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Executives

Jim Nicholson - Chief Financial Officer and Vice President, Treasurer

Ed Buker - President and Chief Executive Officer

Analysts

Brian Grad - DLS Capital Management

Andrea Wirth - Robert Baird

Chuck Roth - Insight Investments

Tom Febrahegan - AGES Financial

Rand Gesing - David J. Greene and Company

Bruce Baughman - Franklin Templeton

Gregory Erwin - Smith Barney

Tecumseh Products Co. (TECUA) Q3 2007 Earnings Call November 15, 2007 11:00 AM ET

Operator

Welcome to the Tecumseh Products Company Third Quarter Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. James Nicholson, Vice President, Treasurer and Chief Financial Officer. Please go ahead.

Jim Nicholson

Thank you, Chris. Good morning, everyone. Welcome to our Third Quarter 2007 Conference Call. This call is being simultaneously broadcast on the internet and will also be archived for replay starting this afternoon. The replay can be accessed at our website, www.tecumseh.com.

We have covered considerable ground since we last spoke and have accomplished several of our important structuring goals along the way. The person who represents one of his important goals is with me on the call today. Ed Buker, our new and permanent CEO is with me on the phone albeit from Europe thanks to the change in the call date.

Ed joined us on August 13th, 2007. Prior to joining the company Ed served as President and Chief Executive Officer of Citation Corporation. Prior to that, Ed served in various leadership positions within the automobile industry with companies such as Honda, BMW and Visteon.

Ed Buker

Hello, everyone. It’s a pleasure to join to Tecumseh Products to be on the call with you today.

Jim Nicholson

On behalf of all the employees of Tecumseh Products Company, we are happy to have permanent leadership in place and focused on a future prosperity of the company. Personally, now that I have a partner to share the responsibilities of this call and you have someone of interest to hear from. We are going to vary from our normal protocol and I will generously share the microphone with Ed.

Ed, will begin our conversation today with some introductory remarks. I will then add some additional comments expanding on the financial information contained in our press release. Following our respective comments we will open the call for your questions.

I would remind you that our prepared comments this morning and the answers to your questions contain forward-looking statements within the meanings of the Securities Laws.

I refer you to the cautionary statements contained in our press release concerning significant risks and uncertainties involved with forward-looking statements that could cause actual results to differ materially from projected results. Ed?

Ed Buker

Thanks Jim. Having been on the job for about 13 weeks, I am going to be the first to be an expert in our computer business. I am still learning. However, in the short time I have been on ground, I have been to all of our compressor operating locations. I am very enthusiastic about the future prospects for the business.

Tecumseh Products is a pioneer in a compressor industry and has 75 years of leadership to build upon. To a combination of existing personnel and new faces, I begin to assemble a team that is ready to get the work building upon this outstanding legacy and restore profitability of the company. Some of the important work started thankful before I arrived both through Jim and Jim Bonsall reference are now coming to fruition.

As you can read in our very press releases and our SEC filings, we have now successfully divested ourselves -- we are in non-core business segments. During the third quarter, we completed the sales of residential and commercial in Asia Pacific portion through electrical component business.

In addition, subsequent to the third quarters end, we entered into and competed the sales of the engine and power train business and we reach an agreement to sell the automotive and specially portion of electrical component business. There are two important consequences of these transactions.

First, we have repaid all of our domestic debt and we have a balance sheet that affords us and myself the opportunity to address the compressor business add on. Second, it eliminates many of the detractions that would prevent us from focusing on our core business of compressors.

Each of the companies former business segment had significant challenges ahead and we have been difficult to fight this many battles on so many different fronts. The majority of financial impacts of these transactions will recognize in second and third quarters and Jim will elaborate on those numbers in a minute.

Of course, the next sort of business and the question I am sure you might have is, what is the next strategic move. How we are going to improve the results of compressor business. The answers of these questions are currently under review, however this does not mean we are standing, stay away from these answers. We will be active in reducing cost and improving our quality and delivery.

We believe we can achieve meaningful cost reduction till the opportunity is created by the simplification of the business by taking advantage of currency shift through more strategic sourcing then less vertical integration.

Now, we are currently being dramatically hurt by the weakness of the dollar versus currencies like the Real, Rupee and Euro. We have to adjust our practices to competency for this no longer run. As you can tell, I am pretty excited about the opportunities, of course opportunity is enormous challenge and our team is ready to address those challenges.

Now, let me turn it back over to Jim, to cover some of our financial information.

Jim Nicholson

Thanks, Ed. Reported results for the third quarter 2007 amounted to a net loss of $77.2 million or $4.18 per share, compared to a net loss of $37.8 million or $2.05 per share in the third quarter of 2006.

The large losses in 2007 were largely due to the recognizing the effects of the various sales transactions that Ed, refer to earlier. Including the results from continued operations is an impairment related to the sale of the engine and power train business of $28.1 million.

Included in discontinued operation is an impairment of $26.7 million related to the pending sale of the automotive and specialty portion of the former electrical component business and a loss on the completion of the sale of the residential and commercial portion of $11.3 million.

If you were to look at the operating results from continuing operations before restructuring and impairment items, you will see that results improved by $25.8 million and moved us from a lost back in the positive territory.

As shown in our segment information $13.6 million of this improvement was attributable to the compressor business. $9.3 million was attributable to the engine business and $2.9 million associated with corporate and other non-segment activity.

Under accounting rules the engine business is included in continuing operations through the third quarter because the company’s commitment to sale the business occurred after the end of the third quarter. However, it will be reported at the discontinued operation in the fourth quarter of 2007 and beyond.

Accordingly, the only business I planned to review in detail is the reported compressor segment. Compressor sales for the quarter increase by $47.6 million or 21% from $230.8 million to $278.4 million. $22 million of the reported increase was due to effects of foreign currency translation.

The remainder of the increase is primarily result of higher selling prices and volume increases in the Indian market. Year-to-date sales have increased by $109.1 million or 14%, $53.5 million or roughly half of the reported increased was due to currency translation, otherwise the factors was same as the third quarter.

Compressor segment operating result amounted to income of $7.1 million in the third quarter versus a loss of $6.5 million a year ago, an improvement of $13.6 million. The improvement reflects selling price increases and productivity improvements, partially offset by the less favorable currency exchange rates.

For the quarter we estimate that the effects of changes in exchange rate negatively impacted comparable quarter results by $13.4 million. While the company utilizes hedging techniques to reduce its short-term exposure to currencies, the continued trend for the value of the dollar still adverse.

Year-to-date compressor segment operating results amounted to income of $28.4 million versus a loss of $3.7 million a year ago. The reasons for the $32.2 million improvement are consistent with our observations for the third quarter.

So far 2007 has been positive for the compressor group. Year-over-year results have improved for each of the first three quarters of the year despite a deteriorating currency outlook. However, our outlook for the compressor group for the remainder of 2007 has somewhat deteriorated against that what I expressed during our last call.

Whether or not the strength of improve quarters continues to sense not only on the value of dollar versus our key currencies but also an overall market demand in light of the recent turmoil created by unstable credit markets and high energy prices.

At this point, if improvement is achieve it will not match the magnitude of improvement through the first three quarters. Now I’ll take just a few moment on our balance sheet.

As we have discussed in previous quarters we have been keenly focused on debt reduction as part of our overall program to restore the company to profitability. With the completed transactions we are currently debt free in the US for approximately $40 million of overall liquidity in the US.

We estimate that the elimination of this domestic debt will favor approximately $22 million in interest cost annually. We still aspect to complete the reversion of our salary pension plan either in the fourth quarter of 2007 or the first quarter of 2008 in the amount of approximately $55 million.

In addition, we have other sources of liquidity that we expect to obtain including a new financing arrangement in the US that we would expect to remain undrawn upon in the forcible future, as well as, other miscellaneous asset sale and tax refunds.

As a result we expect to have sufficient liquidity to accomplish further restructuring and profit improvement activity, as well as, invest in new products. However, this overall liquidity improvement is still depend upon the completion of the items I just described and major changes in currency values or economic activity could result in net cash consumption.

In addition, we need to maintain liquidity in each of the countries in which we operate. As I've indicated in the past our arrangements in Brazil are not committed facility. Ultimately the adequacy of our liquidity will depend on our ability to deal with these circumstances.

Ed would you like to conclude our commentary.

Ed Buker

Sure, Jim. Thank you very much. We believe this has been a very productive timeframe with respect to our primary objective of returning the company to good health and profitability after heavy incurred such substantial losses.

The completion of the sales, the elimination of the debt has put us in the position where we can focus on core compressor business. We have some momentum. Yes, we have challenges of currency and uncertain economy ahead of us.

This is a challenge I openly embraced upon the acceptance of the position here and the remainder of my management team stands behind me ready to accomplish our mission.

This concludes our prepaid comments for this morning. Chris, I think we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from Brian Grad of DLS Capital Management.

Brian Grad - DLS Capital Management

Hi, guys. How are you? Can you hear me?

Jim Nicholson

It’s okay. Brian

Brian Grad - DLS Capital Management

Real good job of back paddling and getting everything straightened away. Can you give us a little bit of guidance on kind of what the depreciation, CapEx, operating margin, effective tax-rate are going to be given that the compressor business is primarily an offshore business in terms of its sales?

Jim Nicholson

I can give that. The -- when I said done if you look at we think a last annual depreciation is probably around $50 million maybe slightly less. CapEx for the year its going to be basically on the same paces as you see to the first three quarters and we would expect to free up some CapEx next year.

It will certainly never return to the level of when we are, you know, the consolidated operation with engine and electrical components. We have mentioned in the past we’ve had heavily invested in the business over the last three years. So we wouldn’t expect heavy amount of investment going forward.

Brian Grad - DLS Capital Management

What kind of the maintenance CapEx longer than you think?

Ed Buker

Jim. I think there is some radical.

Jim Nicholson

Yes. Go ahead, Ed.

Ed Buker

Yes. So what I can tell from first look at it, it’s in the $20 million, $25 million range a couple of points. We have to look carefully going forward and what's substantially restructurings we can do and how we can compliment each other like we have done in the past. So I can tell you that the maintenance only is where we will be -- we look at maintenance and try to give some fairly rapid return on other restructuring investments.

Jim Nicholson

Yes. Brian to add to that, I would agree with that number as maintenance as operation stand today. So we have to kind of overlay what operations might be in the future and we would expect that number to decline in the future.

Brian Grad - DLS Capital Management

That’s right

Jim Nicholson

With respect to tax-rate and I don’t know Brian you are probably new to the call. Our tax position is extremely unique. We currently have NOL, we have foreign tax-credit and we have all our deferred tax assets have valuation allowances applied against them. And we do not expect to be paying for the most part any Federal US income tax for sometime.

And what hits the P&L is a function, believe or not how currency move. Because part of the currency effect is both in consolidated OCI and to the extent that you recognize benefit or expense in OCI there is an offset that hits continuing operations and it’s literally impossible to predict what that numbers are going to be.

I think the important takeaway is at least for the perceivable future and we don’t really expect to be paying tax.

Brian Grad - DLS Capital Management

Got it. Yes.

Jim Nicholson

And when it hits the P&L it’s going to be a vagary of the accounting rule.

Brian Grad - DLS Capital Management

It’s going to be on accrual not going to be on cash-tax.

Jim Nicholson

Right.

Brian Grad - DLS Capital Management

Okay. And I think also as I thinking if you have an idea where you think operating margins. You know, I know where they are in short-term based but you are just saying but what do you think did they would like to see them see over the next year to three years?

Jim Nicholson

Let me answer part one of that and the two to three year part I let Ed answer. In our models that we have created as we look into 2008. We can see a pretty broad range of outcome.

The broad range of outcomes are where's the dollar going to bottom and where is they’re going to go from here and what is going to happen -- to the overall market demand. Given everything is going on the economy today.

So the band is pretty wide in terms of where things can be. We think currently our expectation is that we will be generating positive EBITDA from this business. But the range of outcomes could turn out to be other ways.

Ed Buker

And quiet enormously going forward we have to achieve to become an attractive company to invest in, so I think the first step for us to look in the 3% to 5% EBIT range in the next two-to-three years and then move up from there. Based upon what we can find out of our operating models.

We currently have invested kind of more towards Henry Ford rules driven model and we have towards the Dell model and somewhere in between there is probably the right model for us, which substantially improve the margins in the investment to get to that level. But I don’t have the exact answer to that yet but that’s what we are trying to come up with over the next few months.

Brian Grad - DLS Capital Management

Okay. That’s fine. Thank you.

Operator

Our next comes from the Andrea Wirth Of Robert Baird.

Andrea Wirth - Robert Baird

Good morning, guys.

Ed Buker

Good morning.

Jim Nicholson

Yes.

Andrea Wirth - Robert Baird

I wonder if you could just take a little bit more into the fourth quarter assumption. You know, I understand it’s a seasonally weaker quarter, as expected maybe a little bit larger but to have such a big swing factor from a gain of Phenocol at $7 million to a loss of more than $7 million in the fourth quarter.

Just walk through a little bit more, why such a big swing quarter-to-quarter, there is some other things coming through that takes that number down or is it really just kind of a seasonal pattern.

Jim Nicholson

Help me understand what you just said Andrea that what swing are you…

Andrea Wirth - Robert Baird

In the compressor operating income, you had mentioned in your -- that you had expected operating income to be down slightly from the prior year?

Jim Nicholson

In the fourth quarter?

Andrea Wirth - Robert Baird

Yes.

Jim Nicholson

I don't -- I am not sure that's what I said.

Andrea Wirth - Robert Baird

Okay.

Jim Nicholson

I said that we had sprung together the last three quarters, we had year-over-year improvement and where we end up in the fourth quarter, we can't tell because it is going to depend upon US currency, US currency headed, US currency bend and what is the overall market demand going to be?

You know, we clearly saw, the end of the third quarter when the credit crisis happened a pull back in orders, so I think it is consistent with what the industry saw and where orders going to end up in the quarter and where this currency going to end up in the quarter.

What I am saying, its' a close call is to whether or not we continue the string of year-over-year improvement in the fourth quarter and if there is improvement, it won't be as much as what it was in the previous quarters.

Andrea Wirth - Robert Baird

Okay. Then I guess kind a to ask it little bit differently, just I guess first on the OpEx side. What kind of hedge would you anticipate at this point, assuming the Real is essentially where it is today? What kind of -- we had got about a $13 million impact this quarter what we will be expect in the fourth quarter?

Jim Nicholson

Don’t have exact number for you but it would be at least my expectation would be at least that number as I think back to the pattern of our currency and what our respective hedge positions were in those periods of time.

Andrea Wirth - Robert Baird

Okay.

Jim Nicholson

It’s going to be significant.

Andrea Wirth - Robert Baird

Okay. So at least that number and possibly a little bit higher and then I guess when you think about just a year-over-year improvement that you have been seeing, the main issue may then be more likely due to demand dropping?

Jim Nicholson

Yes. Demand, you’ll get the same benefit from pricing if you will, although that number will probably go down because if you think of the timing of when we did an interim price increase last year, some of that price increase was in fact to the fourth quarter.

So we see less of the benefits from increased prices. We see a larger negative from currency and the Real -- one of the real question marks is, what is -- how many -- what our deliveries going to be over the rest of the quarter.

Andrea Wirth - Robert Baird

And just to that point on deliveries, could you maybe walk through what you saw throughout the quarter, as far as, orders go, maybe in terms of your either, you know, just actual dollar amount or percentage changes or just kind of subjectively how the orders move throughout the course to gain idea of how demand has changed?

Jim Nicholson

Well, we don't typically provide precise in business area. I think we -- I can't remember nice colors but essentially what happened when the credit, first credit crunch happened in North America and in Europe, there were some pullback of the order book. Not a dramatic pullback but somewhat of a pullback of the order book, we had and it hasn't recovered since that point in time we basically taken the orders at that basic run rate, that revised run-rate.

Andrea Wirth - Robert Baird

Okay. And then just on seasonality, typically when you look third quarter to fourth quarter. What should we expect, as far as, in the compressor business. How much of a drop off seasonally isn't or more?

Jim Nicholson

Well. The answer of that question is there is no normal and that's because, the South American, you mentioned the South American market is counter cyclical to what you have up here. The question becomes how was the North American market -- how is the North American market perform versus how is the South American market performing.

You know, we get a relative mix change in terms of the source of income from maybe a Brazilian operation or an Indian operation. Again, that's a long-winded way to say that, I don't think historical patterns are indicative of what you can expect in the fourth quarter.

Generally, what I would say is the fourth quarter is actually a busy time for South America as oppose to a slower time like it is for North America. But that only makes the impact of currency more dramatic for us in the fourth quarter then what it would be in other quarters.

Andrea Wirth - Robert Baird

Okay. Fair enough. Thanks.

Operator

We’ll take our next question from Chuck Roth of Insight Investments.

Chuck Roth - Insight Investments

Hi. The corporate expense line has move around before you take any further actions, should we expect that to be a $2 million a quarter or you know, back up for round 6 or…

Jim Nicholson

Definitely not back up to 6. And if we, think about where we were through the first half of the year, we were incurring a significant expenses dealing with restructuring items, banking items and so forth.

Chuck Roth - Insight Investments

Okay.

Jim Nicholson

I think $2 million a quarter sounds like what has been kind a historically before that time period. I think that our objective certainly is to drive that number lower now we have simplified the business and we have fewer segments to support.

Ed Buker

Yes. I think that’s an ongoing.

Chuck Roth - Insight Investments

Yes.

Ed Buker

That review where we end up balance wise and continue to look at what services we provide for what entities and as the entities disappear there will be less reason to drive that service, there will be room to reduce that.

Chuck Roth - Insight Investments

Okay. And the cash flow from operations in the third quarter and year-to-date, can you tell us what those would be if the engine business had already been sold. So we have some idea of what the current business is generating or concerning?

Ed Buker

I can give somewhat an idea. We’ve taken a look at the compressor business or the remaining businesses and said to ourselves what would ’07 have looked like in, if it would to be normalize and I think that number is around $35 million worth of EBITDA for ’07.

Chuck Roth - Insight Investments

That’s what you would expect EBITDA to be this year as the business is configured today?

Ed Buker

Correct.

Chuck Roth - Insight Investments

Okay.

Ed Buker

Factoring out all of the abnormal items.

Chuck Roth - Insight Investments

Yes.

Ed Buker

So more of an EBITDA, if you will.

Chuck Roth - Insight Investments

Okay. Good. But I am thinking about cash flow statement and cash flow from operations number, do you have fuel for what that would look like year-to-date?

Jim Nicholson

No. I haven’t…

Chuck Roth - Insight Investments

Okay.

Jim Nicholson

With all the time on the transactions.

Chuck Roth - Insight Investments

Understood.

Jim Nicholson

But look at the other factors.

Chuck Roth - Insight Investments

Yes.

Jim Nicholson

And changes in working capital.

Chuck Roth - Insight Investments

Yes.

Jim Nicholson

Hasn’t been in my radar screen.

Chuck Roth - Insight Investments

Okay. I appreciate that EBITDA number though. And maybe this will help, as far as, the previous call. The fourth quarter compressor operating profit is expected to be below fourth quarter of ’06.

Are you comparing against the $0.8 million loss that was reported or are you comparing against the $7.4 million loss that would exclude the tax reversal of what -- that was in last years number?

Jim Nicholson

That’s reversal.

Ed Buker

Actually I was commenting on the segment operating income for the compressor business.

Chuck Roth - Insight Investments

That’s what I am talking about. In your release it says we expect the operating results of our compressor business to be slightly unfavorable in the fourth quarter when compared to the results of the comparable 2006, so I am wondering what 2006 number you are comparing too?

Ed Buker

Okay. So repeat your question, did you mention about expect?

Chuck Roth - Insight Investments

Okay. Last year in the fourth quarter of ’06?

Ed Buker

Yes.

Chuck Roth - Insight Investments

In compressor operating profit you reported a loss of $0.8 million, are you -- in your statement about comparing -- being slightly below ’06. Are you comparing yourself to that or are you comparing yourself to what would have been the number, excluding the one-time tax reversal, which was in that $0.8 million loss?

Ed Buker

Yes. It has nothing to do with tax.

Chuck Roth - Insight Investments

But last year you had a $6.6 million pickup in your fourth quarter operating profit for compressor, which made it look better than it was, if not?

Ed Buker

Yes. But Chuck you are saying that we disclose previously that the operating profits had some non-income tax benefits?

Chuck Roth - Insight Investments

Yes.

Ed Buker

It did. Now I remember.

Chuck Roth - Insight Investments

Okay. Good.

Ed Buker

Yes. Brazil, yes, we got -- Brazil got to recognize that $6 million worth of.

Chuck Roth - Insight Investments

Right.

Ed Buker

Reversal in the loss.

Chuck Roth - Insight Investments

Yes.

Ed Buker

So the comparison includes that number.

Chuck Roth - Insight Investments

Okay. So you are saying you are expected to be slightly worse than $0.8 or slightly worse than $7.4?

Ed Buker

The $7.4 income?

Chuck Roth - Insight Investments

No. Loss, $7.4…

Ed Buker

$0.8.

Chuck Roth - Insight Investments

Okay. Thank you. And I am sorry, if there, if I wasn’t been clear there, can you tell us the impact of currency hedging and commodity hedging in the third quarter?

Ed Buker

I can’t tell you the impact of hedging itself, I can only -- that we disclosed is the overall impact including hedge positions.

Chuck Roth - Insight Investments

Yes.

Ed Buker

I won’t tell you that our hedge position obviously created favorable benefits.

Chuck Roth - Insight Investments

Right.

Ed Buker

And that’s a…

Chuck Roth - Insight Investments

And that’s why I want to know what it is, our currencies and commodities hedged into ’08?

Ed Buker

They are.

Chuck Roth - Insight Investments

Okay. Can you give us a feel for what percentage of your exposure to each of those has hedge in '08?

Ed Buker

In copper, we continue to maintain on a rolling 12 months basis 60% or more cover. The currency, as we have talked about in the past is availability of credit in Brazil, we currently have lower levels of coverage, we’re probably about one third covered for 2008 higher growing 12%, growing 12-month percentage in that?

Chuck Roth - Insight Investments

Lower than one third?

Ed Buker

Higher. So -- on a rolling 12 months including the fourth quarter of this year.

Chuck Roth - Insight Investments

Okay.

Ed Buker

And three quarter next year will be higher than that.

Chuck Roth - Insight Investments

Okay. But for '08 it’s under third?

Ed Buker

It’s under third, yes.

Chuck Roth - Insight Investments

Okay. I'll get back inline hope, yes, with all the changes going on. I hope you guys will stay on the line for a while today to answer a lots of questions. But I'll give someone else the chance. Thanks.

Operator

Our next question comes from [Tom Febrahegan of AGES Capital, actually AGES Financial].

Tom Febrahegan - AGES Financial

Hi, guys.

Jim Nicholson

Hi, Tom.

Ed Buker

Hi, Tom.

Tom Febrahegan - AGES Financial

How's the pricing shaping up for 2008, are you looking for increases and when we are going to know more about that?

Ed Buker

Well, we are out currently getting and negotiating with customers and getting increase at this point in time. I can't give you across the board status, because it's a different with every customer at this point in time. But those who all begin the -- taken at some point over the next 90 days.

Tom Febrahegan - AGES Financial

Okay.

Jim Nicholson

Another way to think about that Tom is, the industry in general had various copper hedge positions over the last couple of years. But it's -- as you continue to buy cover you are buying at a higher prices.

So you are still seeing inflationary effect in the cost to raw material flowing through into this year. So I think that companies are seeking price increases. You know, we are disadvantage in terms of we can't necessary we get price increase for the effective of our currency disadvantage in Brazil.

Tom Febrahegan - AGES Financial

Okay. And is that -- are you seeing that is being different from last year than it was easier last year to get some offset for the Real increase?

Jim Nicholson

I think that's a statement. And the reason I say that is because it was a healthy year economy last year in terms of market demand and as market demand weighing there is probably more price competition.

Tom Febrahegan - AGES Financial

Okay. Is there anything new on the supply side outside of Brazil in the industry?

Jim Nicholson

Yes. I think it's probably fair to say that there is been probably new low cost capacity to come on string over the last 12 months.

Tom Febrahegan - AGES Financial

Okay. Other item I want to talk about, so the recoverable non-income tax item?

Jim Nicholson

Sure.

Tom Febrahegan - AGES Financial

What's a normal level of cash to be tied up in that item?

Jim Nicholson

Okay. Not very much on a normal basis, most of these balances are derived from Brazil. There are various, I'll say there are equivalent value added taxes, where we had got normally those things are recovered as credit against income tax, with reduce profitability in Brazil because of the currency, we are not necessarily getting that recovery to its normal source and that's why the increase in the balances.

They are fundable however, but in Brazil unlike United States the rules and regulations for the processes to collect your refund are not -- almost they are not clear. There is no specific requirement of the government to deliver those refunds against any specific timeframe. So you can initiate the process and you can lobby for the timeframe.

Now, we believe that we are having success in getting those collected, we would expect those balances to come down in 2008, probably down to level at or below you saw at that we will put there at December 31.

Tom Febrahegan - AGES Financial

Okay. So there is at least -- that would account for about $30 million that's coming out for 2008.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

But there is also a statement in the queue that says, we currently expect to recover the majority of this balance in the second half 2008?

Jim Nicholson

That's right.

Tom Febrahegan - AGES Financial

And that's the majority of the full $130 million?

Jim Nicholson

No.

Tom Febrahegan - AGES Financial

Okay. So for 2008, we should look at this as being likely that you pull at least $30 million cash back out of that item?

Jim Nicholson

Right. I'll actually tell you that we are -- we expected to be 50.

Tom Febrahegan - AGES Financial

50. Okay.

Jim Nicholson

Yes. 50.

Tom Febrahegan - AGES Financial

Okay. And then for the reminder of it does that, do we still look it at having about a $100 million tied up there and definitely?

Jim Nicholson

Well, there are and the way this thing is reported there was actually some offsetting liabilities in the balance sheet as well. So the amount that you see the quarter there is a separate line item in the balance sheet isn’t necessarily what tied up, okay.

You know, the reason that line item is appear separately as we’ve sold our businesses and the balance sheet in total has shrunk. You reach an accounting rule it says, we have to breakout other when it reaches the certain level of the percentage of the entire balance. So there are offsetting liabilities that are related to the same tax assets on the book. I can't tell you off hand exactly how much that is, but we don't actually have as much tied up as in this year -- after you reduced that by $50 million.

Tom Febrahegan - AGES Financial

Okay. But the $50 million is an amount of cash?

Jim Nicholson

Real cash. We expect Real cash in 2008.

Tom Febrahegan - AGES Financial

Okay. Real cash. So if we just kind a recap some other sources of cash that you got coming up here from September 30th, forward. There are about $35 million of assets held through sale, net, it's on the balance sheet?

Jim Nicholson

That's correct.

Tom Febrahegan - AGES Financial

There is about $55 million that you're intending to pull out of the Salaried Retirement Plan?

Jim Nicholson

Yes. Now -- the net assets of $35 million that doesn't necessarily equate the proceeds, right.

Tom Febrahegan - AGES Financial

Right. But its, I guess its an estimate anyway?

Jim Nicholson

Yes. Okay. This one I am sure that you are.

Tom Febrahegan - AGES Financial

Right.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

$55 million Salaried Retirement Plan.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

There is the roughly $50 million access cash in those tax recoveries.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

And then there is about a $13 million tax refund as well.

Jim Nicholson

Correct.

Tom Febrahegan - AGES Financial

For '03.

Jim Nicholson

Correct.

Tom Febrahegan - AGES Financial

Now on the Hourly Retirement Plan, is that something that you could also entertain?

Jim Nicholson

There is something that can be entertained the matter of fact, if you see a recent announcement that we made where we are ceasing manufacturing at the Tecumseh Michigan Facility.

That plan covers that facility and we are currently in negotiations with the union about the effects of the shutdown. So I am sure that the disposition of that plan, it will be part of the negotiations.

Tom Febrahegan - AGES Financial

Okay. And is that the amount of over funding there could that result in a similar amount of cash out as from the salaried plan?

Jim Nicholson

Little bit less but order of magnitude pretty close.

Tom Febrahegan - AGES Financial

Okay. So if we just plugged in $45 million for that, we will at, my estimate $35 million for the asset sales which I understand could be off, $55 million for the retirement plan, $45 million for the hourly retirement plan. If you can negotiate that, $50 million that you can get out of the taxes in Brazil, if you can negotiate that and then $13 million tax refund for the US taxes from 2003.

So if I and then I left that's about $200 million of additional liquidity that could well be coming out of the business in the next year.

Jim Nicholson

It's a fair statement, of course, in my comments I said and assuming all those events happened. Right.

Tom Febrahegan - AGES Financial

Right.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

Okay. Just want to make sure we are accurate with that? Okay. CapEx for the compressor is about $20 million roughly, maintenance CapEx?

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

Okay. And the -- could you clarify what you said earlier about the $35 million, the analysis you've done that to say $35 million was a normal compressor EBITDA for this year if you stripped out the unusual items?

Jim Nicholson

Right.

Tom Febrahegan - AGES Financial

Is that?

Jim Nicholson

That's how we characterize it. That's what 2007 looks like. That's what the remaining business looks like.

Tom Febrahegan - AGES Financial

And that's a current exchange rates, prices and commodity prices?

Jim Nicholson

Correct.

Tom Febrahegan - AGES Financial

Okay. So to extent, you get a price increase of the higher number but to extent the Real appreciates more, lets say it is a lower number?

Jim Nicholson

Yes. You know price increases versus commodity costs, I don't think you can just take – I don’t think you can just take price increases to assume increase the number dollar for dollar.

Remember that timeline, copper is still in the 7000 to 8000 per metric tonne range, steel range cheap either and you have various hedges in place essentially you buy at lower but you have to replace those bias. So we still think the cost of materials are going to be higher in '08 then they will be in '07.

Tom Febrahegan - AGES Financial

So to some extent you are saying you need a price increase just to keep that $35?

Jim Nicholson

You got it.

Tom Febrahegan - AGES Financial

Okay.

Jim Nicholson

Yes.

Tom Febrahegan - AGES Financial

Okay. Well, I'll get back in the queue then. That's all I have for now.

Jim Nicholson

Okay.

Tom Febrahegan - AGES Financial

Thanks.

Operator

Next, we will go to Brian Grad, a follow-up from him at DLS Capital Management.

Brian Grad - DLS Capital Management

Hello, guys. A couple of things, was there -- is there a possibility that you get some additional cash out of the FASCO deal on an earn-out basis?

Jim Nicholson

There are no earn-out provisions. There is an ex-growth from the RBC transaction that do represent the potential proceeds.

Brian Grad - DLS Capital Management

What it like…

Jim Nicholson

Unless it’s $11 million.

Brian Grad - DLS Capital Management

Okay. What's the probability you put on that?

Ed Buker

Okay. Instead of putting a probability on it, how would if I just say it will be contextual?

Brian Grad - DLS Capital Management

Fair enough. And could you kind a delve a little bit into the item asset, sale aspect -- to count some of the things might be for sale?

Ed Buker

Well. You know as we've down sized during these operations, we have a number of ideal real estate facilities that around the United States, that are for sale, several of which are actually under contract and would be closing in the fourth quarter and the first quarter. I think Tom had it right when he said, okay, you got about $35 million in basis in this ideal assets and there is -- doesn't necessary have to cover all of that basis.

We think we have recorded net realizable values so that should be a fair approximation between the $10 million we'll receive for the A&S business and the remaining ideal facilities. Here we have close down on aviation operations. We have an airport for sales. We have various real estate for sale.

Brian Grad - DLS Capital Management

Planes for sale too?

Ed Buker

Planes. Yes. Absolutely.

Brian Grad - DLS Capital Management

Could you I don't if you really touched on this. I think the last question about Brazil was a little of different. Could you give us a little insight or clarification what the situation is with the commo or is that -- is that even an issue anymore? Do you have any further potential liability there?

Ed Buker

TMT Motoco. We tried -- we tried to give a flavor of what's going on there. The final for this judicial restructuring and that process is suppose to take 180 days between the creditors and the courts evaluating your plan.

We are well packed to 180 days. There is currently a negotiation going on where a company would like to operate the business as an engine manufacturing facility. That involves a cooperation needed from Platinum who has purchased the North American business because there would be licenses involved.

It requires the banks down there to cooperate and require us to cooperate and that negotiation is going on as we speak and as that negotiation that has what I’ll call delayed the ramping up of that process.

To go down to your final question which is there any exposure for us. There is potential exposure in the sense that their employees down there when an entity closes and people get laid off they tend to sue and they will sue -- they have sued not only TMT but the sister corporation down there, TdB.

Whether or not they would prevail against TdB or not is yet to be determined by the courts and there is some law that would put it at rest but there are also some defenses. So the bottom-line is, yes, there is some exposure. We do not believe it's a material exposure.

Brian Grad - DLS Capital Management

Ed, if you had to quantify with that outside, guess?

Ed Buker

I always tell you we don't consider material and that’s the way that is reflected that just closes in our filing.

Brian Grad - DLS Capital Management

That’s fine. I think it would be glad to have that wrapped up down there. So we can on move on with license?

Ed Buker

Amen.

Brian Grad - DLS Capital Management

And that’s all I’ve got. Thanks.

Ed Buker

Thank you.

Operator

We will take our next question from Rand Gesing of David Greene.

Rand Gesing - David J. Greene and Company

Hello.

Jim Nicholson

Hey, Rand.

Rand Gesing - David J. Greene and Company

How are you?

Jim Nicholson

Good.

Rand Gesing - David J. Greene and Company

Good. I am just trying to get on this $35 million '07 compressor EBITDA. Did you say that compressor [TNA] should be $50 millionish on a normalized basis?

Jim Nicholson

Compressor, no, remaining company, yes. Remember we did a, for example, of this very major Oracle implementation and not insignificant cost and that gets depreciated at corporate.

Rand Gesing - David J. Greene and Company

Yes.

Jim Nicholson

So there is other numbers that ties just within the compressor operation when I gave it at depreciation number.

Rand Gesing - David J. Greene and Company

Okay. Can you give a sense for what I am just to -- what's in our $35 million? I am just having trouble time, you know, year-to-date, you have about $20 million of EBIT in the compressor business. If you quantify, I can constrict your comments on the fourth quarter, you may loose a little bit there on the other…

Jim Nicholson

Yeah. 30 to 36, 35 number I've mentioned. It was not compressor. It’s remaining operation. Everything other than what's sold. So that would include corporate overhead…

Rand Gesing - David J. Greene and Company

Yes.

Jim Nicholson

Which we are trying to scale back.

Rand Gesing - David J. Greene and Company

And should I think about the $10 million, 8 million to 10 million, is what your assumption is or greater because '07, using '07, which had some, perhaps some higher than normal corporate expenses?

Jim Nicholson

I am almost sorry I've said it. The reason I've said is.

Rand Gesing - David J. Greene and Company

It just.

Jim Nicholson

You know what we its analysis that we've done which you refer to as EBITDA so we've tried to factor out some of the abnormality both and includes some overlay it may not actually be in the number.

Rand Gesing - David J. Greene and Company

And I am just saying, if you can offer load number to me based on the fact that first three quarters EBIT for the compressor business alone is $28 million and you are going to loose maybe a little on the fourth quarter. But you got some DNA and I know this is corporate?

So I have just having trouble tying it all maybe the $35 isn't before you flushed out to -- so I am just throwing that out as I thought that was inherently lower number for I guess what you were saying is the '07. What's left, right?

Jim Nicholson

It could be that we haven't added back enough for the abnormality.

Rand Gesing - David J. Greene and Company

Right.

Jim Nicholson

In this particular analysis.

Rand Gesing - David J. Greene and Company

Right. Okay. All right. A question I have is it relates to copper. Copper is seemingly begun to pull back. And I just, I am curious how you guys are thinking about it as you begin to strategies as what you laying and how much you want to be make it to copper over next year. Can you just sort of give us a thought as?

Jim Nicholson

Yes. Every time we think that's the direction it's going. It does that for a couple of days and it head back other direction.

Rand Gesing - David J. Greene and Company

Yes. I know that's been with…

Jim Nicholson

We have a policy, like I said we want to be North of 60% maybe around 70% on the rolling 12-month basis covered. And we time our bias based upon, yes there's a lot of volatility in the daily price that's over a week time it can move 10% and we tend to take the additional cover when its set to lower, but when you see this little down spikes.

Rand Gesing - David J. Greene and Company

Right.

Jim Nicholson

Though our average cost of copper with through the hedging activities, if you took -- if you took a curve which is the spot price overtime versus what our all in cost is we tend to do better than the spot price.

Rand Gesing - David J. Greene and Company

Okay. So then -- I am assuming that you sort of continuing to sort of lay in?

Jim Nicholson

We continue to laid in, that’s correct and the timing of when we lay in the additional cover as its consumed is based upon little trough and the -- and as the cost of the commodity bounces around.

Rand Gesing - David Greene and Company

Is there any update on the scroll at all?

Ed Buker

David, this is Ed, I can tell you that I have customer that we have been using the fuel trials on and he is extremely excited about it and we are currently looking and taking order on a limited release level.

Developing the balance of limited release stuff looking towards the full production capability of the scroll, which will be small initially. So within the market it is working well the feedback are good out of the market and I think we are getting ready to talk about the production case to make sure you have invested properly there.

Rand Gesing - David Greene and Company

All right. Thank you.

Operator

Our next question comes from Bruce Baughman with Franklin.

Bruce Baughman - Franklin Templeton

Hi. Good morning.

Jim Nicholson

Hi.

Ed Buker

Good morning

Bruce Baughman - Franklin Templeton

Just in case we are missed constraint and the context to that $35 million EBITDA, when you refer to remain in business, besides your corporate overhead and this compressor, this is what we are talking about, is there anything else?

Jim Nicholson

Yes. There are something what I -- there are something that are in -- reported in discount that are not going yet. Which is essentially, there are some other remaining small pieces of the electrical components business they are not yet sold or addressed and that’s also the part of the number.

Bruce Baughman - Franklin Templeton

Are those things that are slated for to be addressed though and…

Jim Nicholson

That’s why, yes. That's why they are included in discount.

Bruce Baughman - Franklin Templeton

Okay. And then to what extent to the -- are the companies assets still encumbered under any credit agreements?

Jim Nicholson

Well, the assets are still encumbered because it's still an active credit agreement that we can draw growth on should we need...

Bruce Baughman - Franklin Templeton

Okay. So those terms have not changed?

Jim Nicholson

Those terms are not changed at this point. That’s correct.

Bruce Baughman - Franklin Templeton

Okay. And what do you expect to be an interest rate, excuse me. Yes, an interest rate for 2008, for example you mention at the end of the quarter that the average rate of interest was certain figure what would you expect that to be for 2008?

Jim Nicholson

Well, I don't know. So we don’t expect to have any borrowings in the US. So we are really talking about the average rate in Brazil and I can't remember it's also top of my head.

Bruce Baughman - Franklin Templeton

And. Okay. What would you expect your interest expense to be in 2008?

Jim Nicholson

I don't have that number with me either.

Bruce Baughman - Franklin Templeton

Okay. All right. That -- those are my questions. Thank you?

Operator

We will next to Gregory [Erwin] of Smith Barney.

Gregory Erwin - Smith Barney

Good morning.

Jim Nicholson

Good morning.

Gregory Erwin - Smith Barney

Ed, I was wondering if you could comment just. When you look at this business is the compressive business pretty much of commodity business that subject to constant competition or do you all have a competitive advantage or pattern.

And you mentioned earlier that there is new capacity being added who's adding it I mean, if your customers or where it's being added and then if you could envision the Dell model versus the Ford model, do you think you guys can beat up in the next 10 years in the compressor business that you have some sort of advantage?

Ed Buker

It was wrong. Great questions. As you look at there are several segments that we complete in and we don't supply core compressors. And we don't just supply certain segments and we just don't supply certain customers.

I think, as you look at some of the segment such as air conditioning and you look where most of that market moved. We play in that market primarily in kind of niche ways. And the things with refrigerators and freezers, we play in that market in a larger way, but we don't play in it -- it has biggest some of the players and there's been capacity added in both of those segments and we backed away from that -- their aspect added over time.

But we do seem to do pretty well as in the commercial side of the business which includes several of the commercial products sometimes more than just compressors, we sell them convincing units and refrigeration systems along with the direct distribution through distributors and retailers. Where we still got a considerable market and peace across the globe.

We haven't fully leverage that, excuse me, across the entire globe, successfully as we have done and say North America and Europe. So that's another area, I think we feel good and be very competitive in there.

If you look at fundamentally how we operate we've done some redundancies in manufacturing investment and some redundancies in engineering investment and redundancies in other investments that with the redundancy spilt out we will have a much better cost position.

We also the chance I think, as you look at several of our operation to take out in -- for example, in Brazil, we start with casting which probably we had to do when we created the facility all the way through. And in other location we don't necessarily have to start at that level because there's not a global supply that wasn't available two or three decades ago, when some of this decisions were made.

So we have to look every element of our business, look it whether casting is the right thing or whether we should be doing motors or how many and which kind and all those question, I think will come to us over the next few months to make sure that we can align ourselves with some good supplier and get right down to the part of the compressor where we make the most money on.

We got a pretty good distribution network, but we haven't fully integrated the ordering and distribution, so that we have a balance inventory. I think in another place we've got quite a bit more cash that we necessarily need to have, but I don't have a number yet in mind how far down that order go because we are not purely in OE business.

So I would say, we are not in OE commodity type guy in most cases and where we do complete, we try to cut down initial to do more of that where there's more than a commodity type business we are doing more customer work we’ll grow that segment of business.

Gregory Erwin - Smith Barney

Where there was added capacity that was mentioned earlier on?

Ed Buker

Yes. There was two places that capacity has been added it's primarily in China in the air-conditioning segment or integrated air-conditioning. There has been some our network done in both China and just a little bit India going forward not a lot of capacity but those in the two sectors we're seeing capacity additions.

Gregory Erwin - Smith Barney

Is that in your sweet spot or is that in commodity site that you don't really care about?

Jim Nicholson

That would be -- not caring about not necessary the exact story but we did not something we're investing into competing. We're looking at that and we're competing in different segments.

So that we still have customers in those location that we have serviced well but we don't necessary go after that the volume in the commodity aspect. And I don't think we'll not be moving that way.

Gregory Erwin - Smith Barney

You don't have any patterns or competitive advantages to scroll technology that keeps getting talked about. Is that something that's a big part of your future?

Jim Nicholson

Well. We have a great quantity of patterns and historically we've been a company that has done very impressively technologically. But we have not generated as many new ideas over the last few years that we had done historically but the scroll we talk about is particularly in our commercial segment or it’s a little higher, a much higher load in the segment where we compete with other folks that aren’t really there.

So its not a mass market scroll like a copper might have but it's more of a specific for the segments wherein we are dominating and we want to make sure we continue to dominate. So that’s where the scroll is focused on.

Gregory Erwin - Smith Barney

Thank you very much.

Jim Nicholson

Yes, sir.

Operator

Our next question is a follow up from Chuck Roth of Insight Investment.

Chuck Roth - Insight Investment

Hi. Refinancing of the Brazilian debt seems to be taking longer than at least I would have guessed. Can you talk more about why that’s out there?

Jim Nicholson

I can. I don't know that’s taking longer than I would expect. I think as time has progressed, we have the opportunity to get more favorable terms as the parent organization is, you know, has increased liquidity.

So as long as we've been to maintain adequate liquidity in Brazil under the current methods, getting the committed volumes, we have been patient and I would say it's not that we are having difficulty over taking an abnormal times that we are being patient about it.

Chuck Roth - Insight Investment

Okay. Because you guys keep selling up businesses et cetera, it's tough to know how the business will operate going forward. Part of that frustration is that you won't tell us how much hedging has helped you this year. So when we look at the current numbers or you give us that $35 million or EBITDA we don't know how sustainable that is because if currency has helped that by a large amount then, you know, that's different so I am wondering why you won't help us there?

Jim Nicholson

Well. I don't have the number right in front to me. Second, we have tried to give you a sensitivity in the long run. The hedging is only going to create impacts if you will within the twelve months window.

Chuck Roth - Insight Investment

Right.

Jim Nicholson

As long as we continue to do that you basically seeing a twelve months delay. We have said for every point one that the Real changes is going to cost us $10 million on operating profit.

And I think for analysis purposes, you can just apply that logic. You can say where we'll read, where they're now, where do I expect them to be, apply that formula and that should work for you. With respect to 36, if they are going to allow me to let me back track, we did well. Well we have talking and I have been doing some additional map and like said this was an analysis that was trying to do an overall normalized number reflecting many, many what we call abnormalities or future changes.

So I've convince myself that that number is lower than and that which is probably why your Real scratching your head, lower than '08. It should be based upon the information you're saying. So if you would scratch that 35, 36 from this discussion.

Chuck Roth - Insight Investment

Do you have a new number to replace that one with?

Jim Nicholson

No. Not until I have the time to understand what the team have put in this view.

Chuck Roth - Insight Investment

Okay. That’s all I had.

Operator

Our next today is a follow up from Tom Febrahegan of AGES Financial.

Tom Febrahegan - AGES Financial

Hi. Just a quick one here. The valuation allowance currently or if you could give us an estimate of that’s going to be at year-end for the taxes?

Jim Nicholson

We only -- well -- there is only taxing jurisdiction that we haven't provide the full valuation allowance against our assets and that's Canada. I can recall what that -- but the number is but if basically you can expect that [field appeals] most likely still be 100% at December 31st.

You know, we are recognizing benefits. We are recognizing, you know, some of this transaction had tax gains that were being offset by these benefits. At some point in time, we will have to make an evaluation as to when this stop to provide valuation allowances and we'll have to do that analysis again at the end of the year.

I am not making any assurances as to what the outcome of that is and we'll continue to be a conserved and follow the accounting rule.

Tom Febrahegan - AGES Financial

Okay.

Jim Nicholson

But right now, I know that they are basically a 100% provided for.

Tom Febrahegan - AGES Financial

So at the end of last year, you had about a $120 million valuation allowance. Do you think that's going up or down materially?

Jim Nicholson

Well. Its certainly has because I think operations that give rise to the deferred taxes have disappeared right. So it's going to change materially hopefully the aggregate value of deferred taxes as well as the aggregate value of the valuation. And in question really, I think the focus on is what the net, my expectation is the net is still basically zero.

Tom Febrahegan - AGES Financial

Okay. So you don’t have a current estimate than what the valuation allowance stands at after all the transactions?

Jim Nicholson

No.

Tom Febrahegan - AGES Financial

Okay. Thank you.

Operator

And those are all the questions that we have today. And I will turn the call over to our speakers for any closing remarks.

Jim Nicholson

Well. I appreciate everyone's patience and good questions. We look forward to speaking to you next time. And hopefully we will have more answers particularly and you are questioning about what does the future bring. Thank you everyone.

Operator

Thank you.

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