Tecumseh Products Company Q4 2007 Earnings Call Transcript

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 |  About: Tecumseh Products Company (TECU)
by: SA Transcripts

Tecumseh Products Company (TECUA) Q4 2007 Earnings Call March 14, 2008 11:00 AM ET

Executives

Ed Buker - Chairman of the Board, President and CEO

Jim Nicholson - VP, Treasurer and CFO

Analysts

Charlie Rentschler - Wall Street Access

Scott Barbee - Aegis Financial

Vilian Maveneau - Donald Smith & Company

Mike Schneider - Robert W. Baird

Rand Gesing - David J. Greene and Company

Charlie Rentschler - Wall Street Access

Operator

Good day and welcome to the Tecumseh Products Company fourth quarter Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to Chairman, CEO and President, Ed Buker. Please go ahead.

Ed Buker

Thank you, Gwen. Good morning, everyone. Welcome to our fourth quarter 2007 conference call. This call is being simultaneously broadcast on the internet and also archived for replay starting this afternoon. The replay can be accessed at our website, www.tecumseh.com.

Today I have with me Jim Nicholson, our Vice President, Treasurer and Chief Financial Officer. Our plan is to begin our conversation today with some introductory remarks regarding the status of our business and our plans for improvement. Next, we will provide some commentary regarding our fourth quarter operating achievements as well as some commentary regarding our financial results for the period. Lastly, we will share our perspectives and expectations of 2008. Following our remarks, 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 meaning 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.

The last we spoke, I've been on the job for about thirteen weeks. In that original timeframe, I visited all of our compressor operating locations to assess the state of the organization and its processes. Based upon my investigation, I'm enthusiastic about the future prospects for the company, not necessarily because I liked what I saw, but instead because the potentials that I see.

My team, which is comprised of both old and new faces, has quickly formulated plans to transform the business into world-class. I believe all the ingredients are within our reach. It's nearly a matter of our execution over the next two to three years. I would characterize the company's anticipated transformation in three stages. The first stage is essentially complete, it involved the disposition of non-core assets that has strengthened our balance sheet and allowed us to focus on the core global compressor business.

Phase two consists of very short-term actions that we are taking to make our core operations more competitive and profitable. These actions will show benefits in 2008 and 2009 and include types of actions such as rationalization of our production facilities, our manufacturing lines, new sourcing and procurement strategies, and the implementation of more lean manufacturing techniques throughout the business.

We've not wasted anytime in identifying, planning and initiating these activities, they are imperative not only to improve results but also to counter the headwinds that we continue to face with the value of the dollar, the price of commodities and now, greater uncertainty regarding the general economy in the U.S and other key markets.

It's my goal to be as transparent as possible regarding what we are doing and when we are doing it. We had previously announced that we are executing additional restructuring activities for our North American operations with the consolidation of manufacturing facilities. Under these plans, the Tecumseh Michigan and Dundee Michigan facilities will be shutdown by the third quarter 2008.

During the first half of 2008, we will be consolidating the manufacturing facilities in La Verpillière, France into Cessieu. And in the first quarter of 2008, we have initiated headcount reduction actions within our Brazilian operations. By our estimate, some of these operations will positively affect 2008 results by $7 million, exclusive of any restructuring or impairment charges. In addition, we have capacity availability in India which we intend to fully utilize by shifting production from other high cost facilities.

I am expecting -- as further action steps are formulated, additional announcements could be expected before the end of 2008, particularly around the potential outsourcing of manufacturing activities that are not core to our value proposition.

As I stated in our last call, we have opportunities to achieve meaningful cost reductions through the simplification of our business by taking advantage of currency shifts through more strategic sourcing and less vertical integration. In addition, very recently we announced that we will be relocating our global headquarters out of Tecumseh Michigan to Ann Arbor area

This is another important step in the transformation we're striving to achieve. The purpose of the move is to improve our location to a place where we can be more accessible to our customers, our suppliers and global employees to facilitate the transformation of our culture to world-class by creating a modest but tasteful work environment that facilitates open communication globally. The move is cost neutral.

The third phase of our transformation is expected to set the foundation for achieving the near-term financial target of 3% to 5% EBIT margin in 2010. We've been working with the strategy consultant to more accurately define the markets in which we have sustainable, competitive advantage, and the steps necessary to capture profitable growth in these areas.

While not all the tactical plans are fully developed at this time, the general theme of this phase is centered around our targeted customers and markets, in the formulation of product and service solutions that will bring financial success in the marketplace. This entails introducing revised product offerings that have been engineered for reduced material costs, are produced utilizing a more effective supply chain and deliver superior performance and quality characteristics.

While we will provide additional direction as more specific tactical plans are ready for an introduction, it's accurate to say that at this time that our past focus has been too broad and has stretched our resources too thin. In the future we will be more focused on these parts of the business where we achieve superior return on assets employed.

Now, if we can, let's turn our attention to the fourth quarter of 2007. The fourth quarter continued our trend of improved quarter over previous year's quarter's results. We started the quarter concerned about several factors that had the potential of eroding our string of improvements. However, they did not materialize to the extent expected during the quarter.

Jim will elaborate on the financial aspects of our quarter in a moment. Operationally, I previously mentioned the restructuring types of activities that were initiated during the quarter. Another area of focus has been to improve the delivered quality of our products. Over the quarter, we continued to realize improvement in our measures of quality. On average for 2007, we have experienced improvements ranging from 30% to 40% in our various plant quality measurements. This in turn translates into 11% lower warranty costs in 2007 versus 2006.

One of the great problems we had in 2007 early was delivery of parts in North America. Past due orders in North America have gone down 90%, in last week we achieved a new low point for past due over the past 24 months of less than 400 particular part skus.

In addition, we just saw new reporting and tracking tools for sales and inventories on a daily basis so we can respond more rapidly in market changing conditions. Now let's review the financial results in more detail. Jim?

Jim Nicholson

Income from continuing operations for the fourth quarter, 2008 amounted to $3.6 million, or $0.19 per basic share, $0.18 per fully diluted share compared to a net loss from continuing operations of $25.1 million, or a $1.36 per share a year ago.

As I had mentioned, the fourth quarter turned out to be better than expected in total although the quarter was boosted by approximately $7 million in items recognized in the quarter that should be characterized as one-timers. Examples of such items include revisions to property tax, assessment laws in Europe and export incentive levels in India.

Generally the $29 million improvement can be broken down between $10.4 million improvement in operating income and approximate $11 million improvement in net interest expense. And an improvement in the tax provision of $7.3 million.

If we focus on operating income improvement, excluding the approximate $7.2 million and $6.9 million favorable one-timers in 2007 and 2006 respectively, as well as impairment and restructuring charges of $5.6 million and $2.0 million respectively, results improved by $13.5 million. This is consistent with year-over-year improvement levels that we have demonstrated during the second and third quarters of the year, exclusive of impairment and restructuring charges.

This $13.5 million improvement was attributable to favorable pricing and mix in the quarter of $13.1 million and total cost improvements of $10.7 million. These improvements were partially offset by higher average commodity cost of $1.7 million and a less favorable average realized currency rate when compared to the prior year of $8.6 million. To give you a sense of where we are, net of hedging, our average realized rate for the real was 2.10 real to the dollar in 2007 versus 2.41 in 2006. For the full year, that is an estimated negative impact of $37.1 million compared to full year 2006 results for the real alone.

When adding weakening of the dollar versus the euro and the rupee, our full year aggregate decline in year-over-year results due to changes in foreign currency rates amounted to $43.7 million. The quarter was better than our expectation because we had better than expected volumes in our commercial segment in North America caused mostly by our ability to clear our backlog without losing orders, and a better mix in Latin America. In addition, the value of the real did not strengthen as much as expected during the fourth quarter. Not only did this help the fourth quarter, but it also provided an opportunity to boost our overall hedge coverage for 2008 at rates favorable to current rates however, on average, worse than what we realized over 2007.

We currently have approximately 75% to 80% of our real exposure covered for 2008. And as you have probably noticed, subsequent to the fourth quarter, the real has started to strengthen again with the latest bout of dollar declines.

For the full year, we made good progress in our profit improvement efforts. Our continuing operations showed year-over-year improvements in every quarter. We finished the 2007 year with a slight loss from continuing operations of $2.9 million versus a loss of $48.1 million in 2006, an improvement of approximately $45 million, despite facing the currency headwinds I just mentioned, and overall higher commodity spend of $17.2 million. The reasons for the improvement are consistent with our observations for the fourth quarter; pricing, cost reductions, certain volumes and mix were all contributors.

Now, let's just take a few moments on our balance sheet. Here, we have been successful on executing the plans that we discussed last quarter. Recently and subsequent to these year-end financials, we took important steps to complete the reversion of our salary pension plan. After payment of excise taxes, this will increase our U.S cash holdings by approximately $80 million. We are also nearing the culmination of our efforts to complete a new financing arrangement in the U.S, which we expect to remain undrawn for the foreseeable future. As a result of these events, we believe we have sufficient liquidity to accomplish further restructuring and profit improvement activities. Ed?

Ed Buker

Thanks, Jim. I'd say we are content, I guess that's a goodest words I can use with the results of the fourth quarter, giving that they exceeded our expectation, we are encouraged and we continue to see benefits from our various initiatives. However, everyone should recognize that we continue to face unfavorable conditions that are working against our progress.

For 2008, we see -- three important factors worth discussion; of course currency. We go into 2008 as Jim has mentioned, we have a great deal of forward hedge to cover our exposures. However, even considering last year's and this year's coverage, we're still expecting to realize a value of the real that is 11% stronger than last year. This will have a negative effect on earnings of about $27 million, with other currencies having additional negative effect of about $8 million.

The next factor is the cost of purchased materials; with respect to copper, we also have a great deal of forward cover to help reduce our exposure, particularly in the first half of the year. However, even considering last year's and this year's coverage, we are still expecting to see our copper spend increase. The same is true for the cost of steel and other purchased materials which we also believe will be up relative to 2007. However, unlike copper these costs are less predictable as until recently, there is no good vehicle for hedging steel cost. While we have budgeted 6% increase in steel cost, we're seeing signs of significant cost pressure in steel. The magnitude of which could be significant to have an impact on our expected results in the absence of pricing ruling.

Including our expectations for copper, steel and other purchased materials, we expect to spend an additional $23 million in 2008 over 2007. So, if you're doing the math, including the fourth quarter one-timers that means we have $65 million of ground to make up just in currency and commodities just as they even with 2007.

Through a combination of price increases, cost savings initiatives, the non-recurrence of $19 million in professional fees incurred during 2007. We expect to mitigate these cost increases, but at this point it will be a challenge to cover it all in 2008. As a result, a distinct possibility that our operating income for the full year will remain in negative territory before giving consideration to any restructuring charges or impairments.

Lastly, I have to talk about an important factor that may prove to be the least predictable that being the general economic activity. I don't need to remind everyone of what is happening in housing, credit, energy and commodity markets. Spectra of inflation is been discussed more and more in the media everyday. Accordingly, the general health of the world economy and the potential effects on overall demand represent another factor which we would caution our investors about with respect to our expected results.

Despite the risks, we remain optimistic that we are taking the actions that will yield improved results. The management team is diligently working to achieve these objectives and we appreciate those investors who are placing their faith with this team.

In that regard, I feel compelled to comment on the recent events involving Herrick Foundation. As we've publicly disclosed, we have received a letter from the Herrick Foundation indicating their desire to sell their shares and are requesting certain actions to be taken by the company to facilitate such a potential sale. In our response we indicated the Board intents to take action upon proper deliberations and to act appropriately in light of their fiduciary responsibilities. At this point the Board has not had the opportunity to fully address the requests. We will keep the public properly informed as the events unfold.

That concludes our prepared comments for this morning. Gwen, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Mike Schneider with Robert W. Baird.

Mike Schneider - Robert W. Baird

Good morning guys.

Ed Buker

Good morning.

Jim Nicholson

Good morning Mike.

Mike Schneider - Robert W. Baird

Congratulations on the early progress. I know it's been a very challenging year. Maybe first we could just start on some of the momentum heading into 2008, can you describe, I guess, first on volumes maybe by product category, I know you gave some figures in the press release, but what actual unit volumes are down in the different categories of products and then I guess what your -- based on that momentum what your rough expectations are as we go through 2008? And maybe along with that color just what you are actually hearing from your customers at this point?

Ed Buker

Okay, I'll see if we can do this appropriately.

Jim Nicholson

I deal with history and Ed deals with the future.

Mike Schneider - Robert W. Baird

Sure.

Jim Nicholson

We had a lot of mix change during the year. We really were only down in terms of unit in the R&F market and R&F represents in terms of unit volumes, much larger unit volumes than the rest. Commercial units AC, those tend to be higher average prices, so even though you see larger increases in these smaller segments and decreases in R&F, in aggregate, when you look at all those together, our unit volumes are essentially flat in 2007 versus 2006.

Mike Schneider - Robert W. Baird

And was that true in the fourth quarter as well, Jim?

Jim Nicholson

Pretty close. Pretty close. I think, you know, I have seen your early release --

Mike Schneider - Robert W. Baird

Yes

Jim Nicholson

But I think what you've done is you've made an assumption where we reflected pricing and mix, I think you've assumed that that's all pricing and it's really more mix than pricing.

Mike Schneider - Robert W. Baird

Got it. So then -- with commercial construction slowing here in the United States and consumer spending seemingly globally beginning to slow as well, can you give us a sense of what the momentum has been through Q4, then your outlook in 2008?

Jim Nicholson

The outlook in 2008 for us is, we put in about a 7% to 8% unit decline, and if you look at what we are talking about for sales volume, most of that is offset with the increase in raw materials, the increase in exchange rate and there is some price increase in that.

The first month in January, the volumes came in almost spot on with the slight improvement in North America because of their aggressive past due reduction. In the month of February the volumes in sales were off a couple of more points than the 7% or 8% reduction. We got a daily tracking number, and my current daily tracking for the month of March, has a 7% to 8% off to that 7% to 8%, but that doesn't give me what the month will be because traditionally, we have a lot heavier sales towards the end of the month, but it's showing some softening in the two to three more points. We may be talking 10% for the year as we go though this.

Mike Schneider - Robert W. Baird

And that, that’s in units or in revenue?

Jim Nicholson

It's in units. The revenue is almost up, it's up 15 grand, 20 grand. It's almost flat. It's the best way to describe it.

Mike Schneider - Robert W. Baird

Year-to-date?

Jim Nicholson

Year-to-date.

Mike Schneider - Robert W. Baird

Okay. And so that implies that you are still getting price which is my next question. Of the dollar amount you disclosed for 2007 total pricing, how much of that is yet to roll through in 2008 based on the date of implementation of those price increases and then what would you hope to recover in 2008 in addition to that roll through amount?

Jim Nicholson

There are additional price increases that came in to affect in the beginning of the year. What it ultimately turns out to be in aggregate, what we would tell you is; and we gave you a kind of the math on what we have to make up.

Mike Schneider - Robert W. Baird

Yes.

Jim Nicholson

And our expectation is, we won't get their completely in pricing, and part of the reason is because not all competitors and manufacturers have the real problem that we have.

Mike Schneider - Robert W. Baird

Right.

Jim Nicholson

They have the commodity issue but they don’t have the real issue. So pricing will not get us there completely.

Mike Schneider - Robert W. Baird

Okay. And, what have you seen though, as far as your competitive position goes because of these price increases? And I guess along with that question, have you lost outright volume contracts as a result of somebody’s price increases, have you walked away from contracts because, Jim you correctly point out that your competitors in most cases don’t have this real problem. So, what's been the impact in your competitive position?

Jim Nicholson

As you saw in the fourth quarter we talked about, that effective mix, more so than pricing. You'll see in 2008, I believe, a similar affect. We talk about, volumes been down 7% to 8%, most of that volume decline is in the R&F segment because we are taking our product and we are putting it in higher and better uses than to sell it in R&F, in markets where currency is hurting us. Though there is a mix shift, I would say it's mutual, we are definitely losing volumes in R&F but in the end of the day we will probably benefit by taking that product and putting it in different mix.

Mike Schneider - Robert W. Baird

Okay and then final question, I will get back since I have got several more. The foreign currency assumption, if you look at the incremental hit in 2008 of $35 million, its seems to imply, and I know this isn’t perfect math because I don’t know the balance outside the real with the euro etcetera, but it seems to imply your assumption for the real is about a 1.50 average cost or average rate through 2008 and yet that doesn’t seem to be consistent with your comment that FX should be 11% worse in 2008. And also on top of that, I apologize, but the fact that you’re 75% to 80% hedged already on the real doesn’t seem consistent as well. So I am trying to connect these three dots that don’t seem to be consistent.

Jim Nicholson

Well, that’s true. In the past we have indicated that, you know, the way I put it is 0.1 Delta in the real yields to $10 million change in profitability. There are many factors that go into that relationship that we have provided and at the end of the day when you look back mix is part of that equation. How we buy is also part of the equation? How we buy is also a part of the equation because we disclosed that number. We're not just talking about the effect on our top-line or on our revenues, we're really talking about the effect that's created by net exposures. So, what that's really saying is recently because you are seeing more than that ratio, is that we've had less dollar buying, which would be a natural offset than maybe we've had historically as a ratio to our foreign denominated sales. So, that ratio has gone up a little bit, but on average, I would still like to use that $10 million to 0.1 figure.

Mike Schneider - Robert W. Baird

So given that you're looking for $35 million hit, that would suggest that you're looking for an average Real cost of something around a $1.80, at lest using that 10 to 1 ratio?

Jim Nicholson

I believe I have that number for you, $1.87 is what where we have our expected average rate for 2008, it is a $1.87. Now the 20% of that is still variable right?

Mike Schneider - Robert W. Baird

Sure. Okay, let me think about that and I will get back in line. Thanks.

Jim Nicholson

Okay.

Operator

(Operator Instructions) We'll go next to Charlie Rentschler with Wall Street Access.

Charlie Rentschler - Wall Street Access

Thank you. Looking beyond this year which you obviously described as a very difficult one for a lot of reasons, and going to your comments about the possibilities of 2010 with 3% to 5% EBIT margin, what kind of the top-line, what kind of revenue do you think you'd be talking about 2010?

Ed Buker

This is Ed, Charlie I am trying to think about the number. We were talking in about 3% to 5%, CAGR as a growth and we're still trying to fix that up. That's kind of the range that --

Charlie Rentschler - Wall Street Access

Okay.

Ed Buker

It's not aggressive market domination. It's more cleaning this up and getting this rate of run at a much more effective rate going forward.

Charlie Rentschler - Wall Street Access

Right. Well, I realize this is a work in progress and there is a lot of things that you're still trying to figure out and a lot of opportunity you don't fully realize yet, but all that should be positive right, I suspect. And at that point, I suppose you'd be looking at normal tax type rate for 2010?

Jim Nicholson

Let me address that one, Charlie, and by the way Charlie welcome to the call and thanks for the coverage.

Charlie Rentschler - Wall Street Access

Thank you

Jim Nicholson

While the time you get to 2010, you'll see when we file our 10-K which is later today, with the transactions that were completed and other actions that we've taken. We have substantial NOLs that are clearly going to -- have us not paying tax in the US for several years, quite possibly through 2010. It will be my estimate, because those NOLs are substantial. I think, we won't be paying tax for this timeframe that we're talking about.

Charlie Rentschler - Wall Street Access

Okay and meantime, I mean, you've painted a not very rosy picture for '08, but in terms of cash, you've got several positive things happening here with the Hourly pension plan reversion and extra money coming out of the Salaried plan and 2003 tax refund. So, those are some significant potential inflows that will help. But can we pretty well assume that you are going to be debt free here by the end of the year? I mean you won't be adding any debt?

Jim Nicholson

Well, certainly we'll be net debt free.

Charlie Rentschler - Wall Street Access

Net debt.

Jim Nicholson

There are reasons in foreign jurisdictions to hold some debt. You mentioned those cash influxes, let me just take this opportunity to rundown what we see those are, okay? I think we have some updates. Our global cash on hand, essentially as of last week was $95 million. This includes the completion of miscellaneous idol asset sales that have been completed during the first quarter. We really only have one additional facility that is still to close on, it has additional proceeds of $1.3 million.

Next week, very early next week, we will be receiving the net $80 million in cash generated from the Salaried pension reversion. We will disclose, you will see this also in the 10-K footnotes. We have approximately $115 million in refundable non-income taxes in Brazil alone. And we're estimating that we'll collect $60 million to $65 million of that in the back half of 2008 with the remainder being collected in 2009.

The IRS refund that we've talked about, that $14 million, the audit process is reaching it's culmination, the IRS is challenging not the deduction but the timing of the deduction and its availability for carry bag treatment. We will be in the appeals process here very shortly. We still feel very confident that we will prevail. But this process could take up to two years to complete, so while we do expect that cash inflow, it's not on the immediate horizon.

We've also, another worthwhile event to discuss, with the closure of the Tecumseh facility and we've reached an agreement with the union of that facility a closed down agreement; we will be completing a reversion with respect to that plan which is also highly over funded. Proceeds from that reversion are expected to be in the $45 million $60 million range with completion of that within the first half of '09. And the last one I would mention is inventory and we have a focus on inventory reduction and our target is $25 million to $30 million of inventory reductions by the end of this year.

One other item that we have talked about in the past was the fact that we had substantial appreciation in land value in India. We are as Ed mentioned looking to fill up India; there is a lot of activity going on in India. Given the fact that we have a lot of other liquidity sources, we don't have immediate plans to realize this appreciation. So I wanted to take that opportunity to give you a run down of where we see additional cash sources in addition to what could come out of operations.

Charlie Rentschler - Wall Street Access

Okay.

Jim Nicholson

So I hope that's helpful.

Charlie Rentschler - Wall Street Access

That's very helpful. And so despite all the choppy fees that you are driving through this year, you've got substantial liquidity both on hand and coming along. So that's very positive. Just one more question, I know you have a consulting front that’s helping you and you are still in the middle of the process of trying to sort out where you want to go in terms of manufacturing and purchasing and sales and all kinds of stuff, but will there come a point later in the year where maybe you can be somewhat informative as to where you think you are and what are your plans and what is the timetable for these various kinds of activities?

Ed Buker

Charlie, this is Ed. I think that's exactly what we would like to do. We would like to finish the study, do a couple of more iterations relative to sensitivities and different thoughts. It's wide open. We are looking at all things relative to things that we control ourselves and then things that might build on or might make us a more attractive company should we acquire or create or do other things within with the liquidity. It gives us the chance to rapidly look at those and consider those. So, there is a lot of opportunities for us to really make this a leading edge company again.

Charlie Rentschler - Wall Street Access

Okay, thank you. I'm sorry to ask all these questions.

Ed Buker

No problems, Charlie.

Operator

Will go next to David Shapiro with Aegis Financial.

Scott Barbee - Aegis Financial

Hey, this is Scott Barbee here. I had a question here. We were looking at the corporate expense line for the last three months that come in I guess at $14.2 million. Can you hear me?

James Nicholson

Yeah.

Scott Barbee - Aegis Financial

Right, we are trying to reconcile that against your comment in the last conference call, Jim, about the corporate expense line definitely not moving backup to 6 and so obviously something is going on there that’s a little different than you are anticipating and we just wanted a reconciliation from that $2 million a quarter run rate, that's you were projecting --?

James Nicholson

Right. Well, there is the corporate expense line is still in 2007, the fourth quarter is still burdened by it, but I'll call some of the abnormal expenses that we've incurred throughout the year. The other thing is how we do some allocations. There are elements of good news that are actually captured in discontinued operations today as the accounting rules go. I still believe it's fair to say that our estimate for 2008 is that corporate expenses will be in the $10 million to $15 million range for the year.

Scott Barbee - Aegis Financial

Okay. You are up from the $8 million now to something more like $10 million to $15 million?

James Nicholson

Yeah. When we said $2 million last time, it was really about $2.5 million per quarter so that's the $10 million and then I'm trying to leave some leeway for -- we are working with consultants; there will be work to do potentially to address the Herrick request, so it may be it's not quite completely back to business as usual.

Scott Barbee - Aegis Financial

Now, I was reading the letter that Herrick had put together. They were requesting two very specific -- there was a proxy issue that they talked about and then a part of the, I guess the fundamental documents of the company they wanted to have changed. Can you go into what those requests were asking for?

Ed Buker

Hi, this is Ed. The basic request is related more or less to the ability to trade their shares more evenly. If you look at what we have currently, we've got the A shares have no voting rights while the B shares do, and the A shares have a much more active market as there are about 13.4 million of those shares that can be traded freely. And only about 5 million B shares and only about half of them are freely traded. So there is a huge difference in the daily volume between the two, and the issue they are looking for is liquidity premium in the A and the B.

We do not believe that the Bs currently carry any control premium associated with them because of the A shareholders protection rights, which prevent a buyer from acquiring control through acquisition of the Bs. So, if you take a look at our bylaws you can see how all this is setup and they are looking for an opportunity we think, as they explained to us to do something with their shares to improve their liquidity ability.

We, as management are very open to taking actions that create more value for all the shareholders. So, we'll investigate whether there is any evidence that suggest a single class of stock would enhance the overall value of the company and work closely with the Board to try to come to that conclusion through our responsibilities. And I think that's about as clear as I can get on that.

Scott Barbee - Aegis Financial

Okay, I appreciate that. The other question I had was with regard to kind of the strategic direction, obviously you hired some consultants. We are always a little anxious about companies that achieve a lot of cash balance and we're wondering how you think about the allocation of that cash balance, especially when you look at the overall capitalization of the company, the multiple that your own company trades at as you know, enterprise value to revenues or enterprise value to EBITDA or 2010 projected EBITDA?

We find it hard to think that you could find other acquisitions that would offer better returns than a repurchase and we just want to make sure that in the stack-up of options for a deployment of that capital that repurchase option is looked at as a baseline for future capital expenditures.

Ed Buker

I think that immediately we want to continue to put the right amount of funds into profit improvement in growth activities in the core business and rapidly respond to being world-class in those areas. And I have no history of big bang acquisition, so I would say that that's not something that probably as our strategy goes ahead would be one that would get a lot of favor because it just doesn't appear to be within our current scope of management capabilities to do something of that nature, but small pieces here and there and any other type of work including -- I am not opposed at all to looking at stock repurchases as a way to enhance the value of the company in some positive form that works for all shareholders to make those kind of benefit.

Scott Barbee - Aegis Financial

Okay, all right. Thank you very much.

Operator

We will go next to [Vilian Maveneau] with Donald Smith & Company.

Vilian Maveneau - Donald Smith & Company

Hi, there. What was the depreciation associated with the compressor business in '07 and where do you expect it to go in '08?

Jim Nicholson

It was $44 million associated with continuing operations for '07. I would expect it to be pretty flat, as currency changes that has a tendency to have an effect of inflating the number. We didn't have a lot of CapEx last year so some depreciation falling of should have an positive effect; net-net all those things considered, I would expect the number to be pretty close to what it was in '07.

Vilian Maveneau - Donald Smith & Company

Thanks.

Operator

And we'll go back to Mike Schneider with Robert W. Baird.

Mike Schneider - Robert W. Baird

Guys just a string of follow-up questions; as far as the tax rate goes on a GAAP basis, what will the rate look like as reported in 2008?

Jim Nicholson

Well Mike, we get this question every quarter, and if I had a crystal ball I could tell you the answer and that is because of our unique tax position in the intra-period tax allocation that occurs between the three line items, Disc Ops, continuing ops and OCI which is for non-accounts other comprehensive income in the equity section. The best I can describe as, non intuitive rules that cause those allocations. And the plug is what goes to continuing ops. So we can't really predict what the rate is going to be. All I can share with you that is hopefully helpfully helpful, is that, we have valuation allowances against all other deferred taxes in our largest jurisdictions, the US Brazil and India. Right now we no longer have the reserves against deferred taxes in Europe and in Canada. So as a result, you can expects small provisions, provisions similar to what you would see, I think what you see in current year financial statements from those jurisdictions, otherwise we are not going to be paying tax in India and the US and in Brazil in the upcoming year. And what shows up is provision or benefit is just a function of these crazy rules

Mike Schneider - Robert W. Baird

Okay.

Jim Nicholson

That's the best I can tell you. It's frustrating I know, but that's the reality.

Mike Schneider - Robert W. Baird

Okay. And then the focus now, and trying to close the gap of the $65 million you said in shortfall on EBIT in 2008, $19 million less in fees, and Ed, rolled out $7 million of savings as a result of facility closures and head count reductions. Are there addition savings that you're budgeting as far as productivity and savings over and above that $7 million?

Jim Nicholson

The answer is yes, and we think there is a hole. You actually just did the math for us. We think that hole is $34 million or $35 million. Pricing isn't going to get us all the way there. We have a whole slew of cost improving initiatives that Ed talked about at the beginning of his commentary, some of which will hit in '08, some of which will hit in '09, some of it's on the drawing board now. Our goal is to make up the gap. But we're saying is, based upon the timing when those hits, based upon the things we can't predict like, what's steel going to do in the back half of the year? What are the economies going to do? We're working to close the gap.

Ed Buker

We have, Mike, identified more than that level of gap closure initiatives to try to overcome that. You have to have more than that, because they don't all work. So we have another $10 million or $15 million worth of identified actions that are in progress that require engineering work, and sales works and purchasing work to make that happen, but we monitor those every month, every day, every week depending on the location.

Mike Schneider - Robert W. Baird

Okay. And then, during the quarter Jim, the $7.2 million in unusual benefits you laid out, where were those buried into P&L or split into P&L between cost of goods sold and SG&A?

Ed Buker

Yeah. I don't have the exact split but there are in both cost of sales and in SG&A. I would say a fair assumption is just to use 50-50. I see some nods, yes.

Mike Schneider - Robert W. Baird

Okay. And then just so we can start to focus now on the core business going forward. Can you give us an update as to what the regional or geographic mix is of the core business and also what the product or market mix is of the core business looking forward?

Ed Buker

If you don't hold me to precise numbers exactly, I can tell you generally the refrigeration and freezer market is in total globally about $500 million. And it comes from Europe and Brazil primarily, 80% if I remember my numbers precisely, and some out of India. The balance is the commercial distribution side which is primarily Europe and North America, and then India is beginning to participate at, as is Brazil. So that gets you in that segment and that commercial segment includes things such as unitary condensing units, compressing units, a variety of all commercial applications with a variety of OEs and after-market people. So that gives you the mix. So the European and North American markets are primarily focused on commercial and distribution, and India and Brazil, as regions they are kind of focused on the compressor manufacturing primarily. So, the higher value-added products are still flowing through but we are taking the commodity level things so we can compete better.

Mike Schneider - Robert W. Baird

And the residential products, if [RF] is $500 million, commercial is how much and what’s the third slice of residential?

Ed Buker

Residential is not very large and it's a niche product primarily out of India and some out of France relative to kind of apartment type Silensys units and the residential is probably a $100 million. I don't have anybody saying absolutely not, and I am like, jumping and bouncing, that exactly right, so it's in that range. I can do a better job. I'll be prepared to answer that question better going forward.

Mike Schneider - Robert W. Baird

So then it implies, commercial is roughly $500 million as well equal sized to R&F?

Ed Buker

No. Commercial is probably about 350 and the residential and distribution is probably about the balances of 150.

Mike Schneider - Robert W. Baird

So then North American sales today are approximately what of the total company?

Ed Buker

North American --

Mike Schneider - Robert W. Baird

It sounds like you are less than 20% of total business.

Ed Buker

Exactly, they are 20, exactly 20%

Mike Schneider - Robert W. Baird

Okay.

Ed Buker

And it appear to be going forward from our best projections.

Mike Schneider - Robert W. Baird

Okay. And then can you just talk about again the focus on the trend lines in the core business. Where are you having success with specific customers or products? Where are you not having success and I guess focus on that your businesses that matter most, R&F and commercial?

Ed Buker

The R&F we are taking, as Jim described, approach to where we are uncompetitive. We are either trying to find a way to move the product for example shuffling it from North America to India or France to India or Brazil to India where we can then work in the commercial regards that takes us 6 to 9 to 12 months to get some of that done even with capacity available. So we are packing away from some of our traditional customers on some of the units that are supplied that can't be market competitive and moving them to locations where we are market competitive due to a variety of local economic conditions. And the North American commercial side, we've been then supplying those similar units into the commercial side filling the backorder demand that we were missing in previous years and we have not seen a backlog reduction with the order fulfillment. So that still means the demand is there before we hit the peak season yet in the locations that we had the backorder problem -- but has two problems.

Mike Schneider - Robert W. Baird

Okay. And then as far as mix changes go geographically, Jim you mentioned that Latin America was a particular source of the mix change. Can you explain what's going on there and then again what occurs in 2008 generally speaking?

Jim Nicholson

Yeah, there are two kinds of mix changes going on. One, Ed really just described with more units headed towards higher margin commercial and [fewer R&F]. The other is geographies. The Latin American economy is really booming, so we have the ability to exit places like North America where currency has -- we will also say slaughtered margins and move it into deliveries into Latin America where margins are normal.

So I would tend to say that as we look at '08, and we look at that shift in mix. The R&F volumes are coming out of North America and Europe and they are going into either Latin America or into commercial markets around the world. So that's the general shift.

Ed Buker

We see some volume in India and in the Middle East relative to R&F and some niche unitary or air conditioning segments out of the Middle East.

Mike Schneider - Robert W. Baird

Okay. And as you guys prepare for or complete I guess the strategic plan for the next several years, can you start to at least ballpark where you believe profitability you can get near-term holiday two or three-year goal on an EBIT margin or EBITDA margin basis for us? So we can start to understand what you believe, after reviewing the operation this business can achieve.

Jim Nicholson

I'll go ahead and speak out, the SEC doesn't like us to talk about EBITDA because its not a GAAP measure, but I think Ed clearly stated in the comments that our goal is in two to three years to have a 3% to 5% EBIT margin. And as we look at the cost reduction opportunities, as making that statement, because we believe we can get there.

Ed Buker

No, no that's exactly right. That said, as more we look, the more we find and it just takes a little time and effort because we make highly engineered product even though the market doesn't appreciate the highly engineering that we do for it.

Mike Schneider - Robert W. Baird

Okay, thank you again

Operator

Then we'll go next to Rand Gesing with David J. Greene and Company

Ed Buker

Good Morning, Rand

Rand Gesing - David J. Greene and Company

How are you?

Ed Buker

Fine, thanks

Rand Gesing - David J. Greene and Company

Good. One thing I was curious about was -- what is the effect of pension income, as it may have helped us in '07 and it won't necessarily be around in '08 with the reversions?

Jim Nicholson

Well, actually -- I think, we've covered that in our press release, but if you are not a pension counting expert, I think, only actuaries are.

Rand Gesing - David J. Greene and Company

Okay.

Jim Nicholson

It might be a little bit difficult to understand. Basically what we're saying is, through normal pension accounting within our recurring operations, when you compare 2007 to 2006, OPEB and pensions net-net, we benefit by $8 million and it was pretty much equal across all four quarters. That benefit was derived because over the last several years, we have been reducing benefits and under pension and OPEB accounting, those reductions have started to flow through our income statement.

Now, what we also say in the press release, and if we don't say it in the press release, we certainly say it in the 10-K, is that with the pension reversion there will be a lesser amount of income that is derived from pension accounting.

Rand Gesing - David J. Greene and Company

Right.

Jim Nicholson

But, because of other offsets we've made.

Rand Gesing - David J. Greene and Company

Yeah.

Jim Nicholson

Further reductions in benefits on, not necessarily to the pension side but on the post retirement side, that net, net delta into 2008, I believe there is only $3 million unfavorable, right? And these are one-time event-type accounting. It's really just normal recognition of "income/expense" from the accounting for pensions and OPEBs. I hope that makes it clear?

Rand Gesing - David J. Greene and Company

Yeah, yeah, and that is helpful. In the Sigma reporting, corporate expense for the year was $36 million. I am assuming that the Alix's fees of 19 are in there, or are they all around that?

Jim Nicholson

Yeah. The $19 million that we referred to is not all Alix Partners.

Rand Gesing - David J. Greene and Company

Okay.

Jim Nicholson

Yeah, and we had all firms, but --

Rand Gesing - David J. Greene and Company

Professional fees in general.

Jim Nicholson

But it's fair to say that most of it is right in there.

Rand Gesing - David J. Greene and Company

Okay.

Jim Nicholson

Yeah, it is. Confirmatively, yeah it is all in there.

Rand Gesing - David J. Greene and Company

So if we take it out, we get $17 million or so which is in the range of your, what you thought it would be going forward in '08, correct?

Jim Nicholson

Right, it's a little higher. And other thing I failed to mention is, like we are looking at cost reductions in the operations.

Rand Gesing - David J. Greene and Company

Yeah.

Jim Nicholson

We are also looking for additional cost reductions in this area. We have several transition services agreements from the transactions that we completed.

Rand Gesing - David J. Greene and Company

Right.

Jim Nicholson

And as we are relieved of those burdens, that's an opportunity to further reduce these costs.

Rand Gesing - David J. Greene and Company

Okay. And as it relates to the three-stage turnaround plan, how long we are in stage II? How long do you expect that stage to last? Is that sort of '08, at the end, as we exit '08 will be complete in stage II or --?

Ed Buker

It takes Rand, about 9 to 18 months, and some of the major changes in shifts and movements and implementations of Lean to effectively be at the level that I would consider that we are done, and we'll overlap stage III on top of stage II.

They are not in parallel they are in a series I mean I don't see them as being parallel, but we will begin to layer in -- the products that we have to begin layering in because it's a 18- to 24-month window on major product innovations.

So we will bring that stuff in as we go, but you should see the operating and change in process Lean focus over the next 9 to 18 months and some of ours will be faster than that.

In India, this month we'll start making magnet wire ourselves, or quite a bit improvement in cost and in inventory reduction in headcounts.

So those are things that are happening. They happen 2 or 3 or 4 every month from here forward.

Rand Gesing - David J. Greene and Company

Okay. Is there someway to think about what differentiates the second stage from the third, or is it just sort of the degree or, you get the bigger bang and then that's more subtle things that you are working on?

Ed Buker

Some of them, because I think the best way to differentiate that is many of the things we are doing in the second stage are right there in front of us and you can clearly see them and touch them, and you can move rapidly with the things we are trying to do in the second stage.

The third stage requires a little more upfront time to look at the value engineering of the products to look at the customer response, some of the complexity of the products and that requires some testing time, some customer approval time and then we need new products. Our scroll is out there, we are doing a nice job of selling that, moving that along, we need some more products like the scroll to continue help us to do that.

Rand Gesing - David J. Greene and Company

Yeah. Okay. All right, good job. I feel like we are beginning to start to see some positive impact and glad to see you. Look forward to chatting with you guys soon.

Ed Buker

Thanks, Rand.

Operator

And we'll go next to Charlie Rentschler with Wall Street Access.

Charlie Rentschler - Wall Street Access

Yes, I know we are running out of time here but you talked about your three product segments but could you put the thing around and talk about what is the situation with these markets globally, in other words R&F and commercial distribution? How do they look to you? You made comment about some of the regional stuff but just globally first and then maybe major regions.

Ed Buker

Charlie, I will see what I can do here. As we sit and look at the data with the consultants, we've been pulling a huge amount of information on the global trends. I think you can put the room air conditioner and non niche unitary air stuff off of our radar screen.

Charlie Rentschler - Wall Street Access

Right.

Ed Buker

The R&F products we tend to look at, the regions are of course the North American, South American, European and then Asia without China. That is the way you look at that. Because China seems to be about -- the number we can best describe in China with the products we are in, there is about 100 million of them built and only about 4 million of them pop out. So, we are not in that market other than on niche basis. The balance are 16 to 30 million units in each of the other regions in R&F and we are participating in the Latin American region in a disproportionably high number, a little less in both North America and North America primarily, most of the customers are not in the market as there are in other locations. They're beginning to a large deluxe refrigeration things we're still in the freezers.

Commercial markets in every region in every part of the world is growing. There is the cold chain process growing in every underdeveloped and developed part of the world and that's the piece that we have to do a much better job of penetrating in some of the countries where we have traditionally only been in the R&F side of the business, India is one, and the Latin America side, we don't do enough in that regard. So those are the big opportunities from our perspective.

Charlie Rentschler - Wall Street Access

Thank you.

Ed Buker

If that isn't as data precise as probably I will be able to do in a few months but that's generally what we see.

Operator

And there are no further questions at this time. I'd like to turn the conference back to our speakers for any closing remarks.

James Nicholson

So, I truly appreciate the questions, the comments that you have made and we're working harder in improving, we're becoming a process driven organization. So we are hoping that every time we meet with you, improve the process of exchanging information and knowledge and thoughts. Your help in that regard has been appreciated and we’ll continue to do more of that and we will continue to work hard to beat your expectations where we can. Thank you very much folks.

Operator

Thank you everyone. That does conclude today's conference. You may now disconnect.

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