Tecumseh Products Company (NASDAQ:TECU)
Q2 2014 Earnings Conference Call
August 5, 2014 11:00 AM ET
Christine Saurini – Director of Treasury
Harold Karp – Interim President, Chief Executive Officer and Director
Janice Stipp – Chief Financial Officer, Executive Vice President and Treasurer, Secretary
Scott Barbee – Aegis Financial
David Nierenberg – Nierenberg Investment Management
Good morning and welcome to Tecumseh Products Company’s 2014 Second Quarter Results Conference Call. All participants will be in a listen-only mode, until the question-and-answer portion of the call. This conference call is being recorded at the request of Tecumseh Products. If anyone has any objections, you may disconnect at this time.
I would now like to introduce Ms. Christine Saurini from Tecumseh Products Company. Ms. Saurini, you may proceed.
Thank you, Denise. Good morning and welcome to our call. I am joined today by Harold Karp, 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 second quarter results 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’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 may 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 estimates, 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 for 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 yesterday. Our presentation posted on our web site yesterday, our Form 10-Q for the quarter ended June 30, 2014 filed yesterday, our 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 yesterday 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 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 Harold Karp, Tecumseh's President and Chief Executive Officer.
Thank you, Christine good morning everyone and thank you all for taking time to be on this call. We have a lot of information to review this morning but I would like to start by introducing myself. I intend for this call to be the beginning of a strong shareholder relationship. So I want to make sure that you are familiar with me and my background.
My wife of 30 years and I originally from Louisville Kentucky, we have two sons and a daughter and currently reside in Huntsville, Alabama. Although I’m working full-time in Ann Arbor, after receiving an undergraduate degree in accounting I’ve learned my MBA and became certified management accountant as well as APICS certified in supply chain management.
My industrial career expands more than 30 years including 20 years of experienced leading industrial manufacturing companies. I have led four companies through a restructuring and profitability improvement initiatives. In addition the business leadership my background includes accounting in finance, sales and marketing, operations in product development management. I have significant M&A experience having been involved in more than 15 transactions many of which I have led.
I have also have global leadership experience and I am familiar with the global HVAC and refrigeration markets which are very key to Tecumseh. My background matches quite well with the leadership needs at Tecumseh I see potential on our business and I’m confident I can lead the operational restructuring needed to reaffirm Tecumseh as a global leader in our industry.
Prior to becoming CEO I’ve served for five months on the Tecumseh’s board which gave me great insight into the group the board is a strong team and we’re all united in the pursuit of added shareholder value I feel fortunate to have such an experienced and committed board as a strong foundation and believe I have been put in a great position to succeed.
Before we get into the details of the quarterly results please turn to Page 6, I would like to take a few minutes and share my initial strategic agenda. First and foremost I’ve planned to spend a significant amount of time with major Tecumseh constituents including shareholders, customers, suppliers and global management. I think the most important way to start is by listening and learning in order to understand our business for a variety of perspectives I want to find out what each group believes are Tecumseh’s strength and weaknesses as well as what they feel is needed to return Tecumseh to excellence and profitability.
As you will see in here as we review the Q2 results, we need a resurrected commitment to substantial improvements and many operational areas within Tecumseh. I have already began reorganizing our global leadership team, so that we could be clearly focused and accountable for the goals and initiatives that will lead to significant improvement and customer satisfaction, which is value, quality and service; product innovation and development; operations excellence and supply chain management.
It is clear to me that in order to make the needed changes and progress necessary a Tecumseh culture shift is needed. My mission will be to create and faster and high integrity honest innovative management team that is committed and closely aligned. We will all be held accountable for good judgment impact on the organization and high performance. While there is a lot of work to do, we have established a cohesive and like minded board and leadership team.
Turning to page 7, we will see the new executive leadership team organization chart. As I mentioned earlier, I began reorganizing our global leadership team, you may recall that when Igor Popov joined the Tecumseh team in addition to a CRO responsibility. He also had our operation EVP Jerry Mosingo and Gene Fields our VP of Engineering reporting directly to him. Restructuring, operations and engineering are three demanding and critical components of our company. I felt that is important to reestablish the direct reporting relationship of operations in engineering to me.
So all major discipline had a season to table as we develop the executive – develop and execute our action plans. During the course of today’s call, we’ll talk a bit more about some of these actions and key initiatives. But first, we’ll start with the review of the Q2 results starting on page 8. And a higher level 2014 second quarter net sales of $193 million decreased by $34.6 million or $15.2 million as compared to the second quarter 2013. Gross profit as a percent of net sales improved slightly in the second quarter of 2014 to 8.9% of net sales as compared to 8.4% in 2013.
Selling and administrative expenses of $24.3 million or down $4 million from the second quarter of 2013, although is slightly higher as a percent of sales. Cash and cash equivalents at June 30, 2014 were $37 million compared with $34.7 million at June 30, 2013 and $55 million at December 31, 2013. Let’s take a more in depth look at our second quarter 2014 sales results starting with Page 9.
As I just noted, net sales for the quarter ended June 30 were a $193 million as you can see in the chart, lower net volume and mix of $34.8 million along with unfavorable changes in foreign currency translation of $2.2 million were the main factors contributing to this decline. Net price increases of $2.4 million partially offset this deterioration.
Turn to Page10 now for a more detailed sales review of our three markets commercial, air conditioning and household refrigeration and freezer. Revenue in our largest market which is the commercial market was $123.6 million or 64% of total sales in the second quarter which represents a 9.3% decrease in revenue when compared to the same period in 2013 after adjusting for favorable foreign currency impact of $1.5 million sales decreased 10.4%, this decrease was driven by lower volumes and unfavorable mix of $14.3 million which was partially offset by the favorable changes in currency exchange rate of $1.5 million just noted and price increases of $200,000.
We experienced lower volumes and unfavorable mix primarily at our North American, Brazilian and Indian locations. We’re seeing declined volumes at our Indian location due to shifting refrigerant requirements our engineering team is working to introduce new products in order to meet those new requirements.
In addition, in our Brazilian and North American locations we’re experiencing lower volumes in bottle cooler sales as a major OEM is changing our strategic direction to begin utilizing CO2 refrigerant technology. Lastly, you may recall that during the first quarter of 2014 we sold fixed assets one of our U.S. locations relative to a non-core product our lowest volume decline in relation to this action is minimal it did partially contribute to the volume decline experienced in our North American location during the second quarter of this year.
Next on Page 11, lets review the household refrigeration in freezer market or R&F as we refer to it. The R&F market represented 18% of our total sales of $35 million in the second quarter. Sales into this market were down 17.6% as compared to the second quarter of 2013.
However, after adjusting for the unfavorable foreign currency impact to $2.4 million. Sales into this market decreased 12%. Lower net volumes and unfavorable mix of $6 million as well as the unfavorable changes in currency exchange rates of $2.4 million just noted were the primary reasons from the decline. Partially offsetting these charges were price increases of $900,000.
While we saw higher sales at our Indian locations as a result of increased contractual volumes with a major OEM customer this was more than offset as a result of an increasingly competitive pricing environment at our Brazilian location, which resulted in significant decreased sales.
Finally, let’s review our air conditioning and all other applications market on page 12. This market accounted for 18% or our total sales in the second quarter or $34.4 million, which decreased 29.7% compared to the same of 2013 while currency neutral sales decreased 27%. This decrease is primarily due to the lower volumes and unfavorable mix of $14.5 million as well as unfavorable changes in currency exchange rates of $1.3 million which were partially offset by net price increases of $1.3 million.
Our Indian location experienced declines in this market resulting from product quality issues discovered in the second quarter of 2013. In addition, volume declines occurred at our Brazilian location as a result to get of an increasingly competitive pricing environment. Before Janice reviews our other financial results, I wanted to touch on a very key priority which is customer satisfaction, particularly in the area of value, quality and service.
We continue to experience significant sales decline with 15% down this quarter and almost 14% in the first quarter, we must reverse this trend. We’ll talk a little later about the expansion of our global distribution footprint, which will help addresses this somewhat. But we need to increase market share by delivering high quality products on time that meet our customer’s value expectations.
I’ve already began to meet with our major customers and we’ll continue to do so to ensure we’re well integrated with each of them in every region in terms of technology product and service requirements. Jerry Mosingo, our new EVP of operations who joined our team earlier this year brought within the strong leadership talent that will be focusing on operational performance, improvement initiatives to ensure we have the right capacity, the efficient processes to deliver quality products on time. Along these lines we’re also beginning an initiative that will improve, there supply chain performance in the area of cost, inventory level and reduced lead time. This initiative will also impact our operation performance initiatives and improve our on time delivery metrics.
Lastly, I cannot stress enough the importance of our key product development initiatives. Our goal is to have a continuous suite of products aligned with global market requirement and customer value expectations. I will discuss some of the initiatives in more detail following Janice’s review over the financial results.
Let me turn the call over to our CFO, Janice Stipp to further comment on second quarter 2014 financial results.
Thank you, Harold and good morning everyone. First of all I would like to say, I welcome the opportunity to work more closely with Harold now that he is involved in the day-to-day running of the business.
Now let’s take a look at our financial results on page 15. During the second quarter of 2014 results fell short of our expectation with disappointing top line and operating performance. Our initiatives around main quality, procurement and productivity improvements help to partially offset the negative margin impact of the lower absorption sales and additional warranty accruals.
We intend to keep a prior focus on increasing sales and controlling costs and enhancing operational performance which are expected to help mitigating further impact for the full year. Gross profit for the second quarter 2014 came in at $17.1 million which represents a decrease of $2.1 million over the 2013 second quarter results.
Gross profit margin for this period however increased to 8.9% of net sales as compared to 8.4% for the same period in 2013. The main factors contributing to the $2.1 million decrease in gross profit this quarter were at $9.4 million unfavorable change in other material and manufacturing costs and $0.4 million net increase in commodity costs particularly steel. These unfavorable impacts were partially offset by favorable changes in currency of $5.1 million, price increases at $2.4 million and net favorable changes in volume and mix of $0.2 million.
Part of the unfavorable variance we reported in the other material and manufacturing costs pertains to the accrual of additional expenses related to the warranty claim that are Indian location which originated in 2013.
Turning now to page 16, we saw decreased selling and administrative expenses of $4 million in the second quarter of 2014 as compared to the same period in 2013. This reduced expense is primarily result of $2.6 million decrease related to our incentive compensation awards, $1.8 million lower depreciation and in net decrease of $0.1 million of other miscellaneous expenses. Partially offsetting these decrease is an increase of $0.5 million in payroll and other employee benefits, which is primarily related to the severance of our former CEO of $0.9 million.
Other income was $1.8 million in the second quarter of 2014 compared with $7.2 million for the same period in 2013, or a decrease of $5.4 million. The major components of this decrease include combined a $4 million unfavorable change related to our non-recurrence of net amortization gains on postretirement benefits that were curtailed and fully released into income by the end of 2013 and reduced income from Indian government incentives as well as $1.4 million unfavorable change related to the non-recur of a gain on the sale of securities in 2013, but did not recur in 2014.
Moving onto impairments, restructuring charges and other items, we recorded $0.8 million of expense in the second quarter of 2014 primarily related to severance in business process re-engineering.
Loss from continuing operations was $8.4 million in the second quarter of 2014 compared to a loss from continuing operations of $6 million for the same period in 2013.
Moving over to page 17, the company’s EBITDA from continuing operations for the second quarter of 2014 was $0.2 million or 0.1% of net sales as compared to $5.1 million or 2.2% of net sales for the same period in 2013. Many other reasons we have just discussed let to the decline in EBITDA.
EBITDA from continuing operations for the second quarter of 2014 was $1 million or 0.5% of net sales as compared to the second quarter of 2013 of $7.1 million or 3.1% of net sales. Management believes EBITDA and EBITDAR to be relevant and useful information and it is a measure commonly reported and rather used by analysts and investors and others to gauge financial performance, however these financial measures should not be considered 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 June 30, 2014 cash position on Page 18. We ended the first half of 2013 with $37 million of unrestricted cash and cash equivalent that compares to $34.7 million at June 30, 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 $18 million decrease in cash and cash equivalents during the first six months of 2014 are $16.5 million of cash used in operating activities, $5 million of cash provided by investing activities and $7 million of cash used in financing activities.
Let’s review each of these components in further detail.
Turning to page 19, as previously stated, cash used in operation was $16.5 million in the first six months of 2014 as compared to the use of $7 million in the first six months of 2013. Significant elements of the use of cash from operational activities for the company’s 2014 first half results were net income of $19.8 million, adjustments for significant non-cash items are depreciation and amortization of $12.8 million and $3.8 million of their non-cash items, which includes a non-cash gain of $3.5 million on the disposal of property and equipment.
Now let’s turn to working capital, inventory with a use of cash of $1.9 million as we were unable to fully adapt our inventory levels to the declining sales particularly that are Brazilian location as well as higher levels to adjust seasonal needs in Europe. Days on hands are 73 as compared to 77 at December 31, 2013.
Payables and accrued expenses generated $7.6 million of cash mainly due to higher accrued liabilities related to restructuring, use of settlements and environmental as well as payables related to the increase inventory levels just discussed. This was partially offset by payments of employee related and restructuring charge during the first six months of 2014.
Days payables are 62 as compared to 59 on December 31, 2013. Increased accounts receivable levels used cash of $8.7 million mainly due to sales timing at our U.S. and French location. Days sales outstanding were 52 as of June 30, 2014 and December 31, 2013. Recoverable non-income taxes used cash of $0.2 million. This was mainly result of accruals of additional recoverable non-income taxes.
Cash provided by investing activities was $5 million, primarily related to the release of restricted cash of $7 million most of which pertains to the PNC term loan related conditions being that in first quarter of 2014 that provide a $12.7 million.
In addition $4.2 million of proceeds were received from the sales of fixed assets, partially offsetting both of these were $6.2 million of capital expenditures and $6.2 million of cash budgets collateral for the special term loan at our Brazilian location. Capital investments in the first half of 2014 were 1.7% of sales.
Lastly, cash used in finance activity was $7 million of which $3.7 million relates to prepayment on the near term loan financing with PNC.
Before I turn the call over to Harold, I’d like to stress that we are committed to executing number of strategies that Harold had articulated earlier in the call despite the challenge we have faced within the first half of the year. We are actively looking at ways to change our culture to increase the focus on initiatives that will drive change, growth and enhanced shareholder value over the long-term.
I’d now like to hand the call back over to Harold. Harold?
Thank you, Janice. If you turn to page 21, all our revenues are down thus far in 2014. when we look at overall sales metrics, there is some encouraging news and it’s some of our other primary commercial metrics are trending up. Overall margin in the second quarter was better as our mix of products has improved. We have successfully moved customer to more efficient compressors.
For example, moving to a condensing unit from a compressor, or adding grommets in a wiring harness assembled to Behr compressor for more value. Another improved metric is it related to our new business closure rates. Our new global CRM platform allows us to track sales process more closely by sales person. This platform also enabled us to track new business closure rates more closely and as I noted, we are seeing improvements in closure rates.
We are also transitioning to global account management with larger customers and continued look for area to add more value to each relationship by focusing on closer integration with all of our customers. We will – we look forward to continuing improvement in these areas with a renewed focus to drive additional revenues through the remainder of this year.
Looking at the chart, you can see where we’ve expanded our global distribution footprint. This wholesale distribution market is a key focus and as we work towards sustained – as we work towards sustained profitability. We know that sales success in this market segment arise heavily on having the right product on the distributor shelf at the installer’s time of need and our expanded network will help drive incremental sales growth. Our second quarter distribution expansions include the addition of a major regional distributor in Texas to solidify our North American presence in the Southwest U.S.
We’ve added several new distributors in Mexico, where we are seeing an increase in our condensing unit business. Also new expansion opportunities with one of our key Australian distributors, and finally, we are leveraging our global product offering in Asia with several additional CCC agency approvals on both smaller fractional and larger reciprocating compressors. This will expand business opportunities for our key Chinese distributors and OEMs in a very growing market.
On another positive note, let’s take a look at page 22, we are pleased with Samsung appliances in India recently presented Tecumseh with its best support award at a Supplier Conference in Chennai, India. this was in recognition of both our products and services.
On page 23, I’d like to take a moment to review some of our product line improvements that are critical to drive revenue expansion. We continue to update our product lineup in terms of performance, efficiency and cost competitiveness. I assure you this will remain a key focus as we go forward.
During the second quarter we made additional progress towards full-phase out of our legacy AE fractional horsepower mini-compressor for key commercial refrigeration applications such as bottle coolers.
Most of our primary OEM customers are now utilizing the new AE2 models in many applications. The AE fractional horsepower compressor helped to put to comes on the commercial refrigeration map more than 50 years ago with many still on operation the new AE2 was optimized for hydrocarbon refrigerants while providing a bridge from traditional HFC refrigerants.
We’re also now preparing to provide customers with kit samples of our enhanced version of the 4 to 7 horsepower reciprocating or as we call it AG2 stretch compressor for commercial refrigeration applications including Tecumseh condensing units. The AG range is known for its reliability and its ability to operate in difficult application such as ice machines and milk tanks.
Additionally, our recent scroll and semi-hermetic product line expansions are being well received in a number of markets, where it comes to now offers both AC and refrigeration scroll compressors and condensing units reaching 10 horsepower and semi-hermetic coverage up to 30 horsepower. We also expect to introduce an improved version of our AJ compressor very soon. The new AJ compressor is for using walk-in cold room, large display case, and larger ice machine applications.
Lastly, we spoke earlier about a major OEM shift in the strategic focus to CO2 technology. We have plans to have prototype samples for testing available for our customers as we align ourselves with this shift in their strategic focus.
Now on Page 24, let’s take a quick look at operations. We’ve seen some positive performance operationally in many of the metrics that we monitor. As you can see from the chart labor efficiencies improved five points, seven points in the quarter, scrap levels came down significantly we’ve seen improvements in external PPM metrics in Brazil and France and we’re on track to achieve cost reduction metrics established in our annual plan. While this is encouraging, we do realize this is just a start and further improvements are planned for the second half of 2014.
We have taken additional accrual this quarter for warranty, which will relate to the India quality issues that were first noted in the second quarter of 2013. Since that term a significant increased emphasis has been placed on quality and operational performance. Product and process quality improvements are a major focus for Tecumseh and you can see the second quarter actions on the chart on page 25.
Lastly, let’s turn to page 27, in conclusion as I noted before, it is clear to me that a culture shift is required to reaffirm Tecumseh as a global leader in our industry.
With the support of the board and commitment of the management team our goal will be to quickly implement actions focused on major operational improvements. Also our board continues to strength with the appointment of Gary Cowger as our Chairman.
Having served on the board myself I’m well alined with their direction and along with my executive team we were already to lead Tecumseh forward to enhance shareholder value. I’m glad that I’ve had this opportunity to share my story and vision with each of you along with the results of the quarter. And hope you have a better sense of my experiences. We’re all working towards to a same goals and having everyone integrated together will help drive operational and liquidity improvements throughout business.
That concludes our prepared comments for this earnings call. And now Janice and I would like to take any questions you may have.
Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Scott Barbee of Aegis Financial. Please go ahead.
Scott Barbee – Aegis Financial
Harold, good afternoon guys. The – can you hear me?
Scott Barbee – Aegis Financial
Okay, great, great. I guess I was curious on an item I saw in the financials discussing a new Brazilian special term loan in the equivalent of R$82 million at a low interest rate. And I'm curious what that was about and how that impacts your business there moving forward. Apparently, I guess that applies to investments that you're making, including R&D. But it seems like it's good news if it would help fund R&D somewhat?
Yes, Scott, we are really excited about this opportunity, the Brazilian government has been a very good to work with relative to helping us grow our business in their area. And Janice and her team along with the financial team in Brazil have been able to execute this and we actually expect to close this loan in a short period of time. But, let me turn it over to Janice and have her talk a little bit more detail about the particular loan and the specifics.
Yes, just, so you know - costs been up and it’s really an R&D investments that the government’s doing actions to us for other companies also that have high R&D if that’s in Brazil they are trying to promote that in the region. And so what they will do as a certain projects and for your engineers down there for giving you a low interest loans so that you’ll make investments in Brazil and continue to have that region is going to be a strong engineering centers.
So, we have the R$82 million in Brazil, which is going to be over three years. The first tranche is really R$27 million and we should be giving that in next couple of days. We actually thought it would hit the bank accounts last night or it will probably hit them this morning. But it really is just to faster that so it is great news for us very low interest and we don’t have to commit on for the first tranche we already spend the money and where that money is going to be invested in. But its not just investments but it’s also for you engineers and expense within the R&D. Did that answer your question Scott?
Scott Barbee – Aegis Financial
Yes, that certainly answers. I'm curious about shifting over to the new products front. The AW that's given you so much trouble in India – I guess I'm curious about the commentary that you had on bringing new product in to meet the new EER standards there. And I presume that you're going to have to get that product out and into the market fairly quickly in order to hit the season next year. Can you give us a little bit of an update on that? And then finally, I was trying to understand where the TA2 is in its development cycle as well. I didn’t see too much reference to that. And I understand that you have some high-cost PP and TH product that it would be beneficial just to move on to the TA2 platform potentially. What's the status of that development?
Yes, Scott. I can tell you one thing in general. Since in last four weeks as I’ve coming into the position I've spent more time on new product development or launches and where we’re going with that and I have just to back anything. And we are really resurrecting, we are ensuring we have very, very detailed plans on our top – five to ten projects, which certainly the two you mentioned are two very key projects in that area.
As far as the launch on the AW, we expect to have samples out to our customers where they are beginning to test those on October 15. That's our deadline now. We've all stocked hands on that, and we marching towards that design and products send out on that particular day. So that’s the next make major step in the rolled out of that product. TA2, it will probably be a little later in the quarter, but we’re again we’ve completely revamped that project plan to ensure we have our best resources and Tecumseh from a global perspective to ensure that that product well in fact be out being tested by our customers yet this year. So both of those will be in a test phase this year, we hope to begin realizing some revenue from the sale of those products as they’re approved over the next 6 months to 12 months. And then have that very much integrated into our offering in with our major customers for 2016.
Scott Barbee – Aegis Financial
So we may, however, have missed on the AW next year's season, you think, or maybe only a partial season next year?
Yes, unfortunately it is going to be a partial season. And I can tell you we’ve also modified and will continue to modify our development processes and we’ll tighten them up we’ll shorten the cycle time for these things but at the same time as we see this warranty costs that we’ve experiences in these returns we’re also modifying this development process so we can ensure that these designs of the these computers – of these compressors of we’ll actually be appropriate for manufacturing capabilities of large volumes.
So we’re taking our products quality management process all way back to the design space and making sure we push that through so we can be absolutely certain that these compressors when they come off the end of the line they are going to be of the top quality. So we’re disappointed we’re not having that product out and TA2 for that matter up sooner but we feel we have a pretty good plan now and we’re confident we’re going to be able to hit the these dates.
Scott Barbee – Aegis Financial
Okay, thanks Harold. Look forward to meeting you in person at some point.
Yes, you too, Scott.
And our next question will come from David Nierenberg of Nierenberg Investment Management. Please go ahead.
David Nierenberg – Nierenberg Investment Management
Thank you. I would suggest that part of the cultural revolution, Harold, that you're trying to put in place also should include relations with the Company's investors. Speaking for ourselves, we are shocked by the continuation of, and the magnitude of the adverse consequences from the India quality problem relative to the understanding of the problem, or I should say the misunderstanding of the problem that we obtained from prior management of this Company.
David, its been quite a major upset for Tecumseh certainly in that operation and being new I’m not at this point appropriate they’re going to go back and try to dissect it on this call. But I can assure you beyond the shadow of a doubt that we have looked at the root cause of this issue and any other issues that have come up and we have got a full court press globally to ensure that we’re strengthening our quality systems very significantly.
We’re going to learn from this experience and we’re going to do whatever we can to ensure that our product quality and our process quality has significantly improved and one of the decisions that I made just during this past couple of weeks along these lines is, we are not selling these products ast they come back in. And we’re not reworking and we’re scrapping them. And I’ve did not want to have other compressors going into the market that might have this same quality defect.
So we’re taking the full hit for this, we’re swallowing it and we’re focused on ensuring that doesn’t happen again. And as far as relationship with major shareholders I look forward to the opportunity to meet with you and our other major shareholders, I’m very excited about what we have beginning here at Tecumseh I’m very confident in the brand I’m confident in our distribution network and we’ve got a very strong board and a strong leadership team that I think is stable. And this stability because of the recapitalization we were able to accomplish early in the year. It’s going to allow us to be very integrated and riffle shot on our initiatives and ensure that each month and each quarter, we’re focused on improvements both strategically and operationally.
And just in addition to that just going back to the warranty person and we do under during single, we hired a new warranty person that’s going to be our global person. One of his first tasks will be to rewrite our warranty policy and procedures so that we can ensure that we have standards at every location. So that something like this will not happen in the future.
David Nierenberg – Nierenberg Investment Management
And just to close the subject, my concern is not only how you operate; my concern, again, is how you communicate with shareholders like us about these issues. Sometimes I recognize you cannot quantify something; it's just too early. There's no harm saying that you can't quantify it yet. But when you provide guidance about how long something will last or what it will cost, I hope that the guidance will be far more accurate than the guidance that we received in the past about the magnitude of this problem.
Let me go on to another subject. This disappointment, as well as the revenue decline, as well as the state of the balance sheet, has caused us to waver in our confidence about our investment in this Company. Therefore, Harold, I would love to know, since you're a successful guy and only recently joined the Board, what was it that you saw about the opportunity at this Company that made you commit to become, first a Board member, and second, the interim CEO with a shot at being the permanent CEO? Please tell us, if you can, after a short period of time, what is it that you see. Because I think it would be useful to us in terms of bolstering our flagging confidence in the opportunity at this company?
Yes. First off, what I see is the core value of this company is a brand that is absolutely one of the most respected brands in the industry. Even the first couple of customer visits have been on, the customers want Tecumseh to be successful they’re begging for Tecumseh to strengthen their position in their particular market. And so I think that we’re in a good position to be able to increase our sales, we’re in a good position to rollout new products and our customers want us to be successful.
So they’re begging us to come and be more strategic with them and we gain some position that we had over the last 20 years. For the last number of years there has been a lot of the distractions within Tecumseh in terms of proxy battles and board changes and leadership changes. And there have been some execution problems with bringing able to execute the business strategic, commercially, operationally. And I see a pathway that will enable us to be able to pull together as a team and really focused on these product introduction issues, focused on these commercial market growth opportunities and execute operationally. We’ve got a lot of opportunity to improve liquidity from a lot of perspectives as we look forward in our business.
And David, I'd be happy to meet with you personally, and we could have an offline conversation, talking generally about how I see the business going forward.
And ladies and gentlemen, this concludes the time allotted for the question-and-answer session. The Tecumseh Products Company conference call has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.
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