Tecumseh Products Company (TECUA) Q3 2013 Earnings Conference Call November 6, 2013 11:00 AM ET
Jim Connor - President and CEO
Janice Stipp - EVP, CFO and Treasurer
Christine Saurini - Director of Treasury
Ted Crawford - Roumell Asset Management
Good morning and welcome to Tecumseh Products Company’s Third 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 recorded at the request of Tecumseh Products. If anyone has any objections, you may disconnect at this time.
I’d now like to introduce Ms. Christine Saurini from Tecumseh Products Company. Ms. Saurini, you may proceed.
Thank you, Sheryl. Good morning and welcome to our call. I’m joined today by Jim Connor, our President and Chief Executive Officer; and Janice Stipp, our Executive Vice President, Chief Financial Officer and Treasurer.
We have posted a presentation relating to the third quarter 2013 shareholder update on our website and filed it as an Exhibit to a Form 8-K both 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. Again, 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 also review the cautionary statements and discussion of risk factors included in our press release yesterday, our presentation posted on our website yesterday, our Form 10-Q for the quarter ended September, 30, 2013 filed yesterday, our Form 10-K for the year ended December 31, 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 U.S. GAAP measure, they provide incremental insight into the underlying factors and trends affecting our performance. These measures should be viewed as supplemental data rather than as a substitute or an alternative to the comparable GAAP measures. We have included the reconciliations from net income or loss to EBITDA and EBITDAR from continuing operations in our press release issued yesterday and on page 15, of this presentation, if you are following on. 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 5, of the presentation. And I would now like to turn the call over to Jim Connor, Tecumseh's President and Chief Executive Officer.
Thanks, Christine. And thanks a lot on having your part on this call. Good morning, everyone, and welcome to today's conference call. I want to talk about third quarter little a bit and hopefully provide some explanations on some of the numbers and talk a little bit about outlook, Janice has got a lot of things to talk about our performance on this area as well.
I will start with sales and then kindly go to the market that we have done in the past and then Janice will talk about the numbers and I will come back again and kind at the end and talk about brief update on the different topics.
Third quarter of 2013, net sales of $194.4 million after excluding foreign exchange translation effects of $7 million decreased on a year-over-year basis by 3.5%. And including effective currency net sales decreased $14 million or 6.8%. Gross profit margin improved in the third quarter 2013 to a 12.3% of net sales as compared to an 8.7% of net sales for the third quarter of 2012.
Cash and cash equivalents at September 30th were $40 million compared to $53 million at the same time 2012, third quarter in the 2012 and $55 million at the end of last year. Third quarter 2013 result at its most profit level continuing to move in the right direction for Tecumseh compared in last year, despite our overall sales volume which were disappointing, we will review all of this in detail later on in the conference call. And we have cautioned many times before, however challenging economic conditions, competitive landscape and ongoing regulatory activities are all factors that we face everyday, which could adversely impact of our financial results.
We are quickly closing 2013 here and we're trying to make preparations for our company's 80th Anniversary celebration, just kind of an update here, you'll hear more about that in the future. We're making celebrations at in a number of different areas, focused multi-end trade shows, but we will be toasting our long history, sharing more about our future vision and honoring some of those longstanding customer relationships that Tecumseh has enjoyed in the past.
We’ll kick things off in January with our Expo in New York City, if you are in New York at the time, which is January of next year. Please stop by and visit our booths and see us, it's a good show, I think you'd have good time. And it's New York, so the big apple to look at. We'll carry all those things at the global locations throughout the year and we are proud to pause just a little bit, celebrate and with an eye towards achieving our mission of improved profitability and a turnaround year in the future.
Let's take a look now at a few of our key initiatives. If you turn to page six, we talked this about every call, about the key objectives that are core to our mission to revitalize our product line, improve our competitive position and rationalize our manufacturing capacity to make Tecumseh a stronger company for the future.
While we continue to invest in R&D and technology, while balancing the ongoing efforts to contain our costs where appropriate. There are a couple of areas on product strategy that I want to briefly touch on, more specifically which includes our value added initiatives in our green technology product development.
We talk a lot about our investing areas, being a vital part of our drive towards value added products. We are seeing the beginning of success here in many areas particularly in South America, we've doubled our condensing unit sales in that region in the past two years. We continue to see gains as a result of greater focus on the commercial refrigeration sector in all areas of the world. Our Fraction Horsepower Celseon unit which is a branded unit for us at Tecumseh also continue to drive interest on both the OEM and the wholesale market in North America.
And green technology we're experiencing and interest from several OEM customers for core development of R290 the green refrigerant that we've designed AE2 and we're now putting our same refrigerant and compressors on our conducting units. That technology with several molecular and supermarket applications is now under development. We talk about the greenest supermarket in Texas last quarter and we’ll be hearing more about those kinds of efforts in the future as we more and more projects like that.
Another green technology area we've talked about recently where we're seeing some growth in it solar powered applications as a result of our Masterflux brand we're looking a number of customers to develop solar applications for product vending, medical refrigerator and things like. Solar applications are a strong niche market and probably a level of future area for us, this segment is on growth mode most definitely.
Turning to the other item on that page is the AJ2 which is kind of box there and we kind of deploy. The AJ2 project is underway. We go through the gate process. We push through the concept state. We have drawings in our place, we set our target where efficiency is the noise for sound levels throughout and cost factors. So we've launched into that we're well in the middle of it, I had a good update just yesterday on the AJ2. And that’s project is we are going to get start on. So we’ll hear more about that in the future. This is not something that’s going to come out this year we're still at a design stage. We haven’t even built our first prototype, but hopefully we’ll hear that and then will be launched towards the end of next year, but that’s very preliminary right.
Turn to page seven, let me elaborate a little more on the early comment regarding Masterflux product. There is extension of our AE2 strategy, the compares which is gone and then accepted very long in the market place. Our engineering team has now coupled a Masterflux controller technology with that AE2 compressor, we develop a 48 volt variable speed compressors that combines AE2 with that Masterflux controller. This I would say as state of the art Masterflux technology now coupled with AE2 putting together those two product technologies and matching that upto a variable speed compressor that goes beyond most ranges and is a better cost and better price to our customers.
The primary market for this right now has got a communications gap that’s growing which income that just come out from several OEM customers. We began sampling this product before the end of 2013, so we should be in production in early 2014. Again this is not a huge market, but this is a very good market for us to show very well for us and it’s taking two kinds of technology, one reserve on the AE2 with the Masterflux controller which is a proprietary algorithm that's why is running the compressor at a variable speed and we match those two together and come up with a very unique product with certain markets.
We have introduced a stress version of the AE2 as well. The AE2 we previously worked up to a lot of 5600 or may be little higher btu level, we have stressed that to a number of different technologies moving that up to a 7600 btu level which allows us that attack application, which typically would be larger more costly compressor of our competitors. The variable to pick AE2 technology, a green technology move that into markets that are now using more costly compressor and provide our customers in the market with a less expensive very up to-date compressor at a higher 7600 btu levels, so it opens up a lot of new market for us with AE2.
Continuing on the AE2 we have also developed a low back pressure model that model low back pressure for us means low temperature. So we enter the freezer markets now we have the AE2 at a high back pressure commercial back pressure model we’ve now been able to develop a low back pressure model that is in production and being sold today to a number of OEM customers right now. So that’s going to open up another new freezer market for us as opposed to just refrigerators again using AE2 technology and expanding that market base. So these are all very positive developments on whether it’s turning out to be a very sound fundamentally sound compressor the AE2.
Let’s take a look at third quarter 2013 sales now starting on page eight. The third quarter 2013 as I said sales of $194 million down $14 million or 6.8% from the same period last year. Negatively affecting that was $7 million on foreign currency translation. We adjusted for that foreign currency effect we are down about 3.5% on a global basis. That was driven by net decrease in volume and that’s partially offset by some small price increases as it just shows.
Turn to page nine now and we look at the different markets as we will always talk about commercial air-conditioning and also household refrigeration and freezers. Revenue in our largest market, continues to be our largest market and we’re happy with that which is a commercial market that was $120 million or 62% of our total sales in third quarter 2013. That represents a 2.4% decrease in revenue when compared to the same period last year with a minor change in foreign currency bringing us to a net decrease of 2.1% overall. The decrease was driven by lower net volumes and unfavorable mix of $3.6 million unfavorable changes in currency of 0.3 which is partially offset by some price increases of about $1 million.
As with the first two quarters we continue to experience very good regional demand in India and Brazil, but soft market conditions particularly in North America, and Europe were about flat, I mean North America were quite soft which is troublesome fur us. We realized that North America would be a little bit stronger this year and we are not seeing that growth come back, I don’t believe we are losing any market share our distributors are down, we thought continuously about that operate. We do think market in North America will come back similar to Europe, but Europe again is flat and North America is down.
Let’s take a look at air conditioning now on page 10. This market accounted for 21% of our total sales in the third quarter of 2013 or $41 million down 7% from the third quarter of last year and on a currency neutral basis increased 0.7% on a year-over-year basis. Pretty much of that market closed in air condition, couple of things going that, the 1% decrease is primarily due to unfavorable currency of $3.4 million, partially offset by price increases of 0.3 with new sales mix substantially unchanged.
Brazil, North America and Europe all saw volume increases; this is offset by decrease in India. The decrease in India is really attributable also that issue we had with some [coupling] issues in the motor where we had a warranty plan that we talked about at the end of second quarter which later on is called as the bad issue, now that we’re facing and as far as refilling that market and producing in is really to replace the compressor that we already had out there. That’s caused a decline in overall sales in India and therefore made our volumes less despite the fact that Brazil, North America and Europe were increasing and India conditioning market.
Let’s go to page 12 for the household refrigeration and freezer increase the market or we call on it R&F. The R&F market represented 17% of our sales with $33 million in the third quarter of 2013. Sales in this market were down 19.9% as compared to the third quarter of 2012. Adjusting for currency sales decrease was 11.9%. The decrease was primarily due to lower net volumes, and unfavorable mix of $5 million and change in the currency of $3.3 million which partially offset by some price increases, very small price increases of $0.2 million. The volume decline is really due to regional demand in Brazil, as well as slightly lower demand in India. Overall we anticipate demand volatility to continue for the remainder of 2013 given the continued uncertainty in a global economy which Janice will specify shortly.
Now speaking of Janice, let me turn the call over to our CFO Janice Stipp and she can comment further about the financial results that follow these sales numbers. Janice, all yours.
Thank you, Jim and good morning everyone. During the third quarter favorable commodity and currency impact led the improved margins of the 2012 results. We anticipate this favorability to continue for the balance of 2013 despite the ongoing demand volatility as the overall global economic environment remains uncertain. Regardless of the economic uncertainty the factors on our core competency and strategic initiatives will continue as we move towards delivering on our goals of bringing the company to profitability and increasing shareholder value.
Since Jim, has just reviewed sales, let me share with you our financial results starting on page 13. Gross profit in the third quarter of 2013 came in at $24 million which represents an increase of $5.8 million over 2012. Gross profit margin also increased to 12.3% of net sales as compared to 8.7% in the second quarter of 2012. The main factors contributing to the increased gross profit level in the third quarter of 2013 were $4.4 million favorable change in currency, $2.2 million favorable change in the cost of our commodities, $1.5 million of price increases, $0.9 million favorable manufacturing costs direct labor and overhead and $0.03 million favorable of other expenses. These favorable impacts were partially offset by unfavorable changes in volume and sales mix of $2.5 million, as well as among that $1 million warranty expense. Volume and mix changes include the effect of copper to aluminum [motor] initiative which is approximately $2 million in the number.
Turning now to page 14 we saw decreased selling and administrative expenses of $2 million in the third quarter of 2013 as compared with the same period in 2012. This increase is primarily a result of $2.8 million lower expense related to our incentive compensation awards, and professional services which were partially offset by $0.8 million increase in employee benefits and other miscellaneous expenses.
Other income of $3.6 million in the third quarter 2013 compared with $4.7 million for the same period in 2012, a decrease of $1.1 million. The major components of this decrease include $1.4 million unfavorable change in foreign currency exchange rate and $0.06 decrease in income from Indian government incentive partially offsetting the items just noted is $0.9 million increase in miscellaneous other income.
Moving on to impairments, restructuring charges and other items; we recorded $7.4 million of expense in the third quarter of 2013 related to headcount reductions, business process reengineering, as well as an environmental [discharge]. The majority of expense associated with the reduction in forest of approximately 110 employees at our French location as we've concluded negotiations regarding the social plan. We've already secured funding for the social plan and anticipate a less than one year payback on this initiative.
Loss from continuing operations before taxes was $5.3 million in third quarter of 2013 compared to the loss from continuing operations before taxes was $5.5 million in 2012.
Moving over to page 15, the company’s EBITDA from continued operations for the third quarter of 2013 was $5.2 million or 2.7% of net sales as compared to $5.5 million or 2.6% of net sales for the same period in 2012.
EBITDAR from continuing operations for the third quarter of 2013 was $12.6 million or 6.5% of net sales as compared to the third quarter of 2012 of $6.1 million or 2.9% of net sales. Through our use of our EBITDAR metric you can see a positive trend in operating results before restructuring the more charges.
Management believes EBITDA and EBITDAR to be relevant and useful information at it’s a major commonly reported and widely used by analyst, investors and other strategic financial performance. However these financial metrics should not be computed better measurements than operating income loss, operating cash flows net income loss, earnings per share as determined under U.S. GAAP. Other companies that calculate EBITDA or EBITDAR differently therefore to complete EBITDA and EBITDAR may not be comparable to other companies.
Let’s take a look at our September 30, 2013 cash position on page 16. We ended the quarter with $40 million unrestricted cash and cash equivalents that compares to $53.2 million of unrestricted cash and cash equivalents at the end of the third quarter 2012, $55.3 million at December 31, 2012.
And addressing the borrowing availability noted in the chart the company has regional facts and capabilities which are not quantified in the figures now. Components of the decrease in cash and cash equivalents during the first nine months of 2013 are; $9.7 million use of cash in operating activities, $6.1 million use of cash in investing activities, $0.1 million of cash provided by financing activities.
Now let’s review each of these components in further detail. Turning to page 17 as previously stated cash used in operation was $9.7 million as compared to cash provided by operations of $4.3 million in the same period in 2012. Significant elements driving the use of cash in our operational activities for the first nine months of 2013 were; net loss of $20.4 million, adjustment for significant non-cash items are; depreciation and amortization of $26.9 million, a non-cash employee retiree benefits gain of $9.2 million and 0.8 million related to non-cash share-based compensation.
Now let’s take a look at our working capital, $29.6 million use of cash was due to higher inventory levels primarily related to seasonal needs in Brazil and Europe, as well as the capacity constraint in one product in Europe. Stables and recruit expenses generated $24 million of cash mainly due to the increased purchase of inventory, higher crude liabilities, that is severance and business process engineering, as well as the permitted delay in the payment of social changes in [France].
Decreased accounts receivable levels provided cash of $5.7 million mainly due to a higher level of production in factory. Recoverable non-income taxes used cash of $1.4 million this is mainly result of $16.2 million in cash received at our Brazilian and Indian locations which is more than offset by accruals of additional recoverable non-income taxes.
Cash used in investing activities was $6.1 million during the first nine months of 2013 our capital investments were $8.2 million or 1.3% of sales. Our sales in the cash used for capital investment released a terrific cash of $1.3 million primarily related our 401(k) contributions of $1.8 million. Lastly, cash provided by financing activities of $0.1 million.
Now that we reviewed our third quarter 2013 financial results, I will share with you our outlook for remainder of 2013, please turn to page 18.
We expect to see continued demand volatility during the remainder of 2013 given the continued uncertainty in the global economy --. As a result we currently expect full year net sales to fall somewhere between flat to a decrease of 5% over 2012 levels due to lack of economic improvements, as well as the impact of warranty issues in India. This guidance is based on our internal projections about the market and related economic conditions expected price increases to estimate and estimate for the foreign current exchange rate impact, as well as our continued sales and market efforts. In addition we expect the full year change in average cost of our purchase material including interest of our hedging activities could have a favorable impact when compared to 2012.
Furthermore in aggregate, we believe that changes in foreign currency exchange rate, after getting consideration to our hedging contracts and including the impact of balance sheet transactions can have a favorable impact on our net income for 2013 compared to 2012. If we exclude all of our initiatives in 2013 we estimate that full year operating profit could improve compared to 2012 excludes of over $45 million curtailment gain of our post retirement benefit recognized in 2012.
Operating cash for 2013 is expected to be flat to positive as tax authorities do not significantly change their pattern of payment or past practice for the expected outstanding refundable Brazilian and Indian non-income taxes. We now expect capital spending in 2013 to be in the range of $15 million to $20 million for the entire year.
In summary, we continued our ongoing focus on our operational initiatives and new product introductions with a goal of achieving long-term growth and profitability. While they are still cautioned around the economic environment, with improving margins, commodity prices and focus on core competency, we expect to be able to navigate through the prolonged uncertainty that exist in the global economy. We will also continue to invest in technology to innovate new products, enhanced design and improved product reliability. These actions are expected to position the company to capitalize on future opportunities.
I’d like to turn the call back over to Jim. Jim?
Thanks Ms. Stipp. Appreciate it. Turning to page 20 now, let's just kind of go through a brief update of some things that are going on in the business here. The part of our cost reduction effort, you heard Janice talk about the French employees and the attention that we reduce our indirect staff at that location through a social plan that has been put in place and has been made public and we're in the process of looking towards that, it's gone through the union and we're done, I mean the plan is set, it's in place and we're moving forward with it.
That's significant, that's over a 100 people in Europe as Janice said, I think she mentioned a 0.9 in your payback. And that will show up next year as a significant cost reduction by a European operation and I think we've got it. So that was a real victory for us. Quite honestly, we thought we could get this done in second quarter, drag through with a number of negotiations into the third quarter. But I think we're now in place and we're pleased with the results nothing anybody like to lay off, people out of work, but it will be a positive for the company and for the people have to do look at the company now in the future have a stronger company.
The project at -- in the one class is ongoing. We continue to plan present that both to the shareholders at 2014 Annual Meeting we’ll be filing proxy statements in sometime early 2014 for review and for voting at that meeting so that’s ongoing reporting and we anticipate that will be put in place.
Lean manufacturing activities I can wax on top so that the company optimizes production system for hours and hours it’s something I believe and I am quite passionate about lean efforts in manufacturing. We have it 100% of I mean people trained in Brazil, North America, Malaysia, we're on track completely for the global implementation by that project by the end of the year. We're seeing the benefits now of the tax movement as much in cost reductions as we are in a cultural change that says people you’re here to help us we want to hear what you have in stage, what your ideas you want to conduct (inaudible) and our team leaders we want people involve to making this product day-in and day-out and is not as top down do this and require kind of approach which is often but very [fortunate] company many, many years ago.
So it’s a different feeling, it’s a different cultural environment and we're getting tremendous response by our employees on that basis. I just can’t say enough about it’s not a financial metric that we can measure. We've got this much out of it it was a cultural change it’s going to change this company for better for years to come.
Quality another (inaudible) and everybody I think in this company certainly come in and say don’t come in to work every day you guys and with the idea you’re going to make a bad compressor. Our goal is zero defects going out the door here, no defects, no quality problems, whatsoever going out to the marketplace. We had little ways to go on that with a huge improvements in the quarter-over-quarter base and we measure PPM parts per million so defective parts per million which is a standard in quality measurements. We had a 28% improvement in underlying PPM versus the product going out the door, 28% improvement from last year’s third quarter to this year’s third quarter.
Tremendous improvement, we’re starting to get acknowledge in the marketplace that these guys really do make a very, very good products and we’re proud of this and we’ve got a little bit way to go, but we’re talking about parts per million. If you get five or six different bad compressor, that’s a lot and so we work towards the numbers. This is a whole new environment where we are going to 100 and 100 of defect problems. We've got the handful of them.
So we've got a lot of that, but it’s much more manageable and that (inaudible) definitely gone to work towards that zero PPM number everywhere in the world. Manufacturing process improvements, condensing coils, we started making condensing coils and buying them from our joint venture in China. We have been doing a good relationship with China partner and so we’re making condensing coils in China, it’s a low cost source for us and provides process efficiencies, lower cost and so it’s a lot more coils from our joint venture in China that benefit multi-sales and two joint ventures as well as our lower cost to our condensing unit manufacturing operations, so that’s been a positive.
(inaudible), which is lead detection testing, better than old traditional ways it has, it’s that helium center, (inaudible) but we are bringing them in place and that will be our testing process for the future. So those kind of investments. Centrifugal casting, we cast a rotar aluminum rotar in the center of the motor is cast centrifugally which essentially increases the density of that rotar, and therefore conduct electricity better, therefore provides better efficiency. We’re in production now in Brazil with centrifugal casting machine and we’re seeing those benefits, those results. We need to invest more because we are doing small volume now there, but you invest more, but it’s showing very, very positive results.
A few globalization projects is on track. We are putting AE2 manufacturing in Tupelo Mississippi. We have some in Europe say plants. We currently make it in Brazil, in San Carlos, Brazil and we started a line in India. We are not in production there yet but very close to tracking that and starting to make an AE2 compressor in India for that Asian market and sourcing to others in the world. [Multitude] Asian market, Indian market all will be able to manufacture that compressor at a very low cost in India to sell into the Indian market and even in the China to some extent. So our low cost manufacturing base continues to be India and we’ll continue to increase production now.
That’s kind of just a snapshot of everything we are doing. And on top of all these products and new manufacturing process that we put in place, we continue to update our engineering resources as we’ve got Gene Fields on board now, we talked about Gene last, I could not say enough about the effect that Gene has had on this business. He had been a delight to work with. He is well respected in the industry. He brought on a couple of other people with him that has really, I will tell you we had a world class team led by Gene for manufacturing, for design of compressors, (inaudible) compressors particularly, the team is just top notch. I am very proud of them, we’ll see a lot of benefits from them for many, many years to come things like the AJ2 and AE2 modifications that we are doing on low back pressure and stretch all those things will come to fruition. So I can’t be more pleased with our engineering efforts and the time and effort that we’ve been able to put into that and develop the product line for the future.
I guess in conclusion then we will talk till midnight and focus has taken hold, we look longer term, our goal is to continue to strengthen our competitive position through the implementation of all the strategic initiatives we talked about.
Our world class R&D center which I am sitting in now grow the investment and manufacturing and operational efficiencies. We will make this team very confident in our long-term strategy and help implement that plan for the future if we used to come. So I think we had a decent third quarter, I think we’ve got the plans in place for a lot of good positives happening in the future, certainly a lot of uncertainties in currency and commodities and market strength and weaknesses in global economy, all that continues to hit us.
As I said we are little disappointed in our North American result. We probably will do better here in North America than we have. I don’t believe that’s us. I can say that a flat market is actually a down market in North America which is disappointing. We thought we will do better, but it’s a market condition and we will fight it off.
So I think in general we’re pleased with the status we’re at today and we are good. So in conclusion, I am trying to say I am scripter. In conclusion that concludes our prepared comments, and Janice and I can take any questions that any of the callers that are online will have for us.
(Operator Instructions). Our first question comes from Ted Crawford from Roumell Asset Management. Please state your question.
Ted Crawford - Roumell Asset Management
I have a quick one, and then I think Jim has a question as well. In terms of the cash flow projections for this year, does that include any potential cash pickup from currency? And if not, what do you expect that to be if currencies stay where they are and maybe for 2014 as well Jim?
Cash pickup from currency, are you just talking about the exchange rate from cash balances and things that are in our overseas operations?
Ted Crawford - Roumell Asset Management
So I guess two things, okay. Obviously the balance sheet, we're expecting a FX rates to actually remain somewhat stable from now to the end of the year. We didn't see any change when we're looking at our forecast. So our FX rates are somewhat constant. So when we look at it, obviously our balance sheets are already marked to market pretty much where we're at.
Our purchases on intercompany obviously with the Brazil real and Indian rupee being devaluated throughout the year, we have to cut lower cost products that we shifted into France and into the U.S. So we have to cut that and that is in the forecast to the fourth quarter for the volume that's going into those two locations.
And I think a comment Ted on currency and on cash and it really doesn't relate to your question, but it's not putting into the currency number. It's the amount of inventory that I'm try to flip to our 10-Q now, but we’re on $30 million of inventory. We have used in cash as we grow that inventory number. That will come down on in fourth quarter. So we'll generate some cash there while we've seen it coming down mid quarter now. So that's a positive.
As I said, we thought sales are going to be a little stronger and then we continue to build products into the year and we put some cash and inventory here that will come back to us. We’ll be in a great shape going into the season in North America and Europe start of the beginning of the year, but that should provide us a little bit better cash.
Ted Crawford - Roumell Asset Management
But that’s in the projection already or no inventory?
Yes. The inventory projection is in the projection already.
Ted Crawford - Roumell Asset Management
Okay. And just a couple quick ones for Janice, Jim. One question I have as you know my primary focus is on the commercial business you could do without the rest and look forward to the data, that’s true. But on the commercial business that was down 2.4% on the cost line, how confident are you that that is not the result of any market share losses?
(inaudible) I don’t think there is any market share loss there at all, I think just the opposite. We're probably seeing some market share increases particularly in Europe where that number is pretty flat on a year-over-year basis. North America, we're pretty confident that this whole market is down, we've said as you know to a number of big distributors and they’re just down, I mean their percentage down, it’s the same as ours. So I think that’s really just general market then, that’s in the aftermarket [region] side of the business.
On the OEM side we saw some lightening and again we've got major customers as well and we know we're almost still source with us and I don’t think their business is all that unique to the market and the fact that they will be down and the market will be going a different way. So we don’t see our share at all decreasing there. I think with the low back pressure units and the ability and that’s going to freezer applications, some of (inaudible) we’re starting to do that. We are going to see that grow a little bit. So I am not particularly concerned about loss of market share particularly in North America as we see a down market. And I think probably just the opposite, we got to get more products and more good things going on technology to increase our share the other way around.
Ted Crawford - Roumell Asset Management
Got it. And second question is, can you comment on kind of where you are, you’ve made a lot of statements in the past about strengthening Tupelo capacity and really significantly upgrading that facility. Can you comment on where you are in having that Tupelo facility be able to essentially put the company in a position to exit Brazil?
(inaudible) brazil, but we’re putting new investment in Tupelo, I mean that's what we've done, we play and there is two pieces to it, okay, one is the get to pump kit itself that investment is made, that's the big investment we had a big deal with the government on there and equity still, a lot of jobs in Tupelo. So we make pump kit in Tupelo with all new investment from more refurbishment of existing equipment that we had in Tupelo, most of its new investment.
So that will go into a play. We haven’t move anything from Brazil in that regard, it’s been get produce in Brazil and sell in Brazil and export from Brazil to the rest of the world. So that pump kit. The second piece it is actually assembling the compressor and that is in place and that's clear some modification to our existing term line with regard to our last year, which is our automated assembly line. And a little bit of (inaudible) it’s not that much that impresses make you. The assembly with a kit from Brazil will be in production before the end of this year. The manufacturer of the kit will not be really up and running until probably fourth quarter of next year. So say towards the end of next year we’ll be in production of the complete AE2 compressor with all components from North America in Tupelo and that will change the sourcing from Brazil at that point.
Ted Crawford - Roumell Asset Management
So just to be clear at that point you would be able to exit Brazil without any negative consequences to the commercial business?
I hesitate to exit the Brazil. We’ve never said we’re going to exit Brazil. We will be independent of Brazil and manufacturing the AE2 in North America and throughout the world because we have capacity to make the pump kit in North America and we’ll able to assemble in North America, assemble in Europe and assemble in India certainly by the end of next year or maybe even by the end of this year. However that pump kit will still be made in Brazil towards the end of next year.
Ted Crawford - Roumell Asset Management
Okay. And then just last comment Janice typically there is non-income tax receipts that comes in the fourth quarter, is that you expect that, is that.
Yeah, that’s still in our forecast to come in, in December. We have that significant amount of $16.2 million year-to-date at this point in time and we are being another significant payment in the fourth quarter in December.
Ted Crawford - Roumell Asset Management
Okay, thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. At this time you may now disconnect.
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