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Modine Manufacturing Company (NYSE:MOD)

F3Q 2013 Earnings Call

February 1, 2013 09:00 am ET

Executives

Tom Burke – President & Chief Executive Officer

Mick Lucareli – Vice President, Finance & Chief Financial Officer

Kathy Powers – Vice President, Treasurer and Investor Relations

Analysts

David Leiker – Robert W Baird

[Mike Shlitski] – JP Morgan

Walt Liptak – Barrington Research

Operator

Good day, ladies and gentlemen and welcome to the F3Q 2013 Modine Manufacturing Company Earnings Conference Call. My name is Shaquana and I will be your Conference Coordinator for today. (Operator instructions.) I would now like to turn the presentation over to your host for today’s call, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Please proceed, ma’am.

Kathy Powers

Thank you, and thank you for joining us today for Modine’s F3Q 2013 Earnings Call. With me today are Modine’s President and CEO Tom Burke, and Mick Lucareli, our Vice President, Finance and Chief Financial Officer.

We will be using slides with today’s presentation. Those links are available through both the webcast link as well as a PDF file posted on the Investor Relations section of our company website at www.modine.com. Also, should you need to exit the call prior to its conclusion a replay will be available through our website beginning approximately two hours after the call concludes.

On Slide 2 is an outline for today’s call. Tom and Mick will provide comments on our F3Q results and review our F2013 guidance. At the end of the call there will be a question-and-answer session. On Slide 3 is our notice regarding forward-looking statements. I want to remind you that this call may contain forward-looking statements as outlined in today’s earnings release as well as in our company’s filings with the Securities and Exchange Commission. With that it is my pleasure to turn the call over to Tom Burke.

Tom Burke

Thank you, Kathy, and good morning everyone. As you would expect, Modine like many others was not immune to the continued weakness in our end markets. We continued to see year-over-year sales declines in the quarter in all of our segments except our commercial products group which reported a 5% increase. Conditions in our vehicular segment remain weak but we are optimistic about industry projections that our primary markets will begin to strengthen later in calendar 2013.

This year, OE manufacturers have been cautious about demand, resulting in extended shutdowns and lower order volumes. Our revenue was down 12.6% compared to the prior year, largely driven by weak end markets, delayed program launches, and unfavorable currency exchange rates.

Please note that our financial results for the quarter include $9.7 million of impairment and restructuring charges primarily related to the write down of assets in Europe as a part of our European restructuring program. Excluding these charges we reported earnings per share of $0.02, down $0.22 from a strong F3Q last year.

Mick will provide some more details on our financial results in a few minutes, but first I would like to comment briefly on our segment results. Turning to page 5, revenue was down in the North American segment primarily driven by lower sales to the off-highway customers, while sales to commercial truck customers were relatively flat year-over-year. Looking forward we expect mixed market conditions in North America for calendar 2013 with heavy truck production down while medium truck and off-highway production will be up versus calendar 2012.

Our Europe segment’s year-over-year sales remain depressed due to the wind down of the automotive module business and overall soft market conditions. The truck market remains weak and launch volumes related to the Euro-6 compliant commercial vehicles continues to be slow. We originally anticipated strong launch volumes this year given our new program awards but now believe that Euro-5 truck sales will extend well into calendar 2013, particularly given the lack of incentives to pull forward Euro-6 production.

Our planned market share growth in the European commercial vehicle market is on Euro-6 programs, so this delay has been a damper on our segment revenues. This coupled with the planned wind down of the BMW module business has negatively impacted financial results in the region. Of the $24 million decrease in sales during the quarter, approximately $12 million resulted from the BMW wind down and $5 million was related to the impact of the currency translation. Excluding these factors, sales in the region were down 5.5%.

Our calendar 2013 market outlook includes weak automotive and commercial vehicle markets, a flat construction market and some growth in agricultural equipment. We’re making good progress in our European restructuring program and will see positive results of these efforts in the fiscal new year. As I mentioned earlier, we recorded $9.7 million of impairment restructuring charges in this segment during the quarter, most of which consisted of non-cash asset impairment charges. We are in the process of consolidating our European regional headquarters and our technical center and will market the office building we are vacating to generate cash and lower our ongoing cost base.

Moving to South America on page 6, sales were lower than prior year due to the impact of the pre-buy ahead of the January, 2012, change in emissions standards in Brazil. We believe that of all of our regions the Brazilian market has the best near-term market growth prospects. We are currently anticipating strong growth in the automotive, commercial vehicle, and off-highway markets in calendar 2013 as compared to 2012. We also expect to earn incremental business with several new equipment manufacturers in the region given our ability to provide locally-produced content with proven technology.

Now, moving to Asia, our off-highway customers continued to significantly reduce excavator production levels as compared to the prior year in response to low demand and high dealer inventories. We believe that the market is relatively stable at current levels but that orders will remain weak through the first half of calendar 2013 due to excess inventory with recovery expected in the second half of the year. Our Asia region continues to focus on cost control and organizational improvements while remaining focused on our growth opportunities. We have lowered our breakeven point in the region during the past six months and believe we can reduce it further.

We are also focused on diversifying our business model for this dynamic region. In China, we concentrated our business around the heavy construction market, particularly excavators, and have suffered from the impact of the significant decline in this market. We are now aggressively diversifying our business based upon market needs and Modine’s core capabilities.

For example and as we have previously mentioned, we are near completion of the installation of our aluminum oil cooler production lines in our Shanghai facility. We are now in the process of launching many new programs with several key customers. The popularity of small displacement turbocharge engines in the automotive market is proving to be a significant growth opportunity in China.

Turning to page 7, sales in our commercial products segment were up 5.1% driven by increased orders of chillers in the UK. This increase was anticipated as pent up demand was created by project delays resulting primarily from the London Olympics and the UK recession. We see a continuing backlog of new projects well into calendar 2013.

In North America, our heating and cooling sales were down slightly from the prior year, resulting from a slowdown in our heating market over the past few months. Year-over-year sales were up through October but unusually warm weather caused November and December sales to decline. In addition, we have fully transferred production of our recently acquired Geofinity ground-source heat pump product line from Canada into our US facility, completing the transition well ahead of schedule.

We’ve added new reps and distributors in key territories that will help to grow our presence in this new and rapidly growing market. An important driver of sales for this market is a well-trained sales force. We have therefore recently forged a relationship with a local technical college to provide ongoing training to improve the capability level of our distribution channels to ensure we accelerate sales growth and exceed our customers’ expectations.

We just returned from the annual Air Conditioning, Heating and Refrigeration Show in Dallas where we were able to show these new products along with other important introductions in our commercial product group. This includes the launch of additional high-efficiency unit heater models, state of the art school air conditioning products, and an important expansion to our packaged rooftop ventilation product line which is scheduled to launch early next fiscal year. The response to these products was excellent and I am very excited about the growth potential they will bring to the CPG segment.

And with that I’d like to turn it over to Mick for a full overview of our financial performance and guidance.

Mick Lucareli

Good morning, everybody. Please turn to Slide 8 and I’ll walk through the income statement. As Tom already mentioned, during the quarter ongoing weakness in our end markets combined with the BMW wind down and delayed truck launches led to lower year-over-year revenue. Also foreign exchange continues to challenge our year-over-year comparisons. Excluding the foreign currency impact sales decreased $38 million or 10%.

All of our vehicular segments experienced down revenue. Automotive sales were down 17% largely due to the BMW wind down. Also our commercial vehicle and off-highway sales were down 18% and 19% respectively. But on a positive note we were able to limit our gross margin downside conversion to approximately 25%.

Obviously we remain very focused on cost control in this environment. SG&A increased by $1.6 million but the prior year benefitted from the reversal of a $2.3 million trade compliance accrual, so excluding that impact SG&A spending would have actually been down versus the prior year.

I’d like to point out that we recorded $9.7 million in impairment and restructuring charges during the quarter relating to our European restructuring activities. The combined impact on EPS was $0.21, so excluding impairment and restructuring charges EPS was $0.02 during the quarter.

Turning to Slide 9 we have a summary table that highlights the main restructuring costs incurred so far this year, and as you know we are in the process of restructuring the European segment to match our strategic interest and cost requirements. In the F3Q column you see $1.4 million of cash restructuring and $8.3 million of non-cash impairments.

During the quarter we made the decision to accelerate the sale of a portion of our European headquarters which led to an impairment. The $1.4 million of cash restructuring charges relates primarily to headcount reductions. The actions taken so far will result in future economic benefits through lower SG&A and lower fixed overhead costs plus a lower asset base. In fact, we expect to see meaningful benefits of this program next fiscal year.

Moving on to Slide 10, let’s take a quick look at the balance sheet and cash flows. Despite the volume challenges F3Q free cash flow was slightly positive at roughly $2 million, and in the first nine months of F2013 we generated $8 million of free cash flow which is a $35 million improvement over the prior year. This was driven by a significant improvement in our operating cash flow during the first nine months which improved by $23 million. Capital spending will pick up in F4Q with an overall year target of $50 million to $55 million which is still running well below our historical levels, and our balance sheet is stable with net debt to capital at 30% and $33 million of cash on hand.

Moving on to Slide 11 let’s take a closer look at North America where F3Q sales were down 8%. Overall our sales were in line with the decline in our end markets. Nearly half of the decline related to the off-highway market where we experienced a slowdown in orders during the quarter. Despite the volume decline our gross margin actually held up relatively well, and as I mentioned a moment ago, in the prior year we reversed the $2.3 million reserve related to a trade compliance issue that was successfully resolved. Excluding this impact operating income would have been relatively flat.

As you can see in the upper-right section of the slide we are introducing our calendar 2013 market outlook in all targeted markets, and I do want to point out that we’re in the middle of our planning process and we will provide specific guidance as it relates to Modine during our F4Q communications. But for North America we anticipate the Class 8 market will decline 8% to 12%. The first half will have difficult comparables and then improve through the year. We expect the medium duty market will be flat to slightly up, really continuing some of the momentum built this past year; and in the off-highway space our agriculture and construction market forecasts range from flat to modest growth next year.

Moving on to Slide 12 we have our European business. F3Q sales were down 17% from prior year including the negative impact of foreign currency. On a constant currency basis sales would have been down 14%. Also approximately half the decline or $12 million was the impact of the BMW wind down. Weakness and uncertainty in the commercial vehicle market is also impacting our revenue in Europe. We have experienced delays in launch activity as our customers adjust production in response to declining end market demand and a lack of incentives to pull forward Euro-6 production.

The gross margin decline was due to the lower volume and costs related to new program launches. On a positive side, SG&A declined by $1.6 million due to costs control and some early impacts of our restructuring actions. Looking ahead at our calendar 2013 market outlook, we anticipate the continuation of weak markets for autos and commercial vehicles. The off-highway market looks slightly more favorable with a range of flat to modest single digit growth, and we also anticipate a €13 million reduction in BMW module sales next fiscal year. However, this is becoming much more manageable for us after absorbing approximately €38 million in reductions this fiscal year.

So now turning to Slide 13 we have our South American business segment. Sales declined as we continued to see the impact of the pre-buy of commercial vehicles ahead of the January 2012 change in emissions standards. In addition the weakening of the Brazilian Real accounted for nearly half of the sales decline. On a constant currency basis, sales would have been down 14% rather than the 25% as we reported.

The gross margin declined 110 basis points on lower sales volumes but we continue to see sequential improvement through the year. Operating income declined $1.4 million as a result of the lower sales volume which was partially offset with cost reductions. We anticipate that year-over-year volumes will start to improve in the next quarter, and as for calendar 2013 we see volumes in the commercial vehicle market improving steadily throughout the year, increasing in the range of 8% to 12%. And we anticipate improvement in agricultural equipment and the aftermarket businesses. Our outlook now shows volumes increasing by approximately 5% in both markets.

Turning now to Slide 14 and the Asia business segment, F3Q sales were down 37% from the prior year as order rates in the China excavator market continued to be impacted by low demand and high inventory levels. Margins were down primarily as a result of lower sales volumes and at current volumes, the segment is operating at low capacity utilization levels. But we have a solid book of business and the leadership team is working hard to lower the fixed cost structure.

There have been some recent indications of market improvement in China but we are not seeing any material improvement yet, which is partly the result of excess OE inventory levels. We estimate that we have one to two quarters remaining with difficult year-over-year excavator market comparisons. In reviewing our calendar 2013 market outlook we see the China excavator market stabilizing but not showing meaningful improvement until the second half of the year. A new program launching in India should result in moderate year-over-year growth in the commercial vehicle [segment]. We expect to resume our revenue growth in Asia next year.

So flipping to Slide 15 we have our commercial products group. F3Q sales were up 5% from the prior year driven by higher sales in the UK chiller markets. As Tom mentioned North American heating sales were down slightly from the prior year due to the moderate early winter conditions. Despite the higher sales our gross margin declined about 140 basis points. This was due to the higher sales mix of chillers which are very profitable but have relatively lower gross margins.

SG&A increased $1.2 million from the prior year due to the integration costs of the recently acquired Geofinity business and other product development spending. And as we look in calendar 2013 we are forecasting 2% to 4% market growth for our North American building products, H-VAC products. With regards to the UK chiller market we currently expect an increase of 2% to 5%.

Let’s turn now to our F2013 guidance on Slide 16. Obviously end market volumes remain our single largest challenge. With less than one quarter to go we are affirming our EPS guidance but lowering the upper end of the range. Projected revenue will be down 10% to 12% and clearly much closer to the 12% end. Operating income margin excluding impairment and restructuring expense is expected to be in the range of 2.75% to 3.25%, and EPS is expected to be in the range of $0.40 to $0.45 also excluding all impairment and restructuring charges.

This implies a much stronger F4Q which is driven mostly by the higher number of production days in North America, South America and Europe. We will continue to provide summaries of our European restructuring expenses and progress on the execution of our plan. Given the economic conditions we are focusing on the rapid completion of this program and early indications are that our end market trends will be mixed in calendar 2013. Like most companies in our space we are anticipating some market improvement as we move through the year.

In addition, we expect to benefit from new program launches and early results of our European restructuring activities. So we will be back next quarter with a more definitive outlook and our guidance for our new fiscal year. With that, Tom, I’ll turn it back to you.

Tom Burke

Thanks, Mick. If you turn to page 17, as we’ve discussed Modine has been battling numerous headwinds that are impacting our business including weak conditions in all of our major markets; the planned wind down of the automotive module business, particularly in Europe; and the impact of the stronger US dollar on our revenues and earnings. However, as we look forward into calendar 2013 we expect the near-term conditions to remain relatively stable with slow recovery in some markets.

Even though this has been a very challenging year for us I am very pleased with how our teams have responded to these conditions that are largely out of our control. We continue to focus on what we can control. We are managing our costs in a responsible manner. We’re on track implementing our European restructuring program. We also managed to generate free cash flow for the first nine months of our fiscal year despite these challenges.

This is a clear testament to the effectiveness of the restructuring actions we have taken in the past and also clear evidence that our focus on return on capital employed and cash generation is working. These actions are setting Modine up for profitable and sustainable sales growth. With that we’d like to take your questions.

Question-and-Answer Session

Operator

(Operator instructions.) Your first question comes from the line of David Leiker representing Robert W Baird. Please proceed.

David Leiker – Robert W Baird

Good morning, everyone. It’s good to see the numbers you’re able to put up in these challenging environments. I know it’s tough for you but it looks like under the surface you’re doing well on everything. With that comment, Tom, I want to start with if you take the end markets off the table, what are the biggest challenges you’re facing right now?

Tom Burke

End markets are off the table, clearly the European team is facing the restructuring challenges and just doing a great job I’ll say. But it’s a very deliberate, engaging process to make the steps that we’re taking in Europe and I’m very pleased with how all parties are coming together, working on that. We’re making steady progress and my confidence is high but we still have a ways to go as you know.

I’d say the second issue is clearly Asia. Asia has, from where we were a year and a half ago kind of planning on the bubble I guess you’d call it, we’ve had to revamp and take some different approaches quickly and we’ve got the right leadership and the team coming together over there – a lot of good focus on as we said, how to do that combination of lowering your fixed costs while also keeping that focus on growth.

So that’s a challenge because as you know, the opportunities are there but you’re handling in a down market that we’ve been facing on the construction side. So it’s juggling both those balls at the same time but I feel very good with how we’re focused on that and again, this oil cooler opportunity has really come along strongly. We’ve definitely found a good place to focus on that.

David Leiker – Robert W Baird

And then as a follow-up on Asia, a year and a half ago, two years ago when you were talking about Asia being breakeven with $100 million in revenue – it looks like you’ve lowered that breakeven level. Where do you think that is today?

Tom Burke

Yeah, we’re probably 10% down from where we were and we’d like to get a little bit more than that. We can’t fix it by lowering our costs but we can definitely kind of manage the bleeding if you will. But clearly how we’re doing that is looking at maybe bringing back some expats that can help that cost base and bringing on some more local talent as far as business development, looking for a diversification plan that we need to make over there significantly. So I feel we’ve got the right things in place but it’s going to take another year, year and a half to get us to the point where we’re kind of breaking even again.

David Leiker – Robert W Baird

And is that a business today, that if you get those end markets to normalize… I think at one point we were talking about doubling the revenue over four years or something. Is there any context you can put that in for us today?

Tom Burke

Well, we still plan on hitting those targets that are out there. I think it’s obviously been delayed a little bit. We’ve got the footprint we want, we’ve got the plants, we’ve got the products. We need to add another product or two to that region as part of this diversification plan but the talent, leadership and footprint is where we need it. And if you look at India, again it’s the same story – the right products going into the right markets and we just need a market recovery. So it’s a little bit of a waiting game so you have to manage that well.

David Leiker – Robert W Baird

Okay, and then lastly Mick, on the guidance here it implies a F4Q number that’s not quite doubling the year-to-date numbers but it’s close. And I understand there are more build days but in the environment of what we’re hearing from a lot of folks about this first calendar quarter it just seems like a stretch to get there. Can you help flesh that out a little bit?

Mick Lucareli

Yeah, you know, good question. We knew it would come and we challenged ourselves throughout the forecasting process. Year-to-date adjusting for all the restructuring items we’re about at a $0.22 EPS so that’s clearly implying an $0.18-type F4Q. We look hard as I mentioned in the script, David, at the amount of sales per production day, and the biggest thing we have going in our favor is our OE businesses, and the biggest piece of the entire company – North America and Europe – we’re really looking at our F4Q at a constant sales production day.

Could we have a surprise from maybe an unknown, unannounced customer shutdown? We could, but we feel good about that number and we certainly wouldn’t put it out if we didn’t believe we could hit that estimate. Also last year we had a lot of things going in our favor but we had a similar trend last year, and even F4Q a year ago was a $0.33-type quarter. So really that’s what it’s banking on – North America, Europe, and Asia hitting the revenues side.

David Leiker – Robert W Baird

Yeah, on the revenue side of that line last year your revenues were up call it $15 million; this year you’re looking at a $65 million increase. When you look at that revenue per production day being flat is that sequentially or is that versus last year?

Mick Lucareli

No, that’s sequentially.

David Leiker – Robert W Baird

Sequentially, well yeah, that sounds reasonable. Okay thanks, I’ll let some other folks go. Thanks.

Operator

Your next question comes from the line of Ann Duignan representing JP Morgan. Please proceed.

[Mike Shlitski] – JP Morgan

Hi there, it’s [Mike Shlitski] filling in for Ann, good morning. Hey, I wanted to start off with a question about your North America commercial truck business. You mentioned it was flat in the quarter but the industry was actually down like 20% or more during the quarter. So I wanted to see if you had any big successes during the quarter or was it a kind of timing issue?

Mick Lucareli

Mike, your question is about North America, right?

[Mike Shlitski] – JP Morgan

Yes sir.

Mick Lucareli

Yeah, we’ve been talking a little bit about the shift in Modine in the last year in North America. Right now we’ve become much more of a balanced business between mediums and heavies, so heavies – everyone was following heavies closely and they clearly got pounded in the December quarter, I think down about 23%. Mediums were up about, depending on who you talk to up about 18%, so I think what you’re seeing from us actually in this quarter it worked a little bit in our favor. I think earlier in the year people were asking us where the sales were because Class 8’s were doing so well on a year-over-year. So I think the short answer to your question is what you’re seeing is a balance – we were actually up in mediums and we were down in heavies.

[Mike Shlitski] – JP Morgan

Great, and I guess that does bring up my follow-up question to that, about when you were doing your outlook for 2013 I’m kind of wondering if you can tell us what content trucks are driving that in that segment in 2013 in North America? Is it vocational or…

Tom Burke

Well, we have Class 8’s in 2013 as Mick said being down somewhere between 8% and 12% is our outlook for this year, and again, the mediums are flat to up. So the mix is again a little bit more favorable in the mediums. I think as far as the balance it’s going to be kind of a lower frontend and a stronger backend, so and it’s definitely very customer-dependent. So that’s the other key thing. We have some customers that are strengthening market share and maybe some others that are dropping as well, so you balance that together is how we get to our outlook of 8% to 12%.

[Mike Shlitski] – JP Morgan

Okay. Then switching over briefly to Europe, you guys mentioned down 5% to 10% - that’s probably a bit lower than some folks out there have been predicting for the market. I just wanted to clarify, this sounds like then what you’re saying it’s down 5% to 10% for the industry without any kind of pre-buy or full forward. I wanted to kind of delineate between pre-buy and pull forward with you guys. Is this a pure number basically?

Mick Lucareli

Yeah, great question and I’ll tell you as I mentioned also, we are in the middle of our planning process and this commercial vehicle market continues to move. So what we had talked about on the slide is really using third-party data, probably the same data all of you use, and a couple of weeks ago that was flat to modestly up; and most recently consensus, if that’s what you’d call it, is saying more of a decline in commercial vehicles. But I would say people that we follow are everything from down a little bit to up a little bit.

With that said, I’d maybe let Tom comment because clearly what’s going on in here between the market being down is this what’s the mix of sales going to be between Euro-5 vehicles and Euro-6, because frankly our business is going to grow as Euro-6 launches. Tom, maybe you can talk about the mix.

Tom Burke

Yeah, clearly with the market dynamics that are going on and the slowdown in the economy, the Euro-6 introductions have come on much more slowly than we had planned. As a matter of fact as I mentioned in my earlier comments, the Euro-5 compliant vehicles sales will extend well into calendar 2013. We’re anticipating a maybe two thirds/one third mix or Euro-5 to Euro-6 going into calendar ’13. So we have a mix issue that’s on top of this normal market dynamic that’s happening.

[Mike Shlitski] – JP Morgan

Great. If I may just squeeze in one more about your cost control efforts. Can you maybe just tell us a little about what the scale and scope of that might be, when we could start seeing some benefits from that that are large? And then what’s a good sort of SG&A run rate going forward given some of your efforts there?

Mick Lucareli

Are you talking about in Europe?

[Mike Shlitski] – JP Morgan

Actually overall. You guys had mentioned you were going to control costs in a responsible manner. Just wondering if I could get some more detail on that, that’s all.

Mick Lucareli

Yeah, you’ve got a lot of questions there built in but it’s a good one. I will tell you that it’s at every level of the company and if the full management team were in the room here they’d agree. We managed to the level of travel and entertainment and you name it, and in the year we’ve been in we’re managing at a very small level of spending. So it’s everything from headcount to new growth initiatives to just kind of daily costs.

Clearly what we’re trying to do and we tried to communicate to you is we’re trying to protect the future growth. We’re hiring where we need to hire; we are investing in new engineering products and our R&D, but everywhere where we’ve got discretionary costs we have a serious discussion about it. This year we’ll clearly finish, if you look at our run rate at the kind of $42 million, $43 million mark. We’re going to finish this year well below last year in SG&A.

I would say as we go forward, absent a Europe which we would expect to see some cost reductions coming out of all the actions we’ve taken, Modine globally would resume probably a more normal growth rate or increase, maybe call it inflation-type growth in SG&A, meaning we’ve taken out and squeezed everywhere we can but we’ll probably need to get back to more normal levels of inflation for salaries and benefits. Tom, did you want to add anything?

Tom Burke

No, I think you said that perfectly, Mick. I think the example we’re trying to balance when we say “responsible” is contain costs but don’t take the focus off growth. And I think the Asia team is a classic example of that where we’ve kind of gotten to the phase where we have a stable operation on the ground. Bringing back expats have helped develop that and bringing in maybe local new business development talent that can help us grow across the Asia region. So we’re not just controlling costs but making sure that we keep our eye on the future as well.

[Mike Shlitski] – JP Morgan

Alright guys, thanks so much. I’ll hop back in line.

Operator

(Operator instructions.) Your next question comes from the line of Walt Liptak representing Barrington Research. Please proceed.

Walt Liptak – Barrington Research

Hi, thanks, good morning everyone. I hope you don’t mind if we go back to the F4Q guidance because it is a pretty big revenue delta going from F3Q to F4Q. I’m coming up with about $40 million, $45 million of higher sales in F4Q. So I understand the comment about the production day but are you saying that in January your production or sales per day is tracking to get you to that higher revenue level?

Mick Lucareli

Yeah, as we sit today and we are coming at the end of January, we are tracking to the guidance we’re giving you and we’ve been tracking this month to this F4Q. So that’s why we said with really less than a quarter to go. Still you guys are right to ask – there’s a lot going on out there in the market. We were probably more concerned, Tom, about what would happen after the holidays coming back in January. That has held up pretty well. But it’s basically we get hit pretty hard in North America with Thanksgiving and Christmas and then in Europe the extended Christmas shutdowns. Those two segments alone have an additional significant number of production days in our F4Q.

Also in there, since it’s such a focus for the analysts here, there is some tooling sales that we have in F4Q that I don’t have the exact numbers with me but could account to $5 million to $10 million of that increase. As a reminder that is production tooling that we buy and validate on behalf of our customers, and then when it’s validated we sell those tools to the customers. It flows through the sales and gross profit line in that manner.

Walt Liptak – Barrington Research

Okay. Are those tools sales related to the new products?

Mick Lucareli

Yeah, and our biggest piece of that frankly would be in Europe relating to all of the truck program launches.

Walt Liptak – Barrington Research

Okay. Are margins pretty good at that tooling or do you sell it at cost?

Mick Lucareli

No, I mean it depends on the program but the customers are very good at managing that tightly.

Walt Liptak – Barrington Research

Okay. And I wanted to go back to the Euro-6 and just make sure I understand this, that your products are geared towards Euro-6 and so if there is a pre-buy and continued higher sales of Euro-5 that these new product launches push out.

Tom Burke

That’s exactly right. To quantify it, we had a 10% to 12% market share in the commercial truck market going into the Euro-6 transition, and with the technology we brought into capture more market share that came in with the opportunity of Euro-6 compliant engines. With the way that the dynamics are working in the market, Euro-5 sales, January 1, 2014 is the key date for compliance.

So Euro-5 production is going well into the current calendar year, and as I said the mix that we’re sending up is there’s higher demand for Euro-5 than there is Euro-6. So our market share is going to be delayed at getting up to that approaching 50% level that we’ve been discussing in previous calls until later in the year. But it’s been a slow ride which is impacting our revenue obviously as that delay occurs.

Walt Liptak – Barrington Research

Okay. Is there also a transition inventory that the companies are allowed to build with Euro-5?

Tom Burke

I’m not sure. I’ve not heard of that, Walt. I think part of this why they did not have an incentive to pull things forward is to let a natural transition in the marketplace occur. So I don’t think that’s as planned out in that manner so I think we’ll have a more normal run rate going into this transition.

Walt Liptak – Barrington Research

Okay. And just one last one on those market outlook boxes that you’ve got, just to clarify: these are kind of a macro or whatever industrial service you use to track those end markets. This is not based on your customer outlook or your individual expected production for 2013 calendar year?

Mick Lucareli

Yeah, good clarification, Walt. We use independent third-party data and then we use that to feed our planning process. So right now it’s a fairly high-level look on where we see the end markets, you’re right in that; and also frankly Modine can be both better and worse than the market outlook depending on, as Tom pointed out in one case we’re not with every truck customer so sometimes it depends on which customers we’re with.

Also in the case of like agricultural and construction equipment, we tend to be on certain platforms – for example, in agricultural we tend to be much bigger on the higher combine kind of size. So a lot of times this data is a little bit general and that’s why I wanted to point out we’ll give you a lot more specifics next quarter as it relates to Modine.

Walt Liptak – Barrington Research

Okay, thanks guys.

Operator

You have a follow-up question from the line of David Leiker representing Robert W Baird. Please proceed.

David Leiker – Robert W Baird

Yeah, just a couple of things to follow up on. Not to belabor this Euro-6 thing but I just wanted to try and sketch out a couple of details. Are you shipping, I know there are fewer truck makers with Euro-6 trucks in the market today – are you shipping any Euro-6 product today?

Tom Burke

Yes, we are shipping Euro-6 product at a much lower than anticipated production rate.

David Leiker – Robert W Baird

And so do you see this choppiness in the European production, is that impacting the Euro-5 stuff you’re not on or is that impacting some of your Euro-6 product?

Tom Burke

That is having more of an impact on Euro-6 product. We had a very small exposure to Euro-5 as far as components and systems, so there’s some impact there but the upside on that is because our exposure is low it’s not having much of a bottom line impact.

David Leiker – Robert W Baird

So what do you anticipate right now from your customers on the timeline of when you’re going to begin shipping Euro-6 product? Is that a calendar Q3 event or is that calendar Q4?

Tom Burke

Well, it’s ramping up in both cases. It’s just a matter of getting that launch curve ramped up and so we’re staying very close with customer projections. And I really don’t have a timeline of when it hits full run rate but it’s definitely a slower launch curve than they projected to us early in the game. As you know with any launch curve it’s subject to a lot of factors, supply base being one of them which we’re in good shape; but also market receptivity. And what we’re seeing is our customers having a much bigger headwind on staying with Euro-5 vehicles before jumping to Euro-6.

David Leiker – Robert W Baird

Absolutely. So you’re essentially getting a double whammy now because you’re producing and so those costs are running through your P&L but the revenue’s not there. So not only did your revenue get pushed out but the cost of the launch is higher than what you had expected – is that right?

Mick Lucareli

Yeah David, this is Mick. I was just going to jump in to add that comment, and those that have followed us for a while know this journey started with deemphasizing some of the module business in automotive and replacing it with truck where we had a very small share. So we’ve invested a large amount of capital because of the requirements of the manufacturing process and frankly, making sure we put everything in the right locations. But we’ve invested a significant amount of assets to produce at a large, 40% of the truck market in Europe.

So you’re right – as the auto has winded down and they’ve delayed the Euro-6 we not only have the volume impact but now we’ve got that excess capacity that we need to fill. And when we give you guidance next quarter we’ll spend a little time to help you out. We’ll talk a little bit about how Europe is flowing through the year because I know that’ll be a critical assumption for us as well as all of you, of how Euro-6 launch activity ramps up.

David Leiker – Robert W Baird

Okay, and then on the wind down of the legacy business, it seems like you’re managing the cost side of that pretty well. Is that a fair observation?

Mick Lucareli

Yes, absolutely. The team over in Europe gets kudos for that. It’s very difficult. The last three years have probably been oh, €50 million to €75 million. We knew at the beginning of this journey it was going to be €100 million plus and we’ve managed down the assembly operations very well and also the plants that supply each of those components have been very well managed.

David Leiker – Robert W Baird

Great, and then just two last things here: Tom, after all of these changes that have gone on with Navistar and Cummins and the 15 liter internally sourced going away, at the end of the day there was an opportunity for you to pick up some new business. Can you talk of anything that’s come to light on that?

Tom Burke

Well, as a policy we don’t obviously announce what wins or opportunities that are out there, but we feel very confident with the relationship with Navistar. We’re engaged closely with them to help them through this transition any way we can and clearly with that, that brings opportunities that we’re positive on.

David Leiker – Robert W Baird

Okay, and then I guess the last thing: as we look at, we haven’t talked in a bit about new business wins and I’m guessing on your call next quarter you’ll talk about that a little bit, but can you give us any sense of what the new business activity is in terms of opportunities to quote for new business, your win rate and things like that as we look out at 2014/2015-type business?

Tom Burke

Yeah, I think it’d be a great subject to go into more detail in our year-end call, but clearly we’re happy with our pursuits. We’ve focused down on our product portfolio over the last several years to where we have that right to win as we talked about, and so the pursuits in all those areas are on target. Our win rate percentages are where we expect and so we’re feeling very positive about that, and clearly our diversification focus in Asia is going to bring the strength of that whole approach to bear within that Asia region as well – not to also miss pointing out that the CPG business which has been a big priority for us is a very strong focus.

And as I mentioned in my comments we just came back from Dallas earlier this week and spent a couple days on the stand down there with our new products – our Geofinity and our new rooftop and additional heating and schoolroom products, and we’re very pleased with what the attention is on that. We’re starting to get a lot of looks, a lot of quotes and we’re looking to get a high hit rate on those products as well.

David Leiker – Robert W Baird

Okay, great. Thank you very much.

Operator

I would now like to turn the presentation back over to Ms. Kathy Powers for closing remarks.

Kathy Powers

Thank you. This concludes today’s call. Thank you for joining us this morning and thanks for your interest in Modine. Good-bye.

Operator

Thank you for your participation in today’s call. This concludes the presentation. You may now disconnect and have a great day.

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