Christine Saurini – Director of Treasury
Jim Connor – President and CEO
Janice Stipp – EVP, CFO and Treasurer
Jim Roumell – Roumell
Tecumseh Products Company (TECUA) Q1 2013 Earnings Call May 7, 2013 11:00 AM ET
Good morning and welcome to the Tecumseh Products Company’s First Quarter 2013 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 requested at – I am sorry, 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 begin.
Thank you, Sheryl. 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.
We posted a presentation relating to this first quarter 2013 shareholder update to the Investor Relations section of our website and filed it as an exhibit to a Form 8-K or posted yesterday, if you want to follow along. On page two of our presentation, you will find the agenda for today’s call.
Before we begin, if you turn to page three, 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 developments 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 and our presentation posted on website yesterday, our Form 10-Q for the quarter ended March 31st, 2013 filed yesterday, our Fork 10-K for the year ended December 31st, 2012 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 risk factors that could cause actual results to differ materially from our current expectations 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 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 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, please turn to page five of the presentation. And I would now like to turn the call over to Jim Connor, the Company’s President and Chief Executive Officer.
Thanks, Christine. Good morning, and welcome everybody to today’s call. We’re going to talk about a number of things here today. We’ll go through the usual recap of sales and sales by market. I’ll talk about a couple of things too, that’s our new product outline, as well as some things related to operations that we’re doing regarding our production systems in the plant towards the end of this call.
So, a good start of the first quarter. Looks pretty good, first quarter 2013 sales excluding foreign exchange translation effects of $8.1 million, sales decreased by 1.8% from the first quarter of last year on a year-over-year basis. We include our foreign currency effect, the sales deceased was $12 million or down about 5.5% overall for all markets in all regions.
Gross profit average did improved significantly in the first quarter from 2013 to 10.6 margin on sales as compared to 7.1% for the first quarter 2012, it’s a pretty good improvement on gross profit line some of that’s commodities, some of that just productivity improvement within the plans.
Cash and cash equivalents at the end of March – at the end of the quarter was 40 almost $42 million or $1.9 million as compared about $39 million in the same quarter last year that is down from year-end number of 55. So drop – significant drop of from the year-end.
This is our seasonal fact, we actually we forecast that the 42 million that we ended up with at the end of March. Really it was much inline even fairly favorable than our normal forecast, what we forecasted started in the end of the year – started the end of last year. So pretty much on targeted with what we expected.
First quarter, 2013 results continue to progress in the direct direction, our improve margin, lower – despite the lower sales volume and we’ll talk about sales by the market in a minute.
During the quarter, we exhibited our number of different shows throughout the world AHR in Dallas we were attended that’s a big show for us in North America. NAFEM down in Orlando for the refrigeration business and also good size show Air Cracks in India throughout I mean in number of Mexico we were – we attend this shows quite regularly. We’re active participants in the industry.
In every single one of these shows customers and other competitors came up to us and talk to us about our new product offerings things we were in this shows, lot of condensing and its – are all these shows some variable speed us to move such things for the industry which is shows us as we bursting here to comes it to be really be a key innovator in this industry.
Its notice bullet showing people are exited. We’ve got updated websites and we are technically illustrates now throughout the industry versus maybe the way we were couple years ago.
However, as we’ve constantly forward we got tough economic conditions the competitive landscape, regulatory activities and the other factors that the company respond with every day could diversely impact our financial results in the future. So I need to say that. Let me now provide an update of our key initiatives addressing summery that going challenges.
If you turn the page six of the presentation which helpful all of you get access through in our website hence it web access well. As we discussed on previous calls our focus and key strength of our strategy is back road map. We’ve talk about this in earlier calls, summarize a couple of things here today.
Continue revolution of product line, improving our competitive position and aligning the global manufacturing capacity demand is a huge part of mission that becomes as a real structure of ongoing cost contentment approach.
We talk a lot in recent quarters about the progress we are making and our capacity redesigned that we maximize we are getting both AE2 and TA models. The AE2 is being our lower end commercial model and TA being our net model.
We are also making great progress on condensing units. Condensing units is a key part of our strategy going forward. Higher dollar sales per unit sold and obviously better margins more value added in that product and then compressor for the condensing involving together with the compressor just better for us and better for our customers because.
We are align those their compressor needs with that of the condensing unit. Higher value added and higher margins. In North America we launched updates of three primary condensing unit lines in the first quarter, and we’re making similar updates in other regions.
Into Celseon Low Profile Fraction Horsepower units redesigned Celseon as operative condensing units and upgraded Gen III Outdoor units are all now available. The low profile units, we thought they’re shortly internally, low profile units are nearly a full in short of the standard units and all of our OEM customers love this design because it gives them the increased cooling products base within the cabin itself and takes less space with the condensing unit coil and compressor together.
The app condensing unit and Gen III units offer improved serviceability in all of the installations. These three product lines updates our direct result of the voice of the customer feedback; we’ve gone to our customer, we’ve talked what they wanted to see and condensing units and redesign these units and introduce some other, all available right now and of course they are on our website. So we’ve launched those throughout North America and Europe at this point.
In late April, we launched a new Celseon AK and AJ series in indoor condensing units, extending the Celseon product offering up to 1 horsepower, so a little bit bigger power there on the Celseon unit, which is main thing of our condensing unit program. Celseon has a compact footprint, a rugged construction and a modular design that allows customers to order the features they want for their new applications.
Our new Celseon AK and AJ series condensing units are manufactured initially at our facility at Monterrey, Mexico, and we expect the Greenfield and customer orders in the very near there. Just too quick on our AE2 progress, in Europe as well as North America, we’re seeing some increased OEM customer interest in the placement of AE2 compressors and condensing units using R290 or the green propane refrigerant as advanced refrigerant in the industry.
And remember, when we designed the AE2 we design it to use to be anticipating that the industry would soon move to a green refrigerant and R290 would be that refrigerant. So, we really have a leg up I think in the industry as a fact that we’ve an AE2 unit a new unit designed for the R290 refrigerant.
Page seven, I would like to talk with you briefly about what we are doing at the overall Mississippi operation we have discussed this a little bit on prior calls. We launched a consolidated assembly line there we call it the turbine the thermal line runs all of our compressor families across one line.
We are producing multiple different compressor families now on one single assembly line this one line requires six different lines that are in place down there so we really are in the process of modifying those six those are shutdown now.
We are running everything through the one new line that has been an extremely successful startup a lot of credit for the guys at the Mississippi for making this happen and it’s a lot of who can really need thanks in terms of productivity and reduced cost there and improved quality as well. And you will see quality as constant theme here.
So it’s a big step towards the company’s quest our quest there developed by our guys in Mississippi now really taking throughout the rest of the company. The quest is to become the best global competitor for cluster manufacturer in the world and that’s our question and that’s we are going to achieve.
We appreciate the spoiler at our Mississippi on this project and we just finalized agreement with the Mississippi development authority to provide low cost financing to help us finance that equipment so we’ve got a great deal from the state, we have got some grants and some funding there as, some training grants. So, it’s really gone quite well and we are looking at further expansion of that facility and more technology, of the manufacturing technology on a go forward basis there. So, very, very pleased with our people in Mississippi.
A lot of good things I didn’t talk about the robotic welders, we have got robotic welder units put in there that will take a weight of the turbine and so it’s really I would say state-of-the-art assembling processors or compressors in our Mississippi facility, is up, it’s running and we are very pleased with that.
And then look at third quarter for – third quarter – first quarter of 2013 sales and is on page eight. For the quarter ended March 31, 2013 sales were $207.6 million, as I said down $12 million or 5.5% less given the effect of foreign exchange of $8.1 million down about 1.8% after you consider foreign exchange. The lot of this was driven by some volume decreases offset by small price increase cost on our market.
Take a look at page nine of a more detailed review by the three markets that we always talked about, commercial, air conditioning and household refrigeration and fridge or R&F market.
The commercial market continues to be our mainstay of production, 57% of our total sales that $118.6 million for the first quarter of 2013. 8.5% decrease in revenue on a year-over-year basis compared to 2012 after adjusting for currency – the effect of foreign currency translation as decrease of about 7.1%. The decrease is primarily driven by lower volumes and unfavorable mix of $9.8 million as well as unfavorable exchange in currency rate of 1.8 – sorry, $9.8 million unfavorable currency at $1.8 million and small amount of price increases of $0.6 million.
We do see some continued experience, soft regional demand in India, Brazil as well but that demand was not – sorry – better performance in India, Brazil as well but demand was nice strong enough to overcome the softer market conditions we see in North America and our European market. Most of that softness in North America and European is coming from the distribution segment.
OEM sales are holding up very strongly, but distribution is down, that’s a warehousing exercise. So we shift to the warehouse base. We did put together some early pre-sub programs. I think in retrospect, we prepared ourselves in the back for that. We did pick up some early sales there before as market really softened. So we got hire our own distributors pretty well the staff for the inventory right now and – but market is a little bit softened in both of our real key regions.
Air conditioning, talk about that for a second. That’s market accounted for 23%, it’s shown on page 10 now. The market accounted for about 23% of our total sales in the first quarter of 2013, $47 million, up significantly on a year-over-year, 27.4% for the first quarter, up 2012, currency neutral sales is almost to say 34.7% on a year-over-year basis, excluding the effect of foreign currency, increased primarily attributable to higher volumes, a little bit of favorable mix and some price increases of $12.8 million, partially offset by unfavorable currency, as I said about 2.7 million.
The main factors contributed the higher volume. This market were the first quarter of 2013, a real increased demand in Brazil and Europe and a very strong demand in the Middle East. Brazil a very, very high center for them, pushed our sales forward, if you remember, reflects this more in second quarter and then first.
If we remember last year we had some fair situation, this is a compressor that requires certain local content for lack of better terms to be add by the air conditioning manufacturer that require because our compressor percentage of their bill that tariff would kind of laps last year, kind of oversight and some of that effect was seen in the first quarter, not a lot, we see a lot of that in the second quarter of this year, but first quarter saw some of that favorable impact, as a result of just lower sales last year.
Middle East is a real strong for us. We saw an AW compressor over there in the Middle Eastern air conditioning market. Middle East economy is good right now. Overall, 5% to 6% market growth in the Middle East. And we’ve gotten AW compressor, multi-cell unit compressor that is clearly the favorite compressor in that markets. So, that’s all pretty well for us on a year-over-year basis, and we’ll continue to see pretty strong sales in the Middle East on the rest of this year.
Page 11 on household refrigerators and freezer market, it represent about 20% of our sole sales or$42 million in the first quarter of 2013. Sales of these markets were down 20.9%, compared to first quarter 2012. After adjusting for currency, we are down about 14%. Lower volumes in this market, unfavorable mix of $7.7 million and changed in foreign currency is at 3.6 million, some minor price increase like $2 million in that market.
Most of this market decline has come out of Brazil. We have seen a lot lower demand from the R&F manufacturers there. A couple of our major manufactures or major customers are in Brazil in terms of volume. Again, margins are typically lower in this business, so we didn’t have quite the impact on the gross margin line, as it’s in the sales line.
Demand there really is going to continue into the second quarter. We feel full year sales, we think are going to come back, as our TA compressors. So we have seen strong demand in TA, in fact we probably sold out a capacity right now and what we can make on the TA. And we are quickly working to increase our capacity in all other markets there as we convert from a TH model which is for us a less efficient model – less preferable model in the marketplace moving model TH into the new TA model. So that’s been good for us.
That was a brief look at markets and then I will talk bit more about production in a few minutes. But for now I’ll turn the call over to Janice Stipp, you can talk little bit more about the financial results and what the outlook look like for the balance of 2013. Janice?
Thank you, Jim and good morning everyone. Although there are microeconomic weaknesses around the globe our business is expected to benefit from investment made to upgrade our manufacturing processes are continuing focus on operational efficiency quality and new product innovation. We are confident that these actions will enhance shareholder value been a long term.
Since Jim has reviewed our sale let me share with you our financial results starting with page 13. Gross profit in the first quarter of 2013 (inaudible) at $22.1 million represents increase of $6.5 million for 2012 level. Growth profit margin also increased to 10.6% of net sales as compare to 7.1% in the first quarter of 2012.
The main factor contributed to the increased gross profit level in the first quarter of 2013, 4.5 million favorable changing currency, 1.3 million favorable change in the cost for commodity, 0.9 million price increases, $0.6 million favorable changes in volume and mix and 0.6 million favorable changes in other expenses. These favorable impacts are partially offset by unfavorable changes in other material and manufacturing cost of $1.4 million.
Turning now to page 14 we saw increase selling and administrative expenses of 2.5 million in the first quarter of 2013 as compared with the same period of 2012. This increase is primarily a result of higher expenses related to our incentive compensation award which is predominantly associated with the increase market value of our phantom share award.
Other income was $5 million in the first quarter of 2013 compared with $6.3 million for the same period in 2012, or a decrease of $1.3 million. The major components of this decrease include $1.3 million unfavorable changes in foreign currency transactional expense, 1.1 million of reduced Indian government incentives, as a result of non-recurring transaction received in the first quarter of 2012 and $0.4 million decrease in miscellaneous other income. Partially offsetting these decreases $1.5 million of increased amortization of gains primarily resulting from the curtailment of our postretirement benefits.
Moving on to impairments, restructuring charges and other items, we recorded $3.4 million of expense in the first quarter of 2013. The major component of this expense include 2.9 million related to head count reduction as well as business profits reengineering in addition to $0.5 million due to the relocation of our corporate offices.
Net loss from continuing operation was $7.5 million in the first quarter of 2013 compared to a net loss from continuing operation of $6.4 million in 2012.
Moving over to page 15, the company’s EBITDA for continued operations for the first quarter of 2013 was $3.9 million as compared to $3.7 for the same period of 2012. This is a slight improvement over – on the year-over-year basis for the first quarter.
Our EBITDAR from continuing operations for the first quarter of 2013 was $7.3 million as compared to the first quarter of 2012 of $4.9 million, an improvement of 49% or $2.5 million over the same period in 2012.
That’s really – I mean that’s really significant guidance. I mean 49% improvement on EBITDA level and are being restructuring cost which the account makes expenses that are shows in investment, but that’s really where it is that’s in the future. We’ll take lower sales and softer marketing conditions in North America and U.S. and still improve margins and profitability down at the EBITDA level. We are doing a right stuff and I think the numbers we are showing there are moving in the right direction here. Sorry, Janice.
I like that number.
The financial also the quarter especially in line with operating results in the same period one year ago, however, we can see improvement on a normalized basis through the use of the EBITDA metrics. This improvement emphasized our efforts across the globe to return the company to profitability. And also like to quickly remind you that EBITDA and EBITDAR from continuing operations are not measures of performance calculated in accordance with the U.S. GAAP and you can find the reconciliations from net loss in our press release issued yesterday as well as on page 15 of our presentation if you are following.
Now let’s take a look at our March 31, 2013 cash position on page 16. We ended the quarter with $41.9 million of unrestricted cash and cash equivalents that compares to $39.2 million of unrestricted cash and cash equivalent at the end of the first quarter of 2012 and $55.3 million at December 31, 2012.
Components of the decreasing cash and cash equivalent in the first quarter of 2013 are $10.2 million use of cash and operating activities. $1.4 million use of cash and investing activities, $2.2 million use of cash and financing activities, and smart positive impact from exchange rate changes of $0.4 million.
Let’s review each of these components in further detail. As previously stated, cash using operations was 10.2 million, as compared to the use of cash of 9.7 from the same period of 2012.
Significant elements driving the use of cash from operational activities for the first quarter of 2013 were net loss of $8.4 million. Adjustment for significant non-cash items, depreciation and amortization of 9.3 million a non-cash employee retirement benefit gain of 3.5 million, 10.5 million related to non-cash share base compensation.
Now we will review the changes in assets and liabilities for our operating units. 24.5 million use of cash due to higher inventory levels primarily related to plant increases in Brazil to manage over still capacity of specific products for deliver in the third and fourth quarter of 2013. Payables and accrued expenses generated 21.9 million of cash, mainly due to the increased purchase of inventory just noted.
Increased accounts receivable levels resulted in a use of cash of $8.7 million, mainly due to increased sale of activity with compared to sales activity in the fourth quarter of 2012. Recoverable non-income taxes provided cash of 4.7 million. This is mainly result of cash received in Brazil and India, partially offset by accruals.
Cash used in investing activities was $1.4 million. During the quarter, our capital investments were $2.4 million or 1.2% of sales. Partially offsetting the cash used for capital investments was the release of restricted cash of $1 million, mainly related to our 401(k) contributions. Lastly, cash used in financed activity was 2.2 million, cash both from financed activities are mainly due to the timing of regional operating requirement.
Now let me review our first quarter 2013 results I would like to share you the outlook for remainder of 2013. Please turn to page 17, we expect to see continued demand of our volatilities during the first half of 2013 given the continued uncertainty surrounding the economic environment, particularly in Europe and the U.S. and the events around the world.
However, we currently expect full-year net sales to increase in the range of 3% to 8% of a 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 estimated foreign currency exchange rate impact, as well as our continued sales and marketing efforts.
In addition, we expect that full year change in the average cost of our purchased materials including the impact of our hedging activities could have a favorable impact when compared to 2012.
Furthermore, in the aggregate, we believe that changes in foreign currency rates, after giving consideration to our hedging contracts and including the impact of balancing transaction curtail favorable impact of our net income for 2013 in relations with 2012.
We successfully achieve all our initiatives in 2013, we estimate that the full year operating profit could improve compared to 2012, exclusive of the 45 million curtailment gain on our post-retirement benefits recognized in 2012.
Operating cash flow for 2013 is anticipated to be sufficient to maintain current cash balances and fund ongoing business requirements if we reach in the improved operating profit levels discussed above. This also requires that tax authorities do not significant change their pattern of payment or past practice for the expected outstanding refundable in Brazilian and Indian non-income taxes.
We still expect spending in 2013 to be in the range of 20 to $25 million for the full year. As we look specifically to the second quarter of 2013, we expect our sales and operating profit to slightly improve for the second quarter 2012 and negative operating cash flow resulted from higher inventories levels we discussed previously.
Overall, we anticipate no major change for our guidance we shared during the call last time. In summary, we continue to implement actions to right size the company, the total achievement and profitability. These actions include consolidating office base to reduced leased cost, continuing rationalization of cost and reductions of global head count level as well as new product introduction, which is – which Jim spoke about earlier.
I’d like to turn the call back over to Jim. Jim?
Thanks, Janice. I’m going to do some a little different here and probably not normally held on our investor calls, but I’ll talked about our production system that we put in place. We talk a lot about our product line and new products, things we’re doing in the market place, all of which are tremendously important.
The technology that we’re showing really to the world, but the internally and I talk a little bit about what we do to Tupelo, but internally we really launched in the last year that the company’s optimized production system that is a lean manufacturing process, and encompass the team concept, building qualities, standardization, lead time, continues improvement, in my mind that is how we win this game.
We win this game, by getting all of our 8,000 people working together towards the common system of production. We talked the common language, not a language in terms of French or Portuguese or English, but in terms of how we rolled out manufacturing the product in the same consistent way everywhere throughout the world. That board that you see on page 19, the TOPS board is exactly the same. That one was taken from Hyderabad, India, where he was last week, he came back on Saturday night – Friday night, early morning, that is exactly the same throughout the world.
There is a similar board sitting next to what you can see in this picture, which is in Hindi for those people in our Hyderabad plant, they don’t speak English. That is a communized system, we put in place everyone in the world and I got to tell you, if we can do this India, we can do this anywhere in the world and we’re doing it there. These guys are so fired up and so motivated about the team concept having a word and what they can do people listening, team members regroup, members are talking about their areas, there lines, how they minimize retail.
How they improve quality? I hug these guys. I literally hug these guys and start crying. I mean many are absolutely fantastic. The plant manager was shock, and leasing, I want to hug him. So it was a great deal that we got an enthusiasm going at that level that we got to keep up and once this thing takes off, and it is, I mean we launched this throughout the world.
So it gives us exactly what we need. So we’ll continue to see a great improvement in quality we’re seeing, tremendous improvements in productivity and lead time and reduce cost throughout – we get every one of our 8000 people working on those kinds of concepts. That’s where when we gave in my mind, and we’ll make some investments and we’ll do some things that need to make that happen, but that’s we’re going to see going throughout the world.
If you get on page 20, a common language, common principles, methods process and business results, so we match everybody the same way. We all talk the same language and we are all pumped up about going forward and what we can do in the future. And there is actually a race sample who is going to get to a zero PPM number first in terms quality.
We’ve got a couple of our plants now running at zero parts per million in terms of quality which is a tremendous achievement and we’re going to continue to do that. Do we get everything or one of these plants running with absolutely zero refracts in our product and zero quality? We really will not ship with that product.
So that mindset is coming through to our customers. I think they see it at the tradeshows. They see technology. They see improvement and it’s taking off and there is more of that to come. Once the thing start rolling, it becomes an autopilot and it’s a real fun to watch. I’ve done this several times. We’ve got a great group of people in operations and we’re doing a lot of right thing. So I think operations sometimes, as it get its fair due, but in the gasp of these thing, we’ve really done a good job there – at least the one man’s opinion.
Page 22, I’ll talk about our strategic initiatives. This says that we will be posting something in website within the coming weeks as the PowerPoint presentation. This will probably happen next week, maybe even early next week or try to get a call scheduled, we will go through this presentation. When it will come out, this week, maybe as early as tomorrow.
We just got to get those through legal reviews and file the 8-K before we can talk about it at all. So it will be kind of a summary of all of our strategic initiatives, all we’ve done, we’ve talked about strategic alternatives before. When bankers talk about that, we’ll give you an update in all of that and as candid look at where we’re at as we possibly can. So that should happen because of the website, next week and we’ll try to get a call scheduled as well similar to this. But that will be not a few weeks that will be probably next week.
We’ll get that word out. I guess we did that through the website and communication through press release. The other thing I should mention is what we’re doing in Europe, we have announced to our French employees there that we have begun a process of reducing our indirect staff that would be salaried individuals, no hourly reductions, but salaried, significant, I will say salary reductions, the process in France is to work with the Unions and develop a plan and a go forward plan together, we’re doing that right now. And we have objectives, but we certainly want to develop that with the unions, so that we satisfy what their needs are and work with them to get to the right point.
Good relationship with them now, that’s going to continue. And we want to work together with all of our people in France to get to this to the place where we can be a real significant player in terms of cost and size the operation in the right way.
So, we’re doing that right now. So, I don’t – can’t talk a lot about it. As those things progress we’ll be able to talk more in the future. I believe our commitment and focus to this business have taken hold and we remain energies if you can tell that for my boys energies and excited as we look forward to the remainder of 2013, ‘14, ‘15, ‘16 and then to the new millennium which I tend to be part of. So, we’ll share more of that in our plans in the coming weeks as we talk about the strategic alternatives and as we forward.
So, that concludes all the prepare comments. Not that I read many my prepared comments, but I think at this point, operator, we could turn it over to take some calls.
Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the Ted Crawford from Roumell. Please state your question.
Jim Roumell – Roumell
Thank you. This is actually Jim Roumell. Hi, Jim, hi, Janice.
Jim, how are you?
Jim Roumell – Roumell
Jim Roumell – Roumell
Good. Good. I haven’t been on the call in the past few quarters, so I have a few questions. Like other shareholders look forward to next week’s announcements that you’re alluded to. One question is will that include any new directors and where you at in terms of naming two new directors?
As we said – we’re active in interviewing them right now Jim. We haven’t picked anyone yet, but we’ve got a list of candidates, and we’re going to that process and interviewing. So, it depends out, turns out, I guess, but it shouldn’t be long, I have to pick a date, because you know whatever, but we’re actively interviewing them.
Jim Roumell – Roumell
Okay. So the commitment remains.
Jim Roumell – Roumell
Jim Roumell – Roumell
Okay. Secondly, I recently attended down in Orlando, the refrigeration manufacturing association convention and one of the things I’ve learned and talking to some of your customers, one in particular, which is a major market player is that they had seed sourcing from Danfoss, and that they were now 50%, 50% between Embraco and to Tecumseh.
And they indicated the reason for that was since Danfoss exited the fractional compressor business and the buyer of that business is now manufacturing in China that this company no longer wanted to source from Danfoss. So my question is, are you in North America finding opportunities to take share from Danfoss?
I would say not just North America. The company that they has been renamed Secop, they manufacturer only in China, but in Slovakia as well they – there is a number of opportunities, I think and you’re right I think the Danfoss is maybe slow, their commitment on compressors a little bit and they didn’t do more control condensing units and things of that nature versus a compressor. There is some opportunity I think with them.
When you don’t provide a full line as we do customers like to get – the entire line of their compressor needs from one particular supplier, so you go from small cabinet to a large commercial compressor, our table top refrigerator, you want to buy all of that from one guy and we can do that where Danfoss can’t and they have to order now for the other compressor.
It’s same Danfoss compressor they just fund that business off, but it’s certainly different. So that was a long answer of your question, yes, except that there is not just North America, it’s probably Europe too.
Jim Roumell – Roumell
Okay, all right. Next – at the same conference spoke with many clients that had touched the AE2, like it very much. They had indicated that they already begun designing it into new refrigeration equipment. So it was very, very favorable. My question is when will top line on the OEM side are really begin to reflect some of the anecdotal data that indicates that AE2 is being well received by commercial customers?
Yeah. That’s longer process. I mean some of our commercial guys are hesitant to replace simply even AE or even competitor’s compressor in a cabinet. They would wait similar to what we had to wait for the model changeover to occur and you replace everything in there and everything is going to up for fully cooling. So as cabinet manufacturers or refrigerator manufactures changed their lineup we’ll start to get more and more opportunity and more and more sales on that side.
We’re trying to push some of them. Even if we do the testing to replace the current AE or competitor’s compressor, not a lot of interest most of the time, because that testing protocol is extensive. We have a benefit to offer them, but usually it doesn’t overcome the amount of testing that they would require to put the new compressor in.
Again, a long answer to probably saying, it’s probably a good year or maybe even more away before we start to see a lot of it increase OEM business with the AE2 compressor.
Jim Roumell – Roumell
Okay. Now to be clear in terms of the first quarter, the softness in the commercial side was less OEM related and more just inventory stocking of the aftermarket?
Exactly right. On some of that staff inflected room by us because we did go through the PCs and buy program, so we pulled a lot of sales even though the first quarter and some in even December last year. So we staffed them pretty good, staffed our distributors pretty good with product as we entered into the year. So they were already fall. We try to continue to add and they just really downfall. The market there was soft. I don’t want to allude the fact that we’ve captured some, the market is soft both here and in Europe. But it’s all distribution, we don’t see anything on the OEM side, they are continuing pretty much as they were.
Jim Roumell – Roumell
Got it. And then a product line that isn’t discussed much is Masterflux, and I’m wondering if you can comment – we heard a rumor that a car company in India is manufacturing a solar car using your Masterflux compressor to cool the batteries, is that true?
That is true, it’s not for cooler batteries, it’s the air-conditioning unit in the cars, it’s the cabin, it’s the air-conditioning that you would feel. It’s an electric car and that is all true. The volumes are low right now but we are certainly, – are compressive, we have BO, we have done all the testing, they have approved us and we are shipping now for the very small build of cars at this point. But it’s an electric car, – electric and its cool the cab, the customer the passenger in xylem compartment.
Jim Roumell – Roumell
Can you discuss at all what was the competition and what is that – what does that say in terms of what Masterflux can do and what applications, what end markets it might be well suited for?
Masterflux is great product. It’s a inverted driver DC powered compressor, it gives us confidence I said that wrong, magnetic – the precious metal magnet. So it is extremely efficient compressor, runs at variable speed, it comes to fruition to it, so that in the case of emergency you can run other thing of that circuit board and eliminate the cars of another board in the vehicle as well.
So it’s our proprietary program and its very received product. It’s got niche market like this. I mean it’s not going to be, we’re never going to sale millions and millions and millions of anything, I don’t think but it’s a good product and we can design then – there are others that make a similar product none, it’s a rotary compressor, none with the high efficiency and higher output of Masterflux.
So if you hit that right niche like we see with Mahindra, which is the car manufacture in the Reva car is the name of vehicle works quite well. We really didn’t have much in the way of competition on that product. So we were able to do quite well that.
Jim Roumell – Roumell
I assume lower volume, but assume it’s a much higher margin product?
Yes, absolutely, absolutely. And Jim, we do the same thing with the Masterflux product and commercial trucks in the U.S. here. It’s exactly the same kind of application where we power off a battery with a number coming into effect in the U.S. we require the sleeper cabs which is about half of heavy Class A truck production required where the drivers would require some kind of air conditioning at night, and we put together a unit that we sell to indirectly, but to all the major truck manufacturers all of the truck manufacturers to keep the cab cool and the sleeper cabs. So we have that market a pretty much, pretty much all right, right now as well.
Jim Roumell – Roumell
And I just have one last question and I will get off. In terms of the footprint and its sounds like you’re going to be addressing this perhaps next week. I mean our research indicates that the company’s foundry in Brazil is now operating at full capacity. So my first question is, I wanted to know if you can confirm if that is in fact true, because of auto business that is being done through the foundry right now?
Yes. It is true. We’ve beeped up. We use about half of that foundry for our own production and about half of it for outside production and much of that outside production is automotive related.
Jim Roumell – Roumell
Okay. And further, given its location is Sao Paulo and the difficulty of permitting a new facility in that state, it seems like very low hanging fruit in terms of an asset that could be monetize without disrupting the two compressor plants down there and are we – search at least indicates a price range of $40 million to $50 million for the foundry itself, can you comment whether that – it is true that is an asset that can be monetize without really disrupting the manufacturing challenges of separating R&F from commercial in Brazil?
Yeah I mean that is true, and we will talk about that on the other call, but it is absolutely true as long as we had some kind of supply agreement for our own crankcase casting from – the crankcase casting from a potential different owner, you could monetize that asset without any disruption. Final casting is not quarter, but it is the only place we cast in the world rather we buy castings outside everywhere else, so you could monetize that and take advantage of that – the demand for casts in Brazil right now certainly. I’m not going to comment. And I do want to make it clear I did not comment on your estimates of value, but the concept is correct.
Jim Roumell – Roumell
Okay. Thank you, Jim. Thank you, Janice.
Thank you, Jim.
Thank you. (Operator Instructions). And at this time, we have no follow-up questions. And I’d like to turn the call back over to Jim Connor and Janice Stipp for any closing comments.
Thank you very much. I appreciate it. Hopefully, we’ll be able to do some more of these calls which I think is pretty favorable, and we’ll continue on this path. Thanks all of you for your sport. Appreciate it. And we’ll see you at the strategic – what we call a Strategic Initiative Call hopefully next week. Thanks guys. Bye-bye.
Thank you. Bye.
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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