ATC Technology Corporation Q2 2008 Earnings Call Transcript

ATC Technology Corporation (ATAC)

Q2 2008 Earnings Call

July 30, 2008 10:00 am ET

Executives

Mary Ryan - Investor Relations

Donald T. Johnson - Chairman and Chief Executive Officer

Todd R. Peters - President and Chief Operating Officer

John M. Pinkerton - Acting Chief Financial Officer, Vice President and Controller

Analysts

Analyst for Arnold Ursaner - CJS Securities

Craig Kennison - Robert W. Baird

Gary Prestopino - Barrington Research

Bill Dezellem - Titan Capital Management

Presentation

Operator

Welcome to the ATC Technology Corporation’s second quarter 2008 earnings conference call and webcast. (Operator Instructions) At this time, I’d like to turn the conference over to your host for today’s agenda, Mary Ryan.

Mary Ryan

With me today are Don Johnson, our Chairman and CEO, Todd Peters, our President and COO, and John Pinkerton, our Controller and Acting CFO. Please turn to Slide 2.

Our agenda for today includes a review of our business highlights for the second quarter 2008 presented by Don, a report on eight segment performance and growth opportunities presented by Todd, the financial review and guidance update presented by John, and finally, Don will provide a ramp up and outlook for the balance of the year. At the end of Don’s summary comments, we will open the floor to a pre-approved list of analysts, money managers and institutional holders. Please turn to Slide 3.

Before we go to the substance of our call today, I would like to point out that many of our comments are considered to be forward-looking statements that generally include all statements other than statements of historical facts, statements that are predictive that depend upon or refer to future events or conditions, or they concern future financial performance or position, including future revenues, expenses, earnings, growth rates or margins. You are reminded that forward-looking statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those stated or implied by our comments today. Those risks and uncertainties are fully described in our 2007 annual report on Form 10-K and on other SEC filings. Please turn to Slide 4.

For those of you who are unfamiliar with the ATC story, this slide presents a brief description of each of our businesses. Please turn to Slide 5.

At this time, I would like to turn the call over to our Chairman and CEO, Don Johnson.

Donald T. Johnson

Based on the organizational changes announced during the second quarter and as Mary already indicated, we are changing the topics by each of our speakers, as well as, improving the format of our earnings call today. The agenda will be as follows: First, I’ll provide a brief overview of the company’s second quarter results. Secondly, Todd Peters, our President and COO, will highlight the quarter’s results by business segment and then provide a summary of our new business opportunities in each segment. Third, John Pinkerton, our Vice President, Controller and Acting CFO, will provide more in-depth review of the company’s financials and updated guidance. And then finally, I’ll provide an overall second quarter wrap up and highlight our plans for the balance of the year.

So to begin, please turn to Slide 6 for a summary of the company’s second quarter overall performance. For the second quarter, total revenue for the company increased to a record $135.6 million, up 4% from $130.4 million during the same period of last year. Income from continued operations decreased to $9 million for the second quarter of ‘08, compared to $11.6 million in the second quarter of ‘07. This translates to income from continued operations for diluted shares to $0.42 for the second quarter of ‘08, compared $0.53 for the same period of ‘07. The quarter’s results benefited from our 17^th consecutive quarter-over-quarter increase from our Logistics business. The 25% increase in Logistics revenue quarter-over-quarter continues the company’s significant migration towards predominantly at the industry recognized, fast-fueling asset-light high return Logistics business, which contributed 64% of the company’s revenues and 79% of the company’s operating income in the second quarter.

Our Drivetrain business did improve sequentially. It remained weak from a quarter-over-quarter perspective, reflecting reduced demand related to the Honda Warranty Program and year-over-year softness in the Ford and Chrysler volumes. We are disappointed in the current performance of our Drivetrain business. However, we are pleased with the outcome of Honda’s decision regarding their go-forward sourcing allocation affirming our longer-term relationship with Honda. We’re also pleased with the new business wins in Drivetrain, particularly the one landed in Europe, which displaced the competitor and validates our strategy to drive new business by improving our ability to serve our European customers via our new Czech Republic operation which opens early next year.

To round up the second quarter, we repurchased nearly 15 million of our outstanding common stock. We’re now about [6%?] complete with the $50 million 2008 stock repurchase plan authorized by the ATC Board of Directors and have purchased approximately 5.5% of the diluted shares outstanding. We also entered the quarter in net cash position of $900,000.

Finally, in early June we held our first ever Investor Day. I would like to thank those who attended or viewed our website, for what I hope was an informed update to the strength of our management team and the direction of our company. At this time, Todd will highlight the quarter’s results by business segment and update our new business opportunities. So please turn to Slide 7.

Todd R. Peters

My comments today will cover the following:

Our operating results in our Logistics and Drivetrain businesses for the three months ended June 30, 2008, and the highlights of our business development opportunities for each segment. We will start with the Logistics segment. So, please turn to Slide 8.

Our Logistics segment continue its momentum and, again, delivered a record quarter with net sales of $86.5 million, up 25% from $69.2 million for the second quarter of 2007. This marched up 17% quarter-over-quarter increase in Logistics revenues. Logistics segment profits increased 9.6% to $11.4 million, compared to $10.4 million for the second quarter of 2007, with a segment margin of 13.2% versus 15% for the second quarter last year. The second quarter margin performance was reflected by a more normalized mix of business. Most significantly, the second quarter 2007 includes the benefits associated with an electronic upgrade program that have essentially concluded in Q1 2008 and a customer repair program for Nokia that was terminated in June 2007. The Q2 2008 margin performance is within our overall expectations for 2008 and is in the line up with our long-term guidance range of 12-14%.

Our second quarter results reflects strong volumes of AT&T, up 7% quarter-over-quarter and other based business and significant growth in our business with TomTom. TomTom became ATC’s second largest customer during this quarter, with revenues of $22 million. It grew 690% year-over-year and 62% sequentially. Our team has done a tremendous job of watching and ramping up this and other previously announced new business.

We continue to focus on cost reduction and operational efficiency improvements. Through the second quarter, our Logistics team is on track to deliver the cost reductions targeted per year that are embedded in our 2008 guidance. During this quarter, we established an operation with a partner in Canada that handled returns for a certain cost market. This operation, while relatively modest, is a first step in extending our North American reach and providing value solutions to our customers outside of the US. In August, we will be launching our first Logistics operation in Mexicali, Mexico. This operation added a further important step in expanding the North American reach of our Logistics business. At this site, we will be handling sensor repair operations that offer longer lead times and that are more labor intensive. We believe these expanded operational capabilities will provide future options for our current customers and while also providing opportunities with new customers. Our focus is to continue providing the highest quality, thus value, solutions for our customers wherever they are located.

Now, let’s review performance for the Drivetrain business. So, please turn to Slide 9.

As Don said, this has been a disappointing quarter for our Drivetrain business. For the second quarter, revenues decreased 19.8% to $49.1 million from $61.2 million, and 19.8% reduction year-over-year. Segment profits was $3.1 million compared to $7.7 million for the second quarter of 2007. While our Drivetrain revenue increased sequentially 9.6%, segment profits improved 50 basis points, in comparison to the prior year quarter over shadows these modest improvements.

The decrease in revenue was largely driven by the reduction in demand for Honda remanufactured transmissions. During the first half of 2007, we provided support to Honda related to the extension of warranties for certain vehicles. By comparison, during the second quarter of 2008 our volume with Honda is down $10.6 million, or 45% from the second quarter of 2007. In addition, we have seen continued weakness in our business with Ford-Chrysler due to normal life cycle decay or legacy transmission platforms and general market softness, which is expected to continue through the balance of the year.

On the medium and heavy-duty products, our business with Allison remains solid and continues to perform at expected levels. As a result, the reduction of revenue results in negative operating leverage.

We recently reaffirmed a long-term relationship with Honda. Honda will use supplier strategies to source its future requirements for remanufactured transmissions. This sourcing allocation decision, which is effective October 1^st, 2008, is important to the company as we will participate equally in the remanufacturing of past, current and future transmission models. Additionally in the past year, Honda has ordered our other programs unrelated to transmission remanufacturing, such as the remanufacturing of half shafts and logistics services related to core qualification of processing for other remanufactured products. While individually these programs are modest in scope, they are important to our customers and we are pleased that we have been selected to provide these services to Honda. Although these decisions collectively do not materially impact the balance of 2008, they are further evidence of the value we bring to our relationship with Honda.

While we continue to evaluate additional opportunities to take cost out of the business, we are maintaining our focus on rebuilding our revenue base. So with that, let’s turn to the new business opportunities on Slide 10.

These opportunities represent annual revenue for new potential programs being quoted and they are at various stages of pre-quote, post-quote, customer evaluation, and some cases, final negotiation. Each quarter, these charts represent a snapshot of the deals that we are currently working on with current and prospective customers and will naturally fluctuate. Historically, our run rates are running about 25-30% of the opportunities in Logistics and 10-20% of the opportunities in Drivetrain that’s cycled to our pipeline.

As you can see from the left-hand side of the slide for the Logistics business, we currently have approximately $96 million of annual revenue and sales opportunities to cross 35 unique customers. In the past few months we have made significant progress and the qualification of new business opportunities, as evidenced by the growth of the pipeline in terms of value and the number of unique customers.

Our opportunities pipeline continues to reflect a diverse range of customers and markets, with 22% of the opportunities are high-tech, 25% with wireless, with the carriers, 40% with wireless OEMs, 9% in broadband and cable, and 4% in automotive. During the past few months, I had the opportunity to meet with our business development team and attend certain trade shows with them meeting perspective customers. I can tell you our team is focused and is aggressively pursuing new opportunities.

I would like to take this opportunity to update our previously reported 2008 new business win estimate to $29 million versus a previously reported $44 million. The reduction is related to a program that has been reduced in scope and delayed by the customer for the near-term, and as a result, has been returned to the new business pipeline at a reduced value.

I am pleased to announce that during the quarter we assigned a 3-year renewal of our contract with T-Mobile for certain distribution services. T-Mobile became a customer in 2005 and this was our first contract renewal. This renewal coupled with the recent renewal of our business with AT&T and year-to-date new business line is indicative of the focus on quality and value that we deliver to our customers. We are well positioned to win additional new business based on our industry-leading services and quality and our value proposition to both current and new customers.

Look at the right side of this slide for Drivetrain. We currently have approximately $201 million in opportunities across 16 unique customers. These opportunities are split 73% related products in remanufacturing businesses for light vehicles and 27% for medium and heavy-duty remanufacturing. While our growth over the past year has been disappointing, we have won nearly every major new program that was up for bid in the last 24-30 months. And we are waiting for the buys for these programs that were launched throughout 2007 to grow overtime, such as the Ford and GM 6-speed transmissions, as these products increase in the vehicle population.

Additionally, the growth anticipated with Borg-Warner has yet to develop, as their requirements for turbo remanufacturing services has not materialize. Borg-Warner’s business requires much for their initial program and change due to their volume and capacity changes. The medium and heavy-duty space continues to be a significant interest to us and we foresee additional opportunities to win new business.

During the second quarter I am pleased to announce that we have secured $9 million of new business with the majority of this volume in our European operations. Our willingness to invest in a Czech-Republic operation to service customers on the European continent was the deciding factor securing the largest portion of this new business.

Additionally, during the quarter we have reached agreement to extend our contracts with Ford and Chrysler to 2009. We believe we are well-positioned to win new business both in Europe and in North America and we are continuing to focus resources to aggressively pursue new markets, products and services. I am working on the Drivetrain team to aggressively pursue some near-term opportunities that we should reach conclusion on by the end of 2008. And if successful, we’ll expand our parts offerings in North America and add new business in both North America and in Europe.

In summary, we remain confident about our chances of landing additional new business in 2008 as we continue to roll the sales funnel and pursue the new business revenue opportunities in both segments. Our teams are focused on continued growth and diversification of the markets, products and services and customers that we serve. I would now like to turn the call over to John Pinkerton for a review of our year-to-date cash flow performance and guidance for the balance of 2008. Please turn to Slide 11.

John M. Pinkerton

My comments today will cover the following:

Our consolidated cash flow and net debt highlights and updated financial guidance for 2008. So please turn to Slide 12.

As of June 30, we had total cash and cash equivalents on hand of $7.2 million. This is offset by $6.3 million of borrowings on our $150 million revolving credit facility resulting in a net cash position of $0.9 million. Adjusted cash flow from operations was $5.5 million for the six-month period then ended.

During the first half of 2008, we used $25.6 million of cash for our working capital accounts that include $10.1 million for inventory, primarily related to the launch and ramp up of new programs, coupled with increased test and repair volume in our Logistics segment. However, inventories are down $4 million sequentially from last quarter. We have also used $5.9 million for accounts receivable to support increased volumes in our Logistics segment and $9.3 million for accounts payables in accrued expenses primarily related to payments for our 2007 incentive compensation program.

Capital spending for the period of $8 million is primarily related to facilities, machine and equipment for new business initiatives and capacity maintenance operates in our Logistics segment.

Net cash used in financing activities of $16.4 million was primarily related to $24 million of open market repurchases of our common stock pursuant to the $50 million repurchase plan authorized by the Board of Directors, partially offset from borrowings on our revolving line of credit. As of June 30, 2008, we have repurchased approximately 1,213,000 shares of the outstanding shares, at an average cost of $20.46 per share.

Our 2008 LTM EBITDA of $85.1 million is 5.5% better than the prior comparable period, primarily due to the strong operating performance of our Logistics segment.

We believe that cash on hand, cash flow from operations and existing borrowing capacity will be proficient to fund on-going operations, capital expenditures and other opportunities. Please turn to Slide 13.

With respect to updated guidance for 2008, after consideration of operating performance in related developments in the first half of 2008, we now expect full year revenues of $535-555 million, which would represent a 1-5% net increase over revenues of $529 million in 2007. This range of revenues is based on the following:

Our 2008 Logistics segment revenues are expected to be $345-360 million, which would represent growth of 17-22%. The range of revenues reflect the potential for the capture and implementation of near-term new business opportunities. The growth of our Logistics business is expected to continue to drive improvements in ATC’s ROIC, given that the Logistics business’s ROIC historically has been nearly twice that of our Drivetrain business.

Our 2008 Drivetrain segment revenues are now expected to be $190-195 million, which would represent a year-over-year reduction of 17-19%. The reduction from previous guidance reflects continued softness in demand for Ace, Ford and Chrysler programs, coupled with a slower than expected ramp up of recently launched new business programs. As we have previously indicated and based on input from Honda reflecting the implementation of their go-forward sourcing allocation, we expect 2008 Honda revenues of approximately $50 million.

The key factor reflected in the full year range of revenues is the opportunity for the capture and implementation of near-term new business opportunities.

In terms of profitability, in the Logistics business for 2008, we now expect segment profits of $50-55 million, which equates to segment margins of 14-15% for the balance of the year. This performance reflects the revenue mix anticipated in the second half of 2008 and would slightly exceed our long-term target range of 12-14%. Full year segment margins continue to reflect the outstanding performance in the first quarter that benefited from certain programs and business mix not expected to impact the balance of the year.

In the Drivetrain business for 2008, we now expect segment profits of $12-13 million. The reduction from previous guidance results from negative operating leverage from reduced revenue expectations for 2008. In addition to the actions taken late in Q1, our Drivetrain team continues to develop plans to further reduce cost while maintaining our initiatives to land new business.

We are expecting an effective tax rate of approximately 38.5% for continuing operations. The increase from the 2007 effective tax rate of 37.2% results from the change in the Texas tax law, which impacted us beginning in July of 2007 and the mix of US and UK income.

Our EPS calculations and projections assume an average of 21.1 million diluted shares. As a result of these factors, we expect to achieve income from continuing operations of $38-42 million for $1.80-2.00 per diluted shares from continuing operations.

In terms of cash flow, we expect the following:

EBITDA of $76-84 million, capital spending is forecasted at $15-20 million, which reflects the spending to support a new business capture in our Logistics segment, investment in the Czech-Republic operation for our Drivetrain business, and in Mexico for our Logistics business.

Depreciation and amortization of approximately $15-16 million and our free cash flow for the year is estimated at $20-25 million. Now, I’d like to return the presentation back to Don for closing comments.

Donald T. Johnson

Please turn to Slide 14 for my wrap-up and revised outlook for 2008.

We’re now halfway through the year and we have better views to the launch timing and ramp up of new business and the continued strength of our base Logistics business. The performance of our Logistics business continues to exceed our expectations as allowed us to offset current challenges in the Drivetrain segment where we are controlling cost and kick starting growth.

In Drivetrain, Honda advises us of their allocation decision, thereby affirming the long-term nature of our mutual relationship and we have landed $9 million in new business, including $5 million in Europe, validating our Czech-Republic strategy to better serve our European customers and augment our growth potential going forward.

Because they are now more certain about the outlook for the balance of the year, we have now narrowed our 2008 earnings estimate for income from continuing operations to $1.80-2.00 per diluted share, up slightly from our previous guidance of $1.70-2.05.

During the second half of the year, our focus will be on 1) aggressively pursuing additional new business and are exulting markets in both segments to drive growth and diversification, 2) successfully launching and ramping up our new business wins on time and on budget, 3) further reducing cost by improving efficiencies, and 4) continuing our efforts on evaluation of tactical acquisitions.

Our strong balance sheet and the company’s excellent liquidity position allows us to pursue several initiatives to improve shareholder value, such as, the 2008 stock repurchase program, continued organic growth and pursuit of tactical acquisitions to support achievement of the goals in the 3-year plan.

As you heard from John, Logistics is expected to deliver over 75% of the company’s profits in 2008. Demand for high quality full-sweep logistics service providers providing a variety of in-markets remain high as companies look to outsource their logistics operations in a competitive market environment. We believe we are well-positioned to capture greater logistics market share in the market verticals that we are pursuing to continue our customer and revenue diversification.

Our rapidly growing Logistics business with its revenue exceeding 35% since 2003 and its higher ROIC characteristics, which is 50% or double that of Drivetrain for the net dollar invested, continues to change the complexion of our business and the overall ROIC of the company. We remain enthusiastic about the company’s longer-term plan that by growth and our Logistics business, and has dramatic effect on the company and shareholder’s value, particularly considering the impact on the company’s overall ROIC profile.

Objectives of our 3-year plan remain unchanged. We expect to continue our leadership in quality and service and deliver value to our customers. We expect to continue pursuit of our target markets in both segments for further growth and diversification of our revenues and cash flows. And we will continue our efforts for operational excellence and improved ROIC, which will benefit as the business mix is more heavily weighted towards Logistics.

I’ll thank you for your time today in listening to what we had to say. I’d like to turn to Slide 15 now. And we’re now available for questions and answers.

Question and Answer Session

Operator

(Operator Instructions)Your first question comes from Analyst for Arnold Ursaner - CJS Securities.

Analyst for Arnold Ursaner - CJS Securities

My first question relates to the better-than-expected success in TomTom. Does that have any effect on your outlook for the full size of the contract?

Todd R. Peters

When we said better-than-expected, it actually came in faster. We’ve announced our win with TomTom in late 2007 and we talked about the challenge in 2008 was how quickly could we bring it on. So, what that’s done is it’s actually come online faster, quoted by the year-over-year growth of 690%, 62% sequentially. We think there’s additional growth with TomTom down the road and they’re a great customer. And they’re in a great market segment. It’s really shine to brilliance on their retail side. You’re reading the same reports that I am. Though, we’re happy to have them as a customer.

Analyst for Arnold Ursaner - CJS Securities

Okay, and also related to Logistics, if you take out AT&T and TomTom, the rest of the segment was down about $5 million year-over-year. Can you comment on that?

Todd R. Peters

Yes. That’s if you think about our commentary and what we’ll discuss a little bit in our Q&A, but we talked about there is a one-time automotive electronics upgrade program that had a lot of strength through 2007 that effectively ended in the Q1 of 2008, and that really accounts for the difference. And then we also talked about we have a Nokia test and repair program that terminated in June 2007.

Analyst for Arnold Ursaner - CJS Securities

And then shifting to Drivetrain, Ford and Chrysler announced today that they’re going to do major cutbacks on their recent programs. Is that going to affect you in any way?

Todd R. Peters

Well, in our commentary, we said we see general market softness and one of the things you see is what vehicles being sold by Ford and Chrysler to the market. There’s a marginal impact if you think about what vehicle’s being sold. There’s a lot of opportunities on terms of the vehicle part. So, we’ve been seeing some of the softness that’s already kind of going through the numbers. I think when we started the year, I don’t think anyone expected the automotive new vehicle sales to be where they’re at. So, that impacts our opportunities set in the short-term. It will to be determined but we think we’ve got the softness built in for 2008. But that’s just a momentary thing. If you look at our transmission platforms that we’re on, we announced in late ‘05 and in ‘06 that we won both the front wheel and rear wheel drive 6-speed transmission platforms. So, you have to look at more than just vehicle build. You have to look at the transmission platforms and going forward with the rush to fuel economy, the production plans have changed and because the 6-speed is more fuel efficient, we feel that they’re going to guard our bigger share of whatever number of vehicles that Ford sells. So, we think that’ll have upward pressure even in a down market in terms of the number of transmissions that are out there that we’ll be able to service going forward.

Donald T. Johnson

I’d like to add a couple of comments to that, too. While we won the 6-speed report, we also won the 6-speed front wheel drive with GM. And we launched that in ‘07. So, we think that’s going to be a favorable transmission platform as even GM continues to drive for increased fuel economy along the same lines that Todd just talked about for Ford. So, we think in terms of transmission platforms going forward, we’re very well-positioned for the vehicles that’ll run off the assembly lines in Detroit.

Analyst for Arnold Ursaner - CJS Securities

And on your expense in Europe and in the Czech-Republic, I know it’s early but can you give any sense of what you see in the market there and what possible size that market could be?

Todd R. Peters

Yes, we haven’t really talked about that. First of all, let’s start with our UK business have developed a little over $20 million US a year. So, it’s fairly modest and with respect to the size of the operation in the US. We’ve got great customers over there but we’ve then the whole thing just happened to the UK operation and, of course, you understand the difficult part is there’s more vehicles on the continent and if you think about the drive train services we provide, there’s a freight penalty. Internal, in fact, I don’t see to move products all the way into England and then back onto the continent. So, I’ve met with a couple of our customers and prospective customers and we think there’s a great opportunity to have a duality, in other words, either valid service out of UK or service bound off the continent, which is evidenced by some of the new business wins. We’re already announcing pre-opening of the operation. We just expect that, that will continue to happen and we’ll probably give you more firm guidance on that after we get through our business plan in process and announce our refreshed view of 3-year look in February ‘09.

Donald T. Johnson

By the way, I’d like to kind of take it back to what Todd said in his comments earlier too. It’s not just our belief that will lead to additional growth. When we met with customers and when we’re in Europe just a month ago, the win that we did get that we talked about today was absolutely the deciding factor was the fact that we’re bringing up a Czech-Republic facility. So, we think that bodes well for our future for growth into that market.

And then another thing I’ll add, if you look at vehicle part and vehicle sell, how that market, they’re just slightly smaller than US. So, it’s a huge market opportunity that we have to do is capitalize our new strategy.

Operator

We’ll take our next question from Craig Kennison from Robert W. Baird.

Craig Kennison - Robert W. Baird

First question relates to the scope. You indicated that there was one customer in Logistics that decided to reduce the project scope. Could you elaborate on that?

Todd R. Peters

While it was more than scope, Craig, this particular customer, without giving too much of confidential information, we had identified a program with them earlier in the year that we expected to launch this year for various reasons, both operational and management changes. The program is 1) been delayed and 2) our understanding of the program, which may not happen until early next year now, has been reduced in scope. So as a result, even though we had everything but the signature down when we announced the win, we reluctantly have got to pull that out of our year-to-date new business plans and we tottered that opportunity back in the new business pipeline.

Craig Kennison - Robert W. Baird

At the analyst event that you hosted a month or so ago, you mentioned your desire to get into medical device market. Any progress on that initiative?

Todd R. Peters

I think nothing in the pipeline yet because we have a qualified pipeline. As you know, we work on opportunities outside of what we present in the core of the call. I will say that we are having meetings with potential customers and are enthusiastic about eventually penetrating that market.

Craig Kennison - Robert W. Baird

Also, keeping on Logistics, with the new iPhone coming out, any significant opportunities related to that product?

Todd R. Peters

I think just like we said last year, the iPhone is good for AT&T, then it’s good for us. And that’s really the way we look at it. Apple distributes iPhones on their own behalf and we help AT&T with the phones that go through their company in stores or retail outlet. So, to the extent that, that brings more customers into the AT&T subscriber base, then it’s good for us.

Craig Kennison - Robert W. Baird

Okay, and then finally, there was a leadership change in the Logistics business. Could you address that change and any effect you think it may or may not have?

Ronald T. Johnson

Yes, Craig, I sure can. We certainly have planned a leadership change for quite some time. We brought on Antony Francis well over a year ago. We start working with our primary customers out there indicating this may happen because of those intentions to retire. Now, having said retirement, people nowadays, to quote a commercial, “Don’t retire,” and they really finally retirement, and certainly Bill is doing that with us as he stays on as Consultant on key business development initiatives. But Antony has a background very similar to Bill. They both came up through FedEx or both very involved in Europe; they both were very involved in terms of growth in businesses in FedEx. But also Antony grew businesses outside of FedEx. We tested and honed him over the last year before we made this decision, as Bill started narrowing on the dates that he would eventually leave ATC. So, we feel very well-positioned. In fact, some of our top customers said that we got very, very high marks on them the way we handled the transaction because we had involved Antony in all the high-level executive meetings with our top customers.

We feel very confident with Antony’s ability. By the way, Antony has been very involved in the huge success we’ve had with TomTom. So, I feel very confident of his ability to deliver. And as you know, Craig, I’m a pretty tough judge of that given my 35 years experience in Logistics.

Operator

And we’ll take our next question from Gary Prestopino, Barrington Research.

Gary Prestopino - Barrington Research

Just getting back to the program in Logistics that was delayed. Did that have anything to do with the economic impact what’s currently going on, on the client’s business?

Todd R. Peters

No, in my commentary, really two things, without getting into too much client detail. They had some management changes. So, there’s a difference in how the program would be developed and rolled out. They’ve actually had a couple of management changes. So, I think they’re in a spot now where we could start working with them. That’s what I said. We don’t expect anything to happen on that from now until hopefully ‘09. It’s back in the pipeline.

Gary Prestopino - Barrington Research

Then if I look at the new business, if I take out this thing that’s been delayed, it looks like it’s about $125 million in new business?

Todd R. Peters

Yes, between the 2007 wins of $96 and then the $29 are wholly year-to-date. That’s exactly right.

Gary Prestopino - Barrington Research

When do you feel all of that new business will be implemented and then that we’ll get a full quarter run rate on that business? Is that sometime in late ‘08, early ‘09?

Todd R. Peters

It would got to be mid ‘09 because think about the growth that we just had with TomTom, in terms of getting a full-year effect because our growth in TomTom, for instance, was 690% year-over-year, 62% sequentially. So, to get the full effect of the TomTom program, you would have to, let’s say, we’re close to our run rate on what we’re doing today, you won’t get full effect until the second quarter of next year.

Gary Prestopino - Barrington Research

And then in terms of year-over-year comparison, the run rate will be effective first of the year? Borg-Warner is a little bit more sluggish in its business now or in terms of the new business that you’ve won, could you talk a little bit about that?

Todd R. Peters

Yes. Back in March of ‘07, we announced that we had won an initial modest piece of business with Borg in providing some remanufactured services not full remanufactured. We’re going to do the front-end of the remanufacturing for some turbo because they were having capacity issues then.

Well, to make a long story short, the product of this has a mapped market expectation of their customer and so they’ve got way more capacity than they need. So, really basically, their scope and requirements have changed since we first announced that initial program. We’ve got a pretty good dialogue with Borg-Warner and we think there’s other areas that we’ll be able to work with them but what we wanted to just say is, look, we announced this in March of ‘07. We thought it was going to get started in late ‘07, early ‘08. It hasn’t materialized. It was modest to begin with but we just wanted to make sure that people who were looking for that is there aren’t coming in revenues in ‘08 related to that program.

Donald T. Johnson

It’s actually tied to some of the software we’re announcing and truck sales coming off the assembly line.

Gary Prestopino - Barrington Research

And then further with you’re opening your plant in Mexico. You’re going to be a lot more than manual, personnel-intensive work there?

Scott R. Peters

Two things: Initially, we’re looking at things, as you might expect, things that are a little more labor intensive and 2) that allows for longer lead times because of transportation.

Gary Prestopino - Barrington Research

And is that really just a function of some of these new business wins that you have? Are you contemplating from moving most of these labor-intensive--?

Scott R. Peters

I think it’s a case by case basis. We’re doing this with an existing customer because, like we said, we have to deliver solutions that are best in class in both quality and cost. And if you’re in a consumer electronics industry or wireless, there’s always a nice focus on cost and we’re glad that we’ve been able to convince some of customers that we’re able to do this for them.

Gary Prestopino - Barrington Research

SG&A, as a percentage of sale, looks like it’s running at about $10.6 million this quarter. Would you expect that to ramp up as we get further into the year or is that a decent range, a decent number there?

John M. Pinkerton

I believe that’s an apparently decent range.

Gary Prestopino - Barrington Research

Okay, we don’t have to get too specific but you still got a fairly wide range of guidance here. What gets you to the high end of that guidance in ‘08?

John M. Pinkerton

Really, the successful capture of some near-term business opportunities. And if the capture and implementation happens relatively quickly, then we could achieve the high end of the range. If it gets delayed a little bit, then we’ll be closer to the low end.

Donald T. Johnson

Gary, the only other thing that would help was if we got some additional strength out of existing businesses that we have already launched. And we have seen some evidence of that like in TomTom but we’re not certain if that would continue. So, we’re taking a prudent approach on the range.

Operator

(Operator Instructions) We’ll go next to Bill Dezellem, Titan Capital Management.

Bill Dezellem - Titan Capital Management

First of all, relative to the Mexico facility, you mentioned you were ramping that with an existing customer. Which customer is that?

Todd R. Peters

I’m not allowed to talk about that.

Bill Dezellem - Titan Capital Management

Shifting into Drivetrain: The win rate there you mentioned over time is in the 5-10% range and I think you also, on another segment of the call, mentioned that you have won virtually all of the business that has been awarded over the last 18 months to two years. Those two comments seem to be on nearly opposite ends of the spectrum. Can you help maybe reconcile those please?

Scott R. Peters

Yes, I think two things. I want to go back to my comments, Bill. First of all, the Drivetrain wins we said that it’s 10-20% versus, I think, you stated 5-10%.

Bill Dezellem - Titan Capital Management

My apologies. Thank you for the correction.

Scott R. Peters

And then the second thing is in my commentary is that major new programs in the last 24-30 months. And we have long lead times. And what I meant by major programs is these are new trans in the confines of understanding that when a OE launches a new transmission program, they don’t do this everyday. That it takes a while for them to get their production up. So, in late ‘05, we announced that we had won the rear-wheel drive for Ford and that in early ‘06, we announced that we had won the front-wheel drive for both GM and Ford. And in 2007, we actually installed the capital equipment to do those. So that’s why there’s a very long lead time. And now that we’ve got the capital equipment in place, now our customers are putting those transmissions in new vehicles and building the fleet, if you will, of cars in the park. And so, right now that’s been a slower goal but if we see some really good upside pressure, if you will, on the application of ‘06 be to get to more and more models. And then if you look at the model, they have to be more favorable for those types of vehicles going forward because of fuel economy. We think that helps rebuild the fleet even faster for the transmissions that we’ve already been commissioned to remanufacture.

Bill Dezellem - Titan Capital Management

And just for clarity, the winning virtually all of the wins in the last 24-30 months, that’s really, as you said, the major programs, whereas your win rate of 10-20%, there are major programs in there but then there are also some not major programs.

Todd R. Peters

Well, when we said we won nearly, maybe the qualifier has to be new. So, for instance, there was only one quote that we didn’t get. I’ll go back. We said we won front and rear for Ford on the 6-speeds. We won the front General Motors. We didn’t win the rear-wheel drive for General Motors. That went to a competitor. That’s not to say that’s all the programs. Those are the major transmission ones. There are other things where we’re bidding on business against other competitors or in-house operations that would be in our pipeline. For instance, the $9 million we won this year, some of it we won from a competitor but those aren’t necessarily new programs for new products. Those are just in our run rate revenues.

Bill Dezellem - Titan Capital Management

And then continuing with Drivetrain, the operating profit for the segment was about $3 million this quarter. Given what you have said, would it be a fair interpretation that operating profit of Drivetrain is now near or at the bottom and will bounce along at this level for a while until we get the benefit of use, the economy or the parts fleet?

Todd R. Peters

Well, we’re going to give guidance for 2009 in February but if you look at our guidance range for the year of $12-13 million and apply where we’re at year-to-date and overlay that against what we said in terms of revenue, that seems about right. That’s kind of where we’re at in our run rate basis. So, we rebuilt the revenue base and we’ll do some incremental things to adjust our cost structure.

Bill Dezellem - Titan Capital Management

And if we have been interpreting your comments correctly, there’s really not a lot of deterioration that you would expect from this point forward in the revenue base and overtime, you would expect that revenue base to build. Which again, we support the idea and we’re probably going to bump along the bottom here for now as opposed to being declined.

Todd R. Peters

Well, based on what we’ve seen as of today, that’s correct.

Bill Dezellem - Titan Capital Management

Relative to T-Mobile, would you please describe the business that you are currently doing with them and what the future potential could be with T-Mobile?

Todd R. Peters

Yes, we have a modest contract with them. As we’ve talked about this before, you’re familiar with the chart we use to lay out our customers, our contract terms, what services we provide, we do, do forward distribution services for them in the US.

Bill Dezellem - Titan Capital Management

And T-Mobile, have they indicated any interest to have discussions about additional services?

Todd R. Peters

Yes, I think all the players in the United States constantly look for ways to improve the way they deliver their products and services to the market. I think we’ve been able to show them some value. That’s why they gave us an initial contract in 2005 to test the water. I’m happy that first chance we got a renewal we got a chance to do that. I think our team is aggressively working both opportunities with our existing customers and new customers. So, you can say yes, that includes T-Mobile. We think there’s additional growth opportunities with T-Mobile.

Operator

Mr. Johnson, we have further questions remaining in the queue.

Ronald T. Johnson

Thank you very much. I want to thank each and every one of you for your time today and your questions today.

I’d like to begin by saying we’re happy to narrow our EPS range with an increase to the bottom of the range now that we have a better view to the balance of the year. As we said during our call, we are disappointed in our current Drivetrain results but their early win in Europe validating our strategy. The Honda decision for our on-going relationship and our sales op to the pipeline coupled with the 6-speed program launch in ‘07, that are expected to ramp up in the future as Todd just said, this all encourages me looking forward for Drivetrain.

On the other side of the fence, our Logistics business continues to thrive and deliver excellent growth and performance. We’re starting to see the results of our diversification efforts, with the fact that TomTom is now the company’s second largest customer and AT&T, while up year-over-year, is down to only 60% of the Q2 Logistics revenue, plus evidence that our diversification efforts are starting to pay. Our opportunities pipeline in Logistics is being reloaded and I see new business wins and continued growth in Logistics going forward.

The company’s relationships with our key customers and our essence reputation in our market translates into a bright future for ATC. The company’s management team is strong and focused on delivering the goals of our 3-year plan to continue our growth and diversification of revenue and cash flows and to improve both ROIC and shareholder value.

Our liquidity position allows us to pursue multiple initiatives at the same time to ensure we drive for shareholder value improvement. And we continue at the same time to be diligent on cost advantage and their culture of continuous improvement.

I remain very excited about the company’s future and our ability to achieve the goals of our 3-year plan. Finally, I want to take time to thank all of you who joined us today and for your continued interest in ATC Technologies Corporation. Thank you and have a good day.

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