notion of a time period to add these two people? Is it likely that that would be something that would actually happen after the annual meeting?

James J. Connor

I don't have a timetable for you. We're certainly not going to drag our feet. We're going to move forward on that as fast as we can. We've identified certainly some criteria and there are people in the pipeline now that we're talking to. Whether that gets concluded by the annual meeting, I would hesitate to say. We're certainly going to do this in a deliberate way and a process to a thoughtful review of candidates and try to find the best people there. So I hate to constraint ourselves to a time to then try to hit that. I'd rather concern ourselves to the right person and launch forward there. These are not unimportant decisions, so we'll our time and do it and move that way.

Tim Stobaugh - Stonegate Securities

For the record, if I may ask, are the two Roumell-suggested candidates included in the pool of candidates?

James J. Connor

Yeah, they are. We'll look at everybody that anybody has recommendations, we'll certainly take a look at them. But our governance and nominating committee takes this all very seriously and they've got criteria that they're looking for on that. But the two candidates that Jim has put forward are certainly capable individuals and we'll look at them.

Tim Stobaugh - Stonegate Securities

Okay. Now, help me out with the collapsing of the two classes of stock into one as proposed. I think it's a great idea, because it will help with liquidity of the stock overall, among other reasons. But why are we waiting until the 2014 annual meeting? Is there a lot of processes involved? Or shouldn't we hold a special meeting, frankly, to do something like this? Or does that cost too much money or what?

James J. Connor

Well, yeah, there is. This is not an easy process to go through mostly because of securities regulations as well and our own bylaws which will require shareholders' approval, registration statements with the SEC you have to file, the registration of the shares when you're taking voting ability away from people, there's certainly regulations that cover those. So it's really that timing and since it requires a shareholder vote to do a separate proxy in midyear is just awfully expensive. So you really do this on an annual basis and just include that in the next proxy which is what we'll do. And quite honestly, the whole process of filing the registration statements is going to take that long too.

Tim Stobaugh - Stonegate Securities

Oh, really? Okay. Let me just ask one more question and I'll get back in queue, if that's okay. Either one of you, I guess, can you clarify the nature of the product launches, what percent of them were available in Q4? What percent are available now, just in terms of getting a sense of -- I mean, I guess you gave guidance -- just as an aside -- you gave guidance that Q1 is going to be somewhat not quite as good, I guess, as Q1 a year ago. So, there's obviously not a pent-up demand thing going on with new products then, right?

James J. Connor

No. Both -- I mean the two main new products we got is the AE2 and the TA. Every model that we've got on both of those are available for sale honestly right now. We've got -- the research has been done, the engineering has been done, product has been tested by customers which is really the process we're in. So we've launched it, we're in production on a lot of that pending customer approval. The AE2 is really done. We're starting the AE2 now in the aftermarket or distribution business as well as OEMs. So that has launched. The TA, which is really an OEM product because it's going to (inaudible) there's not a lot of aftermarket or distribution business with the TA model. It's on test now and we're selling, oh gosh, maybe half of that volume that we could potentially get with the TA, we're probably selling at the end of the quarter. We exited the year that way. We should have been selling half of it to the year, but at the end -- at the exit of 2012, probably 50% of the TA sales have already been launched and in production.

Tim Stobaugh - Stonegate Securities

Can you give any comment, then, on why we wouldn't see a certain amount of -- why we wouldn't, say, see an increase in Q1 sales over -- and profits or whatever -- over Q1 a year ago? Is there some other factors going on?

James J. Connor

Yeah, it's just the market itself. I mean we're looking at kind of a soft market in Europe, in North America here as well. I will say the Latin America market has been surprising today for us, so we see -- maybe we'll see a little bit of good news down there. And India has been pretty strong for us. So, I think overall with Europe and North America being our big markets, we just look at kind of a softness there for the first quarter compared to last year.

Tim Stobaugh - Stonegate Securities

Okay, I'll get back in queue. Thank you.

James J. Connor

Thanks, Tim.


Thanks for your questions. We have no more questions at this time. So ladies and gentlemen, that concludes your presentation. Thank you very much for joining and please have a very good day.

James J. Connor

Thanks, Matt.

Janice E. Stipp

Thank you.

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