Tecumseh Products Company (NASDAQ:TECU)
Q1 2014 Earnings Conference Call
May 12, 2014 01:00 PM ET
Christine Saurini - Director of Treasury
James Connor - President and CEO
Janice Stipp - CFO and EVP
Good day and welcome to the Tecumseh Products Company’s 2014 First Quarter Results Conference Call. All participants will be in listen-only mode until the question-and-answer portion of the call. (Operator Instructions) This conference call is being recorded at the request of Tecumseh Products. If anyone has 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, Chad. Good afternoon 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 the 2014 first quarter results shareholder update on our website and filed it as an Exhibit to a Form 8-K both posted today, if you want to follow along. On page two of our presentation, you’ll 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 2014 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 issued today, our presentation posted on our web site today, our Form 10-Q for the quarter ended March 31, 2014 filed today, or form 10-K for the year ended December 31, 2013 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 reconciliation from net loss to EBITDA and EBITDAR from continuing operations in our press release issued today and on page 17, of this presentation, if you’re following along. Again all this information is readily available and can be accessed on the Investor Relations’ page of our web site 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, Tecumseh's President and Chief Executive Officer.
Thank you, Christine and welcome everybody to today’s call. I’m going to cover some of the high-level views of sales and the numbers on the income statement and talk about things we're doing in the marketplace, come back in and talk about the individual markets and then turn it over to Janice to talk to you about financial results.
So to begin with in 2014 the first quarter net sales were 179.3 million. If we exclude the unfavorable changes in foreign currency of 7.8 million, we saw a decrease by 9.9% as compared with the first quarter of 2013, including the foreign currency net sales decreased $28 million or 13.6%.
Gross profit in the first quarter 2014 was 9.5% of net sales as compared to 10.6% in 2013. In addition to cash and cash equivalence at March 31, 2014 were $43 million compared with $41.9 million at March 31 and $55 million at December 31, 2013.
Declining sales in the quarter created challenges for us ultimately leading to lower gross margins, which we will review all that in further detail during the course of today’s call. As you’ll be cautioned many times, the company faces numerous challenges which could and sometimes do adversely impact our financial performance such as changing economic conditions, high and competitive landscape and on-going regulatory activities.
Before we begin the financial results I want to talk about some things that we are doing in the market and a few of the key initiatives that we’re working on at the company.
So turning to page 6 of the PowerPoint presentation which should be on our website, we remain dedicated to revitalizing our product line, improving our competitive position and rationalizing our manufacturing capacity to make the company a stronger company for the future.
We continue to invest in R&D and technology while the same time identifying engineering cost reduction and opportunities where appropriate. Over the past two years we've developed and released several new models of the AE2 to replace our industry standard AE model, the long-standing benchmark of the industry.
We expect to stop manufacturing that altogether in the very near future. We've already stopped that primarily in the U.S. itself and a little bit in Europe. And as a reminder, both of these newer AE2s and the TA models which we have also introduced, offer better performance to the customer and improved position with the company from a manufacturing standpoint. We achieved all the results that wanted, although it could do better.
The AJ2 is also proceeding on plan for an early 2015 launch. We designed the AJ2 similar to the concepts used in the AE2 and the TA. Lower material cost, improved efficiency, green test compliant, improved manufacturability has been our objectives. This AJ however, the old AJ is a good compressor. This is the best model in Europe continuing today. There was a lot of innovation already in our existing model, but the AJ2 will be even better.
Turning to page seven, part of our product road mapping includes ongoing evaluation of our product offering, especially in the aftermarket. With regards to full rounded line up of our wholesale distribution customers. Recently we introduced to the company VS new series scroll compressor designed specifically to replace original equipment compressors used today until the 5 Ton R22 and R410A residential and light commercial universal air conditioners and heat pumps.
The VS new series scroll compressors are considered universal or drop in replacements since they have the same mounting footprint overall height and diameter, connection to its sides, orientation and performance characteristics on the competitive models.
We’re offering them through a partnership with a leading global manufacturer as a complement to the company’s current 1.5 to 5 ton R22 and R410A reciprocating in rotary compressors given our authorized wholesalers, a single source for air conditioning and replacement compressors.
This (indiscernible) scroll compressors sourcing outside, not making them our self is really the key component to our future. We will be able to offer our distribution customers the aftermarket a broad line now with a scroll compressor that’s greatly enhanced with our scroll line and really complements as I said, our reciprocating product line to all of our distributors.
We expect to see some successes here, certainly towards the end of this year and into next year and the scroll compressor that we’ve just really introduced the Decimal line, we had a display in the AHR show in New York here recently and we’ve done the same thing in Chicago -- the same thing in China which we’ll talk about in a minute. So it’s been -- we're looking forward to some improvement here because of our scroll compressor introductions.
Turning to page eight now, for the past several years we’ve worked with our North American wholesaler (indiscernible) on a pre-season advanced order stocking program which has been slated for 2014 in the first quarter. This program helps the company operate with a (indiscernible) manufacturing, while also providing high delivery performance in the months leading to higher selling season.
We’re now working to develop similar programs in other global regions, the Big Chill as it shows on the slide here was our introduction Big Chill3, that’s a third year in a row we’ve done this which promotes conducting units throughout the industry in the US and again we’re carrying that into the other markets, we’ve been very successful in the US, I am going to carry that in other markets on a global basis.
As a follow up to the pre-season stocking program, we recently rolled out a condensing unit pull promotion with the US wholesalers focused on contract to install our reach initiative. This is the first season we've offered this type of program in the US and we’re also working to deliver this contest in other regions where we really defined wholesale distribution programs.
From other recent marketing and sales initiatives in some of the other regions include further focus on the commercial refrigeration opportunities in South America, if you are offering a higher horse power compressors and condensing units including scroll and Semi Hermetic models.
Additionally we continue to see favorable currency exchange impacts from India and Brazil, specifically, which is offering us increased opportunity to export business. We’ve been disappointed slightly in our condensing unit growth on a year over year basis, we’re making efforts to remedy that and achieve the goals that we had originally wanted to see.
Turning to page nine, we finally kicked off our 88th anniversary celebration in late January at the AHR Expo in New York City this recent quarter. We continued to mark the milestone with customer appreciation events in Canada and China in the first quarter. The slides you see in there, the pictures on the slide are related to China, China Refrigeration Show.
There are some pictures that you can see; you can follow on with a presentation on page nine. We're planning on corporate celebrations in other regions where we’ll be talking a long history, sharing more about our future vision and especially honoring some of the tremendous long standing customer relationships that we even braced throughout the world.
We'll be proud to pause a bit to celebrate with (indiscernible) continuing our mission to build a company for the future. I will say it was very encouraging when I met with a number of customers over in Beijing, in the last two months to talk with them about Tecumseh, the future and their absolute loyalty to the company name and the product and it's very encouraging to see that they are looking at AJ2 with the best of all states CAA2 and they see the TA to a lesser extent, it's not a really commercial process, but in the marketplace. So this is where we’re going in the market overall. I think there is a lot to be done, there’s a lot of things we’re working on and we continue to do that in the marketplace.
Page 10; let’s take a look now at first quarter sales in 2014 and how we compare to last year’s 2013. For the quarter ended March 31, 2014 net sales were 179.3 million, from 28 million or 13.6% as I said versus the first quarter 2013. Sales were negatively impacted by 7.8 million due to unfavorable changes in foreign currency, adjusting to exclude this in back up sales decreased 9.9% as compared to the same period in 2013. This was driven primarily by net decreases in volume and mix partially offset by price increases.
Want to go in to there some more detail in the three markets we service and I think you'll see some clarity on exactly what happened to the sales number in this first quarter which certainly wasn’t good.
Turning to page 11, now for a more detailed review of those three markets. Revenue in our largest market which is the commercial market was 115.3 million and speaking of the three bars in the middle of this page, (indiscernible) commercial air-conditioning and R&F. So the first set of bars there which is the revenue for the commercial market has 115.3 million or 64% of our total sales in the first quarter 2014. That represents a 2.8% decrease in revenue when compared with same period in 2013. And adjusted for currency differences, the sales decrease was 2.6%. The decrease was primarily driven by lower net volumes and unfavorable mix of 3.2 million as well as unfavorable changes in currency exchange of 0.2 million, both of which were partially offset by price increases of 0.1 million.
We experienced lower volumes and unfavorable mix primarily in France or Europe and India. India, we were down really because we shifted -- we have a capacity constrain at one of our facilities in India and we purposely moved some production out into an R&F customer from a commercial customer; so some of that was really due to us shifting production with our limited capacity.
France was also down a little bit although it was helped by foreign exchange rates, as far as the sales line is concerned, generally on a year-over-year basis, the strengthening of the euro has shown higher sales, but generally the strengthening of the dollar in both Brazil -- the Brazil the real, and the rupee in India has helped us up although the sales volume shows less, it helped us because it easier for export at a lower cost.
Turning to page 12, let’s look at the household refrigerator, and freezer market. We had our market revenues at a 21% of our total sales or at $38 million in the first quarter 2014. Sales in this market were down 9.5% as compared to the first quarter 2013. However after adjusting for currency, sales in this market increased by 3.6%. Remember, we moved some production out of India into the R&F market, out of commercial into the R&F market so some of that is caused by that.
R&F volumes and unfavorable mix of 24 million as well as price increases of 1.1 were more than offset by unfavorable changes in currency exchange rates of 5.5 million. The volume movement was primarily result of new customers at our Indian locations, which is being somewhat matched by the clients at our Brazilian location due to increased competition.
Again, remember we moved some production out of commercial into R&F so there is a balancing effect here to some. In general, between the commercial and the R&F market, it's more or less a flat environment here. We are down slightly, as you consider exchange there, but nothing, I don’t think there’s a trend here that we need to be concerned about. Not to be true in the air-conditioning market which is on page 13. So if you move to page 13, let’s just talk about what happened to air-conditioning which is really where our big shortfall came about in on a year-over-year basis.
This market accounted for 15% of our total sales in the first quarter of 2014, of $26 million. This decreased 44.7% compared to the same period in 2013. Taking into account currency, we decreased 40.2%. So a little bit better, but essentially a 40% increase on a year-over-year basis after considering currency. This decrease is primarily due to lower volumes and unfavorable mix of 19.2 million as well as unfavorable changes in currency of 2.1, partially offset by price increases of 0.3.
But remember the total overall drop in sales was 22 million in volume and this market accounts for 19.2 of that. So this is our big problem child for the quarter on a year-over-year basis.
Two significant issues here, our Indian location experiencing clients in this market resulting from the quality issues which we've talked about before. That resulted in a reciprocating compressor that we're making here and has some significant problems on wiring and aluminium motor and that’s caught up with us here. We have lost market share in that market in the first quarter of 2014 compared to 2013. There's a couple of customers that are with us, we’re testing new products, and resulting in a back but right now we do not have that market and we lost that market share.
In addition, (buying) [ph] the clients occurred in our Brazilian location too, as a result of increased competition. This is our RGR small rotary compressor where we had somewhat of a cold summer; there has been some decline because of competition. This is the product where our tariff has changed, where there is some protection for local manufacturers and those tariffs have changed and tariff law has changed, starting on July 1; and some of that competition we’re seeing in anticipation of lower requirement for local content of this compressor going forward. So those two factors account for almost all of that decline in the $19 million decline in sales; the reciprocating compressor, the large reciprocating compressor out of India and the small rotary compressor out of Brazil.
Let`s turn now towards the numbers and talk with the CFO -- our CFO, Janice Stipp to comment further about first quarter 2014 financial results.
Thank you, Jim and good afternoon everyone. During the first quarter of 2014 increased cost and declining volumes led to reduced margins over 2013 first quarter results. While we experienced a marked decline and lower demand in this quarter or focus on driving growth, new product introduction and a cost conscious culture remain as a constrain to our continued efforts to our enhancing shareholder value over the long term.
Since Jim has just reviewed our sales, let me share with you our financial results starting on page 15. Gross profit for the first quarter of 2014 came in at 17.1 million, which represents a decrease of $ 5 million over 2013 first quarter results.
Gross profit margin for this period also decreased to 9.5% of net sales as compared to 10.6% for the same period in 2013. The main factors contributing to decreased gross profit level in this quarter were $4.3 million unfavorable change in other material and manufacturing cost, $4.2 million net unfavorable change in volume and sales mix, 0.2 million of increased commodity cost particularly steel. These unfavorable impacts were partially offset by favorable changes in currency of $2.2 million and price increases of $1.5 million.
Turning now to page 16, decreased selling and administrative expenses of $6.1 million in the first quarter 2014 as compared to the same period in 2013. This decrease is primarily a result of $1.9 million lower depreciation, $1.9 million decrease related to our incentive compensation awards, $0.7 million lower professional fees, $0.7 million decreased payroll and other employee benefits, as well as a decrease of $0.9 million of other miscellaneous expenses.
Other income of $4.2 million in the first quarter of 2014 compared to $5 million for the same period in 2013, or a decrease of $0.8 million. The major components of this decrease include $3.4 million unfavorable change related to the non-reoccurrence of net amortization gains on postretirement benefits that were curtailed and fully released into income by the end of 2013 and 0.8 million reduced income from Indian government incentives. Partially offsetting these items was a $3.4 million gain on the sale of fixed assets at one of our U.S. locations.
Moving onto impairments, restructuring charges and other items, we recorded 4.1 million of expense in the first quarter of 2014 primarily related to headcount reduction, business process re-engineering, a legal settlement and an increase to environmental reserve.
Loss from continuing operations was $7.8 million in the first quarter of 2014 compared to the loss from continued operations of 7.5 million for the same period in 2013.
Moving over to page 17, to company’s EBITDA from continuing operations for the first quarter of 2014 was $0.6 million or 0.3% of net sales as compared to 3.9 million or 1.9% of net sales for the same period in 2013. EBITDA from continuing operations for the first quarter of 2014 was $4.7 million or 2.6% of net sales as compared to the first quarter of 2013 of $7.3 million or 3.5% of net sales. Management believes EBITDA and EBITDAR to be relevant and useful information and is a measure commonly reported and used by analysts and investors and others to gauge financial performance, however these measures should not be construed as better measurements in operating income or loss, operating cash flow, net income or loss or earnings per share as determined under U.S. GAAP. Other companies may calculate EBITDA or EBITDAR differently therefore company’s EBITDA and EBITDAR may not be comparable to other companies.
Let’s take a look at our March 31, 2014 cash position on page 18. We ended the quarter with $43.1 million of unrestricted cash and cash equivalent. That compares to 41.9 million at March 31, 2013 and 55 million at December 31, 2013. In addition to the borrowing availability noted on the chart, the company has regional fact and capabilities which are not quantified in the figures shown.
Primary components of the $11.9 million decrease in cash and cash equivalence during the first quarter of 2014 are 19.2 million of cash used in operating activities, $13.4 million of cash provided by investing activities, $5.9 million of cash used in financing activities. Let’s review each of those components in further detail.
Turning to page 19, as previously stated, cash used in operation was $19.2 million in the first quarter of 2014 as compared to the use of 10.2 million for the first quarter of 2013. Significant elements of the use of cash from operational activities for the company’s first quarter results were net loss of $11.1 million, adjustments for significant non-cash items, depreciation and amortization of $6.4 million, a non-cash gain of 3.4 million on the disposal of property and equipment.
Now let’s turn to working capital, inventory with a use of cash of $9.4 million due to higher inventory levels primarily related to seasonal needs in Europe, increased inventory in our Indian location related to the 2013 quality issues, utilization of the new scale supply stores and timing of raw material purchases. Days on hands are 80 as compared to 77 days at December 31, 2013.
Payables and accrued expenses generated 3.8 million of cash mainly due to higher accrued liabilities related to restructuring, use of settlements and environmental as well as payables related to the inventory increase just discussed.
Days payables are 62 days as compared to 59 days at December 31, 2013. Increased accounts receivable levels used cash of $5 million mainly due to sales timing at our U.S. and French location. Days sales outstanding were 46 days as compared to 52 days at December 31, 2013. Recoverable non-income taxes used cash of $1 million. This was mainly result of accruals of additional recoverable non-income taxes.
Cash provided by investing activities was 13.4 million, primarily related to the release of restricted cash of $12.1 million most of which pertains to the PNC term loan related conditions being met in first quarter of 2014.
In addition, 4.1 million of proceeds were received from the sales of fixed assets, partially offsetting both of these items with 2.8 million of capital expenditures. Capital investments in the quarter were 1.6% of sales.
Lastly, cash used in finance activities was $5.9 million which is primarily related to our new term loan financing with PNC. Collateralized assets were sold and the proceeds from the sale were utilized to repay the debt as required by the credit agreement.
Overall we face challenges in the first quarter; our focus on our operational lean manufacturing quality initiative has been reinforced with the addition of several new individuals, mainly our CRO and our VP of Operations in quality. I’d like to turn the call over back to Jim. Jim?
Thanks, Jazz. If everybody could turn to page 21 there’s just a couple of points as far as business update matters a kind of higher level on what we're doing here at Tecumseh. I am pleased to announce that the recapitalization of our Class A and Class B stock and the one stock of class was approved by the shareholders at the 2014 annual shareholders meeting and became effect on May 2, 2014. As a result you will now see our stock trading as TECU and the old ticker symbols of TECUA and TECUB are both gone. We now have one class of stock. I am not going to expand on that because I think the perspective clearly outlines the benefits and where we think we should be headed, and generally the board was very pleased that the shareholders adopted their recommendation to approve their proposal.
There’s an on-going focus on re-initiative, quality and manufacturing processes, this remains the key priority for Tecumseh. That sounds old trite I know, but it is a key focus of ours within this business, we got to reduce cost, we got to keep men in place, we got in through quality throughout. In addition to all that, it’s not given in this chart; we got to improve our product roadmap. The continuing with AJ2 is a positive, we’re doing that. There are prototypes, I have a prototype in my hands, I've got a spot on my shelf and a credenza where I am going to put the first working AJ2 and they know that over there.
We’re ready to do that and we've been follow that now. We're seeing the efficiencies and their lower cost on the AJ2 and we’re moving towards that. So this is what we got to do in the marketplaces, other models as the multi-cylinder model that we got to look, so as far we have to yet to start that, but those are in process, so the advancement there, the scroll compression product right now, all that enables us to sell more and at the end of the day we got to sell more compressors, we need to be profitable here. So we got a lot of initiatives to do that, a lot of initiative to reduce costs.
We were to targets however that we outlined in the May 2013, strategic initiative which some of you will recall are no longer achievable by 2015. Remember we said EBITDA margin was going to be 8% to 10% of net sales; we are not going to there by 2015. A number of factors that got up to us here, this last quality situation at the AW is part of it, but we’re just not going to be able to achieve 8% minimum on net sales by 2015.
With the addition of our new CRO, Igor Popov, we have commenced a new strategic recession process and we talked about this before, we hope to share that directly with you in a very near future.
In conclusion, the first quarter of 2014 was challenging, we navigate the lower sales and higher cost, aggressively impacting our gross margin, you saw the market that we got involved in as far as the lower sales. But there’s a still caution around many of the factors that influences our business, our goal is clear. We near to achieve long term growth and profitability for the company and our shareholders. We add and will continue to focus on those efforts that we believe will enhance shareholder value.
That concludes our prepared comments of this earnings call. And now Janice and I will take any question if you may have.
Thank you. (Operator Instructions) This concludes our question-and-answer session. Thank you for attending Tecumseh's first quarter 2014 results conference call. You may now disconnect. Thank you and take care.
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