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Executives

Teresa Hess - Director of Investor Relations

Ed Buker - President and Chief Executive Officer

Jim Nicholson - Vice President and Chief Financial Officer

Lynn Dennison - Vice President and General Counsel

Analysts

Brian Grad - DLS Capital Management

Charlie Rentschler - Wall Street Access

Jason Nelson - Rommel Asset Management

Scott Barbee - Aegis Financial

Tecumseh Products Company (TECUA) Q4 2008 Earnings Call March 17, 2009 11:00 AM ET

Operator

Good morning and welcome to the Tecumseh Products Company's Fourth Quarter and Full Year 2008 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the conference. This conference 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. Teresa Hess, Director of Financial Reporting and Investor Relations at Tecumseh Products. Ms. Hess, you may proceed.

Teresa Hess

Thank you, Jimmy. Good morning and welcome to Tecumseh Products fourth quarter and full year 2008 conference call. I am joined on the call today by Ed Buker, President and CEO, Jim Nicholson, Vice President, Treasurer, and Chief Financial Officer and Lynn Dennison, Vice President, General Counsel and Secretary.

Yesterday afternoon, we announced the company's fourth quarter and full year results for the period ended December 31, 2008. If you did not yet receive a copy of the press release, please contact Amanda Passage at 616-2333-0500 to have one sent to you. Please note that the release is also available on many news sites and it can be viewed on our corporate website at www.tecumseh.com.

Also this call is being simultaneously broadcast on the Internet and will be archived for replay starting this afternoon. The replay can also be accessed at our website tecumseh.com.

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. 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.

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. 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. Risk factors exist, a new risk factors emerge from time-to-time that may cause actual results to differ materially from those contained in the forward-looking statements.

Given these risks and uncertainties, investor should not place undue reliance on forward-looking statements as a prediction of actual results. Furthermore, the company expressly disclaims any obligation to update, amend, or clarify forward-looking statements.

In addition to the foregoing, several risk factors are discussed in the company's most recently filed Annual Report on Form 10-K and other SEC filings under the titles Risk Factors or 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.

With that said, I would now like to turn the call over to Ed Buker, President and CEO of Tecumseh Products.

Ed Buker

Thank you, Teresa. Good morning and welcome to our fourth quarter and full year 2008 conference call. Today I will provide you with an update on our business from several perspectives. First I'll provide some context for our fourth quarter and full year results as well as the broader markets and global economic conditions and their impact on those results.

Then I will turn the call over to our CFO, Jim Nicholson to go over our financial results for the quarter in year and greater detail. Then I'll update you on a number of recent developments including the investigations into our industry and our ongoing initiatives to transform our company into a world-class compressor manufacturer. Finally, we'll open up the call to your questions; I've asked Lynn Dennison, the company's General Counsel to join us in case you have questions but most appropriately answered by legal counsel.

Although 2008, will likely be remembered for the significant global financial turmoil which has led to the worst economic contraction at least the last 25 years. Year just ended was in fact a period of progress for the Tecumseh. While the deepening global recession as a significant impact on our financial results and masked our progress during the year particularly in the fourth quarter. We didn't complete many actions towards transforming our company into world-class competitor and our core compressor business.

As we entered 2008, we knew we had our work cut out for us. We also knew that course before us would take more than a year, then we would face unforeseen challenges and opportunities along the way. The primary mandate of that course is in the near-term is ringing out the waste in an efficiencies created over the past several decades. The period characterized by over-investment in vertical integration and redundancies across our various geographic locations.

Under the philosophy of our former management, the global locations of our operators are autonomous businesses resulting in duplicate operational marketing and product development processes, extremely inefficient use of valuable scarce resources.

By coordinating all of our activities globally and conducting certain operations in those locations that offer the best costs and shifting other activities to those locations that are critical to properly serving the local customer, we expect to substantially improve the financial results of our business over the next several years.

While the current economic climate will slow our progress, and as a result it will take us a little longer to arrive at our destination. I am still confident that we will achieve our stated goals.

As I said on many occasions, our primary goal is to transform Tecumseh Products Company back into world-class supplier of compressors, condensing units and complete refrigeration systems. This includes the goal of 3 to 5% EBIT that we regularly discuss as a group, but more on goal achievement in a second.

First I would like to recap the progress that we've made during 2008. During the year, we spend a great deal of effort undertaking carefully planned steps directed improving the most important aspects of our business. The priorities that we instituted for our improvements in the overall direction of the business we're establishing early part of 2008 when the Board of Directors and Senior Management undertook an exhausted strategic review of the business and formulated a strategic roadmap for enhancing shareholder value.

We've wasted no time in making progress against the plan starting with our manufacturing activities. We now have been placed in all of our facilities around the globe that Tecumseh Production System or TPS, which includes methodologies for continuous improvements in the manufacturing process, cost and quality.

The system has already yielded positive results reducing the cost of poor quality by 20% over 2007. In addition through Kaizen events to identify and implement efficiencies combined with other operational initiatives, we have produced significant improvements in productivity and efficiency including a 13% reduction in the size of our manufacturing footprint and realigning that footprint to better leverage our presence in best cost countries.

These and other actions which were completed on-time within budget and without any disruption to our customers yielded cost savings of $6.8 million in 2008 and expect to generate $13.3 million of ongoing annual cost savings.

We also implemented a new product development process that includes a method for prioritizing and coordinating our development activities across the globe. Utilizing our new process, we have formulated our product platform strategy for the next three years.

Consistent with our business strategy, new platform takes a global view driving investment and development of product platforms that have global applicability, resulting in fewer platforms and eliminating global redundancies which internally to further cost reductions.

More importantly, we anticipate after the first full iteration of the product development cycle over the next three years; we will have rationalized and refreshed our full product line to world-class portfolio in terms of operating characteristics, customer requirements and cost.

While we've made progress in reshaping our global business, that progress is masked by the rapid deterioration of economic conditions in the areas of the world where we operate.

Recession was precipitated by the credit crisis, but it since expanded to include deterioration of credit availability for consumers and customers. Increased borrowing rates for those who are able to secure lines in credit, dramatic declines in the housing market and new construction, and growing unemployment rates in many countries where our business is concentrated. These conditions are affecting all of our global markets with near equal severity, thus mitigating the benefits of our diverse global business base.

To address marketing conditions and improved our competitive positions, we have accelerated certain restructuring activities in the later stages of the fourth quarter and the early first quarter, including idling unrealized assets as well as making further head count reductions throughout the world. In 2008, we reduced our global head count by approximately 2400 people or 24% in comparison to the beginning of the year.

In January and February, we have taken further actions and further reduced permanent head count by 300 people at a cost of $1.6 million. This excludes any temporary associates or employees that have been added for seasonal production.

Our approach has been utilized both voluntary and involuntary programs to affect head count, and we're possible we have used over-funded pension assets to fund the head count reduction programs.

Head count is only a single element of our response to the volumes that we see in the current economic environment. We employed many of the techniques that you've heard about from other companies, including the furl or elimination of compensation increases in non-regulated locations, benefit reductions, mandatory furloughs, restrictions on hiring, travel and other spending.

In addition, we've implemented new controls on spending, all of this with one goal in mind, to preserve our cash.

We can offer no firm prediction in light of the vast uncertainty regarding sales and the general fragility of the global economy. We believe that even with severe costs and governments costs, we will continue to build cash by the end of the year.

Let me caution you again. There are many variables here that could change things either for the worse or for the better but we do have our eye on the both.

The outlook for 2009 suggests there will be no quick return to historic volume levels in our business. Run rates over the first quarter 2009 are similar to those of the fourth quarter 2008 and due to severe nature of the economic events that have unfolded no one has good visibility beyond the near-term. Many of you would like to know whether we think we have hit bottom. I can only offer anecdote deliverance.

In January and February, our OEM customers hit their forecasted needs. Something they didn't do in the fourth quarter. In February, some of our distribution customers were willing to pay air freight, suggesting they run inventories to their lowest levels.

March sales so far, halfway through the month, are running at a better rate than in January and February in comparison to last year and our annual pre-season program for distribution customers generated sales more than doubled of the prior year's program.

Again, I caution your interpretation of these comments as we think... as we have seen things can change in a hurry.

Despite the economic hurdles, we successfully maintained our cash balances through the fourth quarter ending the year with over $110 million in cash and equivalence. We also further reduced our debt levels to manage interest expense.

We believe we have adequate resources available to withstand the current economic challenges but we remain highly disciplined in our use of cash. We very carefully reign in all of our controllable expenditures in 2008 and we expect to continue to do so in 2009 by closely monitoring our sales levels and responding accordingly to ensure we do not burn cash.

We have redefined the goals for 2009 to reflect the fact in this credit constraint, low sales environment, Cash is king. We will slow the pace of change and take appropriate actions to preserve our cash balances.

As I mentioned earlier, this will ultimately extend our timeline for achieving our goals. But we expect to emerge from the recession poised for greater success.

Jim, will elaborate further on our financial results.

Jim Nicholson

Yes. Thank you Ed. As Ed mentioned, the intensification of the global economic slowdown in the last three months of 2008 has significant detrimental impact on our financial results for the quarter. Although we made efforts to adjust our production and cost structure for the lower levels of volume, the speed of the economic decline in the areas of the globe where we operate overtook those efforts.

On the bottom line, we reported a net loss of $63.3 million or $3.43 per share for the fourth quarter of 2008 versus net income of $4.1 million or $0.22 per share in the year ago quarter.

Income from continuing operations for the current quarter amounted to a loss of $43.6 million or $2.36 per fully diluted share, compared to a profit from continuing operations of $2.2 million or $0.12 per fully diluted share a year ago.

For the full year, we reported a net loss of $50.5 million or $2.73 per fully diluted share compared with a net loss of $178.1 million or $9.64 per fully diluted share in 2007.

Results from continuing operations for 2008 were a loss of $79.9 million or $4.32 per share versus a loss of $6 million or $0.33 per share in the prior year.

Operating loss was $48.1 million for the fourth quarter compared with an operating loss of $3 million last year.

Operating results included impairments, restructuring and other charges of $23.4 million which were primarily non-cash versus $5.6 million in 2007.

Included in the impairments and other charges in the fourth quarter of 2008, were goodwill and impairments of $18.2 million and $5.2 million in severance costs reflecting the company's continuing restructuring efforts as well as our countermeasures to current volume levels.

The goodwill impairment eliminates all remaining goodwill that had been carried on the books, all of which were related to foreign compressor operations.

Given the severity of the fourth quarter slow down and the outlook for 2009, our valuations indicated that this goodwill had been fully impaired.

Excluding impairments restructuring and other charges, the operating loss amounted to $24.7 million, which was caused by much lower unit volumes and associated unfavorable over head absorption, as well as the affect of foreign currency exchange rates and unfavorable commodity cost.

For the full year 2008, operating loss was $71.1 million compared with operating income of $1.9 million in 2007. The operating loss for the full year 2008 included impairments, restructuring charges and other items totaling $43.5 million. By comparison, in 2007, operating results included $7.2 million in restructuring impairment and other charges.

During the fourth quarter, our sales were significantly impacted by the rapidly deepening global recession. Consolidated net sales for the quarter fell $88.4 million or 35.1% to $163.7 million from $252.1 million in the fourth quarter of 2007. Excluding the impact of currency translation consolidated net sales declined by $64.7 million or 25.7% in the quarter.

Breaking down the total $88.4 million decline in sales, sales for refrigeration and freezer application fell by $45.5 million which was driven by the dramatic decline in market demand and overall consumer contraction which can be attributed to both lack of access to available credit as well as low levels of housing starts around the globe.

Sales that compressors used in commercial and after market applications declined substantially in dollar terms following $38.1 million. These declines were driven by the contraction of the global economy resulting in reduction of new store openings, delays in coaching development and access of customer inventory that needs to work its way through the system.

Sales on compressors for air-conditioning and other applications declined by $4.8 million in the fourth quarter due to higher customer inventory levels and cooler than normal weather in the high temperature, high humidity areas, where our air-conditioning pressures are sold.

Consolidated net sales for 2008 fell $147.9 million where 13.2% to $968.9 million from $1.1 billion in 2007 excluding the benefits of sales of foreign currency translation of $56.2 million. Sales for the full year would have declined 18.3% from the prior year.

The decline in sales for the year was the result of the global recession which deepened as the year progressed and had the most significant impact on sales of compressors for R&F applications which fell $106.1 million or 26.6%.

Compressors with commercial and aftermarket applications were down by $24.8 million or 4.8%, while compressors for air conditioning and other applications were down $17 million.

The driving forces behind these declines with a same in the full year as there is I've mentioned for the fourth quarter. The impacts however were felt most significantly in the third and particularly the fourth quarters of the year.

Cost of sales was a $159.1 million in the fourth quarter of 2008 compared with $216.4 million in the prior year's fourth quarter. As a percent of net sales cost of sales increased to 97.2% in the quarter from 85.8% last year. In dollar terms gross margin declined $31.1 million to $4.6 million from $35.7 million in the fourth quarter of 2007.

The significant decline in gross margin in the quarter was the result of lower fixed cost absorption as the rapid volume declines outpaced our ability to contract our cost structure. To aggregate the impact on gross margin from volume declines during the quarter amounted to $8.8 million while unfavorable foreign currency movements had an unfavorable impact of $8.8 million and unfavorable commodity cost had an impact of $10 million.

On the positive the side selling price increases generated a favorable impact of $6.2 million in purchasing productivity and other cost improvements accounted for the remaining difference. For the full year gross profit was $101.2 million or 10.5% of sales compared with the $139.9 million or 12.5% of sales in 2007. The majority of the decline in gross margin was driven by the volume declines we experienced. Particularly in the second half of the year, which accounted for $49.5 million, decline in gross margin.

Although commodity cost declined and the U.S. dollar strengthened in the latter months of 2008, the full year impact of those two factors was nonetheless unfavorable. Compared to 2007 commodity cost were unfavorable to gross profit by $23.1 million from net currency impacts unfavorable year-on-year by $32.3 million.

On the positive side, these significant unfavorable factors were partially offset by favorable pricing impacts of $38.8 million as well as productivity and purchasing improvements in other field impacts totaling $27.4 million.

Selling and administrative expenses decreased $3.8 million to $29.3 million in the fourth quarter of 2008, but as a percentage of sales S&A increased to 17.9% from 13.1% against the much lower revenue levels in the period.

We spent $6.7 million in the fourth quarter for one-time professional fees incurred outside the normal course of business primarily for legal fees related to corporate governance matters and to our investigation into possible anti-competitive practices including execution of related amnesty agreements with respective authorities. These expenditures marked a $4.1 million increase in such fees compared to the fourth quarter of 2007. Aside from these expenses, we would have reduced total S&A cost by approximately $10.5 million. For the full year, S&A cost were lower by $2 million, or 1.5% to $128.8 million compared to prior year.

However, as a percentage of sales S&A increased to 13.3% from 11.7% due to the decline in sales volumes in the second half of the year. While we incur approximately $17.7 million in 2008 for professional fees outside the normal course of business which included consulting services for strategic planning and legal fees for corporate governance issues and anti-competitive matters, this figure represented the $2.1 million reduction in fees when compared to 2007.

This improvement was offset by a net increase of $0.1 million in other selling and administrative cost was notably $1.4 million in expenses recorded for share-based compensation. And a net increase of $0.6 million reflective of higher company contributions to 401(k) plans as compared to the prior year.

These contributions were reflected in the P&L, are actually funded by cash restricted to this purpose as a result of our prior pension reversion. We've recorded expenses of $23.4 million in impairments, restructuring charges and other items in the fourth quarter of 2008. As mentioned earlier, these expenses were a result of the impairment of the company's goodwill balances, as well as severance cost.

For all of 2008, the company had a great deal of activity in this area given the extent of our overall restructuring initiatives. Full year net expenses amounted to $43.5 million in impairments restructuring charges and other items, included in this amount where expenses of $20 million for excise taxes paid in cash on the proceeds received from the reversion of our former salaried retirement plan.

Goodwill impairments in the amount of $18.2 million and an additional $14.6 million of full impairments of buildings and machinery as a result of consolidation and relocation of global manufacturing capabilities. And lastly $12.2 million in severance cost.

Partially offsetting these expenses with several settlement and curtailment gains related to our pension and post-retirement benefit plans totaling $21.5 million.

Turning to cash flow, cash provided by operations during 2008 amounted to $70.6 million compared with cash used by operations of $14.8 million in 2007.

2008 operating cash flow incorporated net loss of $50.5 million which included the non-cash impact of $42.5 million in depreciation expense and $32.4 million from impairment of long live assets and goodwill. The 2008 net loss also included a working capital settlement with the purchaser of our former engine and power train business of $13.1 million which we paid in cash in March of 2009 and is recorded and discussed.

Operating cash flow was also significantly impacted by the $80 million and that proceeds realized from the reversion of the company's salary retirement plan. As well as, the $45 million received in the fourth quarter of 2008 from the refund of non income taxes in Brazil.

Excluding the effects of currency translation, inventories decreased by $8.3 million during 2008, reflecting our continued global efforts to reduce inventories. This effort was somewhat solved by the sales slowdown in the fourth quarter. Accounts receivable by contrast increase be $10.9 million from the beginning of the year as a net result of offsetting factors.

First a decrease of $55.9 million in the amount of discount of receivables at the end of 2008 as compared to 2007 reflected the use of cash as this has decreased discounting thereby increases the amount of accounts receivable reported on the consolidated balance sheet. This increase was offset substantial by substantially lower customer receivables in the fourth quarter of 2008 as compared to 2007, as a result of lower sales volumes.

The company also recorded decreases to accounts payable and other accrued expenses and liabilities of $28.4 million since the end of 2007 which will also primarily attributable to the weakness increase volumes. The extreme volatility in certain commodity prices and in foreign exchange had substantial impacts on our business in 2008. We are actively engaged in forward purchase contracts and futures contracts to lock in prices and reduce the risk of commodity volatility on approximately 68% of our forecast and copper use over the next year to 15 months.

While these hedge positions protect us from increases in price, they can also delay the benefit we see from price decreases such as those experienced over the last five months of 2008. We've seen significant volatility in copper as prices surged more than 30% in the first seven months of the year and then dropped 62.8% from August through December. Beside from copper, our most significant remaining commodity exposure is steel, simply because there are no well established effective hedging vehicles available for steel. Particularly, for the specific type of electrical steel employed in our production.

Prices for this type of steel did not experience the significant declines like many other commodities in the second half of 2008.

Considering our hedge positions, we project that our full year 2009 cost for purchase materials will be slightly higher than 2008. Subject of course to the ultimate cost of these commodities, especially steel, over the course of the upcoming year.

To address this throughout 2008, we implemented price increases as partial means of addressing escalating commodity costs. Over the course of 2009, we expect to closely monitor pricing levels and make adjustments based upon changes to our cost structure whether favorable or unfavorable and the reaction to market forces, as lower industry volumes will likely result in pressure to lower prices in order to retain volumes.

Turning to foreign exchange exposure. The Riyal, the Euro and the Rupee continues significant volatility against the U.S. dollar. We have considerable forward purchase contracts that cover our exposure to fluctuations in the value of these currencies during 2009, particularly the Brazilian Riyal to which we have the greatest exposure.

In the aggregate, the changes in foreign currency exchange rates, after giving consideration to open contracts, and including the impact of balance sheet re-measurement, are expected to have a favorable financial impact totaling $28 million in 2009 when compared to 2008. Although, the greatest benefit will accrue in the latter half of the year as older hedged contracts mature during the first half of the year.

Finally, let me spend a moment on interest expense. In the fourth quarter, our interest expense increased by approximately $4.8 million to $3.9 million compared with a credit of $0.9 million in the fourth quarter of 2007. And interest expense for the fourth quarter of 2007, included in adjustment to full year interest expense of $5.8 million which was re-classed to discontinued operations under accounting rules. Excluding this adjustment, our interest expense declined by $1 million from the prior year.

Now I'll turn the call over to Ed for some additional remarks.

Ed Buker

Thanks Jim. Certainly, 2008 presented more than its fair share of challenges, both economic and operational. In addition to these challenges, we continue to face corporate governance issues that have extended into 2009. We're now facing a new issue on a legal front.

As we announced the mid February, Tecumseh is one of several companies involved in investigations into possible anticompetitive practices and the compressor industry being conducted by the antitrust authorities of the United States, Brazil and European Commission.

First and most important point I want to emphasize that on February 12th 2009, United States Department of Justice, (DOJ) granted the terms and conditional amnesty under the Antitrust Divisions Corporate Leniency Policy. Under the terms of this agreement with the DOJ, the Company will not be subjected to criminal prosecution with respect to the investigation so long as the Company continues to comply with the Corporate Leniency Policy. This requires among other things, the Company's continued full co-operation in the investigation.

We expect to co-operate throughout the investigation and secure a final amnesty which would exempt us from considerable fines and penalties that can flow from such matters. We've secured similar amnesty arrangements in Brazil and the European Union. The other significant benefit we can obtain as a result of our conditional amnesty relates to liability and civil litigation, which primarily occur in the U.S.

By statue, if we co-operate in a satisfactory manner with private complements, we can avoid the joint and several liability and trouble damages that can be available in such matters. This should have the effect of either further reducing our total exposure, and although, I understand many of you would like me to provide a solid estimate of what the total exposure will be, it is not possible to do so.

What I can tell you is that there are several exposures driven by a number of factors such as, with products are involved, with factors other than potentially and a competitive behavior drilled pricing. For example, material costs plus the time frame involved.

I only have information from our internal investigation which tends to indicate a potentially limited time frame and a focus on a subset of our products, the smaller compressors of the type manufactured in our Brazilian facilities. That is all I can share with you at this time. We'll update you further when we're able.

As our long-term shareholders investors are no doubt aware, we faced a variety of corporate governance issues in 2008 which are continuing this year. In the fourth quarter, we held a special meeting of the shareholders to consider a proposal by the Herrick Foundation to remove two of our independent directors, Dr. Peter Banks and Mr. David Risley.

At that meeting the current Board of Directors and management team received the support of our class B shareholders and Herrick Foundation's proposal was defeated. We then signed on the course to eliminate our dual-class capital structure through a stock dividend that was said to occur at the end of 2008. However, the Herrick Foundation filed suite to block the recapitalization.

To the rest of concerns raised in that litigation, the Board of Directors approved a recapitalization proposal and director better be submitted to the company's shareholders for consideration at the annual meeting.

In approving the recapitalization, the Board determined that the recapitalization is fair too, and in the best interest of the company and all of its shareholders. As a part of the recapitalization each share of class A common stock would be exchanged for a share of new voting common stock, any share of class B common stock would be exchanged for 1.1 shares of new voting common stock.

The recapitalization will be subject to the approval of the majority of the outstanding class A shares and class B shares, each voting separately as the class. The Board believes that the recapitalization if effected will result in substantial benefits to the company shareholders including provide our -- providing closer alignment of economic interests and voting rights, creating greater trading volume for the resulting single-class of new common stock. Creating a simplified single-class one share one-vote capital structure, which we will believe will eliminate confusion with the respect to the company's capital structure amongst the investors.

Creation of a more attractive financing vehicle, creating an improved corporate governance profile and increased acceptance by institutional investors which may in turn to be further improvements in stock liquidity. And finally, facilitating the ability of the whole of the class to be common stock including the Herrick Foundation and the other Herrick family interest to dispose of their interest in the company.

In addition, the recapitalization proposal the Board of Directors is recommending the shareholders elect at the 2009 annual meeting a slate of director candidates that was recommended unanimously by the independent governments nominating committee of the board for election at the 2009 annual meeting of the shareholders.

The slate of seven candidates includes three incumbent nominees and four new nominees with impressive experience and backgrounds who would provide valuable, additional advice to the company as we execute our strategic plan in this very difficult economy.

Also with glad to the board election, Dr. Peter Banks and Mr. David Risley have informed us of their decision not to stand for reelections of the board. We thank them for the long and dedicated service as they've made substantial contributions to the company and played key roles in guiding the company through a very difficult period in its history.

As I mentioned, the company has been granted conditional amnesty under the DOG -- DOJ anti-trust divisions' Corporate Leniency Policy, we would do an investigation to the compressor industry. It is noteworthy the company's amnesty arrangements specifically excludes former CEO Todd Herrick and current board member Kent Herrick.

Kent Herrick and Todd Herrick have not cooperated with the company in our independent investigation and we believe have also refused to corporate with the investigating anti-trust authorities, despite the company's request that they do so.

The governments nominating committee just under among other reasons that it would not be in the best interest of the company and its shareholders to re-nominate Kent Herrick for election as a director since Mr. Herrick has refused to cooperate in the investigation. The committee also decided against re-nominating Steve Lebowski based on a number of highly qualified director candidates willing to serve on the Board.

We did receive notice on February 19th 2009, the Herrick Foundation intends to nominate its own competing slate of candidates for election and at the annual meeting including Kent Herrick and Steve Lebowski. I am helpful... hopeful that our shareholders decision, at the upcoming annual meeting will work a significant... will mark a significant step forward in our ongoing efforts to modernize our capital structure and corporate government practices. And frankly, stand with us as we work to build the future rather than relive the past. We are on the process of filing our proxy and once it becomes effective we explain in greater detail the company's position.

In summary, 2008 was a very difficult year given the state of the global economy. Even so we made substantial progress in transforming our business to be a global leader in our core compressor business. 2009 is shaping up to be another challenging year but we're prepared to take the additional actions necessary to survive the current downturn and ultimately describe as the recovery eventually and soon. We will continue to exercise prudence with regard to the use of our cash including investments in capital expenditure and working capital. Keeping in mind that our sizeable cash balance will be a critical asset for us, as we work through this slowdown. We must remain flexible in our operations to make needed changes as conditions want.

As we are in our 75th year, we are challenged, yet confident and our ability to transform to counsel into the industry leader that we want to be for the next 75 years.

This concludes our prepared comments for this morning. Jimmy, we are now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll take our first question from Brian Grad with DLS Capital Management. Please go ahead.

Brian Grad - DLS Capital Management

Hi guys, how are you?

Ed Buker

Hi Brian, how are you?

Brian Grad - DLS Capital Management

What a tough quarter man?

Ed Buker

Jesus.

Brian Grad - DLS Capital Management

Could you talk a little bit about what your anticipated cash restructuring cost and governance costs are going to be in '09. I was little disappointed to see that the Herrick had been this much of an annoyance and cost this company 8 million bucks.

Jim Nicholson

Well, we'll agree with the latter comment.

Brian Grad - DLS Capital Management

Hope they're listening.

Jim Nicholson

With respect to our prediction it's difficult to say. I can tell you for the full year 2008 the severance cost were 12.2 million and those we're the cash cause. 2009 looks like it's shaping up, it depends on where sales is ultimately going to turn out. We have scenarios where the number could be larger; we have scenarios where the number could be lower. And it's ultimately going to depend on the kind of sales level that we are seeing.

If we are talking about sales at the run rate say at the fourth quarter and first quarter they would be at the higher end into that range. And it's probably too early to tell what kind of impairment charges for assets. I know I do not expect those to be a noteworthy as we go through the plans for 2009.

With respect to the governance we believe that the good person and number can disappear once the... once it's ultimately settled. But there will be ongoing costs as we work through the competitive investigation.

Brian Grad - DLS Capital Management

Any estimates on those costs or dollars that just?

Jim Nicholson

I'll go back, yeah I'll go back to Ed's comments that it is just, besides the investigation, there is also civil litigation and it's just way too early to formally any kind of prediction and what that is.

Brian Grad - DLS Capital Management

Got it. Did you... one further thing, did you apply the tax refunds in Brazil from the debt in Brazil because it looks like your debt went down last quarter?

Jim Nicholson

It did, a little bit of our unbalance sheet debt is also as well as scaling back discounting a receivables, so, yes, that is with the application that cash.

Brian Grad - DLS Capital Management

Okay and any further tax refunds form Brazil, you are going probably do the same thing, I think you said there was possibility to get some money out of there?

Jim Nicholson

We have about another 40 million of non-income tax receivables to collect in Brazil, we were the top of a line last year and now as other people turn it's going to take a little bit longer to get the next trench of the money in our pockets, we're actually anticipating that I wont be 2009 it might be more like 2010 but the number that's on the balance sheet is $40 million.

Brian Grad - DLS Capital Management

Okay that on the balance sheet already?

Jim Nicholson

Yes.

Brian Grad - DLS Capital Management

Under what it is classified as?

Teresa Hess

Recoverable non-income taxes and asset.

Brian Grad - DLS Capital Management

Got it. Okay. All right, I'll get back in the queue.

Operator

We'll take our next question from Charlie Rentschler with Wall Street Access. Please go ahead.

Charlie Rentschler - Wall Street Access

Good morning, everybody.

Ed Buker

Hi Charlie.

Teresa Hess

Hi Charlie.

Charlie Rentschler - Wall Street Access

Ed you talked about being prepared to take additional action necessary to further cut cost and I don't meant in any way to integrate what you've done because you done a hack of the job here. But I am just wondering, how much a attainable cost reduction that left out there if you saw sale go down another 15-20% or something, I am looking, I like to look at that old measurement of sales per employee and last year we still ran around 125,000 or something like that. Maybe that's not quite a number but now obviously a lot of those people are in foreign land.

So, it's a mix kind of a thing, but are there some significant remaining opportunities out there? I am looking in terms of your capacity, you still have an off a lot of capacity in Brazil so rolled it up to India. But are there some substantial things left that you can reach for still?

Ed Buker

Yes Charlie. If you remember, we've embarked as a three year journey to eliminate the redundancies in our facilities and we are going to add it here. The cost as you go along gets higher to do those redundant the eliminations but if there is no volume you have to start picking that fight. That's why Jim said, if the volumes stay low there --the severance costs will be higher as we make the move.

There are still products that are in multiple locations that could be accomplished in a single location at a much more competitive level by combining them and we're looking at those... all those opportunities that are trying to pick the right investment at the right time for the right returns, five year return, it's not a good investment for us. Its less than 18 months, 15 months, 12 months, its a good idea for us to look at those things.

So I would say there are still, Charlie, significant opportunities because that's... if you recall the foundation of our strategy is to eliminate those fixed costs and fill those competitive volumes up to make that nice return on... return to profitability.

Charlie Rentschler - Wall Street Access

Okay.

Jim Nicholson

If I can add on to that Charlie, kind of put a box around that with some financial figures. We believe, between the restructuring actions that we've already embarked on in the plan and some additional belt tightening that we're doing in reaction to volume that will reduce fixed costs in 2009 by an additional 30 million in comparison to 2008. That puts us in a level where our fixed costs would be about 185 million.

If you include, both the fixed costs and cost of sales and assuming that all S&A costs are fixed, and remember these are assumptions, okay? It also assumes, I'm excluding in this analysis a severance and governance cost, as basically non-recurring type costs. At those levels, and we think our EBITDA or kind of our cash break even level is around 690 million in sales. So, I think that it surely answers that we believe there is opportunity to reduce cost. We got the -- our eye in the ball is conserving cash and making sure that we can sustain ourselves at low levels of sales.

Charlie Rentschler - Wall Street Access

90 million, that's a very positive outlook I think. Second question, you touched on Brazil packs refund of 40 million coming back probably in 2010, what are the other -- are there still some other non-operating cash items that will come back in `09 or 2010. I am thinking, I don't know where you are with some of the pension plan items or some of the tax items, please?

Jim Nicholson

Absolutely, let's do the typical rundown that we've been doing over the last couple of quarters.

Charlie Rentschler - Wall Street Access

Okay.

Jim Nicholson

So, we mentioned the 40 million in refundable taxes in Brazil. But we haven't mentioned thus far is that we've had a favorable outcome with respect to the 14 million we were seeking from the US. We have reached an agreement with the IRS and we'll be collecting the 14 million some time in 2009, probably most likely mid 2009 and so that's a positive development.

The reversion of our hourly pension plan of the Tecumseh facility which is a shut down facility is in the works. We've every indication that the timing is on track and that also will happen sometime mid 2009 and our current estimate of the net proceeds there are $45 million.

And then lastly, while the inventory reduction efforts that we undertook in 2008 were somewhat stymied by the lack of sales in the fourth quarter. And depending on what sales levels are in '09 we still think there is a 25 to $35 million opportunity to reduce inventories by the time we get to the end of '09. So there is... there are still significant cash generation opportunities that lie ahead of us.

Charlie Rentschler - Wall Street Access

If I add those up in '09 you've got the 14 from the IRS and 45 from the ROE pension reversion and say 25 for inventory reductions. So that's about $84 million, and then the 40 possibly from the Brazilian refund in 2010.

Jim Nicholson

Right.

Charlie Rentschler - Wall Street Access

Did I get that right

Jim Nicholson

You did. And let me add one other item, it's a negative, it's the 13 million that we did pay in March over the settlement of the working capital adjustment so that's a negative number you got to take out of those.

Charlie Rentschler - Wall Street Access

Can you explain... expand on that I'm sorry to use up more than my second question but.

Jim Nicholson

No problem, it so as part of the various sales there is typically in adjustment to purchase price for ending working capital and this was highly unexpected in our part but shortly after that sale a number of detrimental things happened to debt engine business after the closing they lost their major customer... another major customer maybe their second largest customer filed for bankruptcy, and the buyer made claims -- essentially made claims that elements of the working capital that were delivered were value us...

Charlie Rentschler - Wall Street Access

Okay.

Jim Nicholson

And that was settled in arbitration and the arbitrator found in their favor to the tune of $13 million. Now that outcome we accrued in the 2008 results, and that $13 million adjustment is sitting in discontinued operations, but the payment of the amount happened in March of 2009.

Charlie Rentschler - Wall Street Access

Okay, so in other words I take my 84 and that again when I get 71 and all the numbers.

Jim Nicholson

Yes.

Charlie Rentschler - Wall Street Access

And then plus the 44 for next year, so I don't know why the share is so... what they do, but that's for somebody else to ponder, I guess. Thank you.

Operator

I'll take our next question from Jason Nelson with Rommel Asset Management. Please go ahead.

Jason Nelson - Rommel Asset Management

Thank you. Hi, this is Jim. Going back to the 6.7 in legal and compliance, I did some basic math and that works out to $554,000 a week or 32 full time employees per week that a 50 hour work week at $350 an hour. And setting aside the issue of the necessity of these expenses given some challenges, what is being done to negotiate down these legal bills, it's beginning to feel like this is a supporting the legal system of Michigan at these run rates and what is being done to drive these cost down if you're delivering these legal firms, this much continuing business.

And then can you also segregate out, how much of these expenses are non-Herrick related, that has nothing to do with the kind of cat fight there. And then lastly, are the legal expenses Ed in terms of your bonus on the EBITDA do they -- are they a piece of the art (ph).

Ed Buker

Yes. The last question is easy there, when we set the original compensation plan out the year ago, we're part of that our -- so they are in adjustment. The non anti-trust and non-governance issues we've gone back to every one of our legal firms in this environment because they are all slower too and renegotiated rates on our ongoing business. That difficulty we've had with the governance issues and the anti-trust issues is that it's been a reactive position and we were a bit at the mercy of the process. We can't tell you when each one's going to end but we're looking forward to trying to find the solution as quickly as possible anyway we can on the governance issue that's reasonable for the company and good for the shareholders.

And the anti-trust issue, we hope that our preliminary work on the investigating will preclude serious levels of we are going forward but we can't be certain about.

Jason Nelson - Rommel Asset Management

But it is my estimate and Jim I guess you get the bills. Is $350 an hour a decent estimate for Michigan Legal?

Jim Nicholson

Well first I would tell you that the majority of it isn't Michigan Legal, it's New York Legal. And types of represent us in the majorities particular matters are New York based. But there is a Michigan component, so...

Jason Nelson - Rommel Asset Management

Well, I can give you a list of authority. There are more firms in Washington D.C. or laying off attorneys. And if these fees have to be then as a shareholder I just... I want to say someone beaten up these on these bills. I mean we get legal bills and we negotiate them 30, 40% down sometimes and these are giant expenses.

And, I just want to have the confidence that everything is being done to push these numbers down, I mean, again we're employing about 30 attorneys a week full time in the fourth quarter.

Jim Nicholson

But I would remind you that we have two major items going on in the governance issue as well as the antitrust issue, the anti competitive issue. And not all of this cost were in fact have been legal costs, when the proxy fight was held, there were solicitors and so forth.

So, your math is probably only off a little bit, I can tell you that we are doing what we can do to negotiate and manage those fees, we don't treat as an open cheque book but we don't have the fullest amount of leverage either.

Jason Nelson - Rommel Asset Management

All right, let me just talk in another on the same in terms of expenses, is number one on the civil litigation possibility standing from the price fixing thing, is it a forward going conclusion that there will be civil litigation? In other words, is it possible that at the end of the day, the damages are pretty particularly given the role in the timeframe and what not or do you already see indications that there will be civil litigation?

Lynn Dennison

This is Lynn Dennison, I'll take that question, there is civil litigation at this point, which is very typical one, the existence of an investigation becomes publicly known. To date we have 22 complaints that have been filed in 5 different jurisdictions. And what, the way this will play out it s very early in that process if these firms file these cases at the first indication of an investigated matter and then it will, their emotions currently pending before the multi-district litigation panel to consolidate these and a jurisdiction will be selected and this will play itself out over the course of the investigation. And, as Ed said during his remarks, there are a variety of factors that ultimately drive what the financial impact of those litigation matters will be and it can range significantly depending on the facts of our particular matter and what we know about our situation Ed shared during his remarks but we simply don't have a number or even a range of numbers that we can give you right now.

Jason Nelson - Rommel Asset Management

But can you, which I think Ed mentioned in his remarks were certainly alluded to a significant lack of exposure on the civil side given your conditional amnesty which is that you are confident will result in kind of permanent amnesty given your full cooperation with the government. And you made a comment or Ed made a comment that very much impacts the limiting of civil damages. Can you say that, that cooperation and full amnesty will in fact in your legal opinion preclude the company from total damages?

Lynn Dennison

There is... as I pretty certainly understand there is a statutory provision that relates to the antitrust legal and regulatory scheme in the US that provides and if you company-operate satisfactorily with claimants and you're the amnesty recipient, you'll remove yourself from joint several liability and travel damages which really have a note to update multipliers that in the civil litigation context and we're the amnesty recipient, we're co-operating with government.

We intend to co-operate pursuant to the requirements of those -- of that statued in the civil claims context to eliminate joint several liability and travel damages. And there are other factors that can also have eliminating effect on that liability, what subset of your products are actually involved in the potentially anticompetitive behavior. What other factors impacted pricing ultimately. How does this co-operation and negotiation with the council for the claimant go?

All of those things can moderate your ultimate exposure and those are things that we're learning about but do not know.

Jason Nelson - Rommel Asset Management

But I hear you understand that the cooperation also extends to the civil litigants?

Lynn Dennison

That's correct. That's a condition to the relief from joint several liability and trouble damages. You then have a cooperative information exchange and approach with the private claimants.

Jason Nelson - Rommel Asset Management

Got it. So on these 22 complaints, you're essentially cooperating with their council to kind of get through the bottom of it and so long as you do that the statue allows for you to exempt yourself from these trouble and multiplier effect damage rewards.

Lynn Dennison

That's generally how the mechanic works. That's... there'll be a lead council -- for selected out of this group that's jockeying for prominence among the plainest firms and then we'll walk down that path to try to efficiently and appropriately resolve these.

Jason Nelson - Rommel Asset Management

Okay. So...

Lynn Dennison

That's their typical approach.

Jason Nelson - Rommel Asset Management

Got it. So you will... a court will now decide, a judge will decide of the attorneys representing these 22 complaints. Basically, they'll be like there is going to class actions so to speak there'll be a alternate Plaint of Attorney that you will deal with as opposed to dealing with 22 different lawyers and 22 different cases.

Lynn Dennison

In general, yes. Sometimes there can be a couple of lead council firms or one that -- they try to focus the discussions with somebody who can represent the group on the other side of the table, so to speak.

Jason Nelson - Rommel Asset Management

Okay.

Lynn Dennison

It is inefficient to try to deal with 20-30 law firms.

Jason Nelson - Rommel Asset Management

Got it. So Jim, I believe it was you earlier who mentioned that you expected to end '09 with a greater cash position than the company exited '08 on and I'm wondering if you can provide a range of that and whether in that analysis you took into account legal fees associated with these 22 complaints. And can you give any color to what the current monthly legal run rate is for the... this litigation?

Jim Nicholson

Series of questions and they are actually was animate to...

Jason Nelson - Rommel Asset Management

Okay. I'm sorry.

Jim Nicholson

But it's still valid even though it's added. The reason to it Charlie is that expected non-operating or this various area inflows that we expect so.

Jason Nelson - Rommel Asset Management

Right. I got the cash inflow part.

Jim Nicholson

So in the cash inflows the run rate from operations what we might incur in severance costs and restructuring costs and well as these... a leading a cushion for a reasonable amount of these ongoing fees. We do believe that cash will end higher than we started the year.

Jason Nelson - Rommel Asset Management

Right...

Jim Nicholson

Certainly, in terms of a range, we're not trying to predict what sales levels are going to be in 2009 and for that reason we really can't give you the -- a range. As for run-rate, Lynn may have a better sense of whether or not our first quarter run-rate is any different than the fourth quarter?

Lynn Dennison

Its hard to know, we hope we obviously hope its going to come down some, some of it is going to be driven by the nature of the disputes and the whole host of variables non of which are very few of which we control.

Jason Nelson - Rommel Asset Management

And well from the perspective of the anti-competitive behavior, with respect to the governance matters that may I suppose there is a potential outlook that the voters are going to -- the share holders are going to decide at the annual meeting and maybe after that point those costs will stop -- maybe, no guarantees.

Operator

And due to time constraints, we'll take our last question from Scott Barbee with Aegis Financials. Please go ahead.

Ed Buker

Hey Scot, you still there?

Scott Barbee - Aegis Financial

Let me pick up the phone here. The first thing I wanted to ask you about is your recent commentary on commodity costs, and I looked back at the call modes from last conference call and you had expected '09 commodity cost to be down directionally that I think you've mentioned that, and so I was somewhat surprised to see that you believe that now '09 cost of purchase materials for the full year to be slightly higher than the prior year, given that we were on the phone in early November and commodity cost haven't done much, probably since that point.

I'm trying to asses whether your, is that on a per unit basis that you're expecting those commodity cost to be higher, I'm noticing a sentence above that you believe volumes are going to decline by 15% as compared to '08 levels. And yet, purchase material costs are supposed to be up, and I'm trying to reconcile that and also try to figure out if there is an issue with respect to kind of financial control in the business, I know in the past the company was un-hedged as the pricing of raw materials went up and was the kind of behind the curve and is there a -- was there an issue now where the company became over hedged at the top. And so that I'm just wanting to get some clarity on those issues?

Ed Buker

Yes, I can give you some clarity with it. So if you think about you have a mix of hedges what you are going to buy from your forward and future's contracts right to some locked in number. And then the remainder you are going to buy on spot. And as we are looking at, and as we did this call in November at the end of the third quarter we hadn't seen the drastic amount of sales decline.

So the mix if you take your... that the percentage of first purchases you'll make under contract the percentage of purchases you're going to do at spot which is now much lower rate you come up with an average cost of X. But as your volumes drop and you are committed to those purchases that were hedged at our higher cost levels that now becomes a higher percentage of your total mix, Right?

Jim Nicholson

That's correct. So your average cost and we compute, and we do these -- we do these computations based upon our average cost for the volume that we have. So the numbers that we currently say are slightly higher if you want, we are talking on a per-unit basis as opposed to in aggregate, because clearly if our volumes are off 30% compared to the prior year, our total purchases cost will actually be down in total dollars. But as a percentage of sales or per unit, the commodity element is going to be as we stated pretty close to what it was on average unless volume picks up and then we're buying more on the spot market, and we start to get greater realization of the fact that commodity cost have come down but that's the general reason why the change in outlook from the third quarter to the to the fourth up to now,

Scott Barbee - Aegis Financial

Now, how much on aggregate do you spend on this commodity cost as you measuring up here, you know ball park '08 historic expenditure in that

Jim Nicholson

Historic expenditure wait for a second, just gives me time a second to think you can come back to that question.

Scott Barbee - Aegis Financial

Okay the second piece I was wondering about is I noticed that the discounted receivable at the end of Q3 that were sold with 39 million and at the end of Q4 it was now 61 million and I know that the kind of the Brazilian on balance sheet that was paid down but the differences as the additional discount receivables were sold going up. I am trying to square that with the, your thought about the debt paid off comment early on the call. And in addition I am trying to, I guess I noticed on that, that you have that a very large translation loss in the fourth quarter that hit cash to tune off I don't know how you were, the difference between may be 20.6 to 36-$37 million. Now, can you explain to us why that translation loss occurred this was because of you had bigger cash holdings in Brazil that while the depreciation of the riyal occurred?

Jim Nicholson

Yes so let me start with the last question first. The simple way to think about is what cash did you have at the beginning of the period lower is the change rates and that's the affect right. But its more than that, its not just the beginning cash but it is the throughput that went through the quarter and the difference between the average rate and the end of the period rate and it still happened in the fourth quarter we had tremendous throughput through operations because we collected the taxes, the non-income taxes. And, because the rate moved so much during the quarter, when you the difference, the magnitude of the throughput times, the difference between the average rate and the end of the period rate, that's what flows through that line item. So, the magnet, the bulk of it does relate to Brazil, it doesn't relate to cash that was there at the time. It relates mostly to the throughput that occurred during the fourth quarter and the fact that the rate moved so much.

Scott Barbee - Aegis Financial

Okay. Let me think about that and I'll circle back with you probably. I guess my final comment is I wanted to encourage you to spend a little more effort on as Jim had now had suggested earlier spend additional effort on monitoring those... the legal situation in those legal bills, it does seems like spending 5 or 8000 maturity partner hours per quarter. It's a huge expenditure of the company. It's one where the Board should probably have somebody incentive (ph) to spend or some group of people incentive to be watching that and some of that should certainly be focused on moving forward.

Jim Nicholson

Scott, we look at... we set them up as a process. We keep a very close eye on the things we do, and we do the same things as we review the legal bills we spent time with that people on the phone. We try to minimize those things. But we'll continue to look hard and I will take the suggestion and see if there is some ways we can find other things to do about it.

Scott Barbee - Aegis Financial

Thanks.

Jim Nicholson

Hey, Scott, going back to the metal cost. Copper... last year 2008, we consumed about 12,000 metric tones of copper at an average cost of 6900 to 6950 per ton. And our steel costs run higher than that number. I don't have the exact one in front of me but that's order of magnitude percent of steel, copper.

Scott Barbee - Aegis Financial

So the steel costs are higher as... 50 to 60% of your total might be steel. Is that correct?

Lynn Dennison

Total commodity cost?

Jim Nicholson

No... steel so if... I don't have a calculator in front of me. If you do the multiplication of that 69-50 times the 11 to 12,000 metric tons, that's copper spend and then the steel spend is higher than that by a turnover of about 30%.

Scott Barbee - Aegis Financial

Is that more...

Jim Nicholson

In general, between the two there're about half the total cost of the sales.

Scott Barbee - Aegis Financial

All right.

Jim Nicholson

It depends on where each commodity is at the time you calculated. I usually look at and there's a rule of sum (ph) here about 25% each of the cost of sales than easily one will be 28, the other will be 22 and that why I was struggling at the end. Copper came down with our steel business so they have isolate between themselves

Scott Barbee - Aegis Financial

That helpful any movement since a year end on the steel cost portion to that I know you mentioned in the Q3 call you haven't seen any decline in that.

Jim Nicholson

We added another supplier on a couple of locations to help for leveraging aspect of other that we seem a bit of movement than no where near the copper revolver movement 10 to 15% range

Scott Barbee - Aegis Financial

All right, guys. Thank you very much.

Jim Nicholson

Thanks.

Operator

And now I'll turn it over to Ed Buker for any closing remark.

Ed Buker

Okay, I'd like to thank everybody today for the call as you described and talked to us. We're going through some extremely challenging times not just economically that in other aspect of business. We're working diligently to see if we can straighten this all out and get back on track and we appreciate your support going forward and we'll talk with you next quarter. Thank you very much.

Operator

This concludes our conference call today. Thank you for your interest in Tecumseh products and we look forward to speaking with you next quarter. Thank you and have a great day.

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