Modine Manufacturing F3Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Modine Manufacturing (MOD)

Modine Manufacturing Company (NYSE:MOD)

F3Q09 (Qtr End 12/31/08) Earnings Call

February 17, 2009 11:00 AM ET


Susan H. Fisher - Director of Investor Relations and Corporate Communications

Thomas A. Burke - President, Chief Executive Officer and Chief Technology Officer

Bradley C. Richardson - Executive Vice President, Corporate Strategy and Chief Financial Officer


Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Keith R. Schicker - Robert W. Baird


Good day, ladies and gentlemen and welcome to the Modine Third Quarter Fiscal 2009 Earnings Conference Call. My name is Jamali and I'll be your operator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference has been recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Susan Fisher, Director of Investor Relations and Corporate Communications. Please proceed.

Susan H. Fisher

Thank you, Jamali and good morning everyone. Thanks for joining us today for Modine's third quarter fiscal 2009 earnings call. With me today are Modine's President and Chief Executive Officer, Tom Burke; and our Executive Vice President, Corporate Strategy, and Chief Financial Officer, Brad Richardson.

Tom will lead us off today with opening remarks and his perspective on the business amidst challenging economic and market conditions. Brad will follow with a review of our financial performance and an update on our liquidity including the recently amended credit agreement. Finally Tom will wrap up with comments on our business strategy and specific actions we're taking to strengthen our business. We will then be happy to take your questions.

We will be using slides for today's presentation. Those slides are available through both the webcast link as well as a PDF file posted on our Investor Relations section of our company website.

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.

Before we begin, I would remind you that this today 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.

And with that, I'll turn over this call to Tom Burke. Tom?

Thomas A. Burke

Thank you, Susan. Clearly the world has changed substantially since our last quarterly earnings call. During a period of heavy restructuring and launching within Modine, our business, like most within our industry segment, has felt the full impact and the severity of the credit market crisis and resulting global economic recession, which has fueled both macroeconomic and end-market uncertainty. Within this environment, our third quarter results were clearly a disappointment, which created a default in our past credit agreement resulting in a precipitous drop in our stock price. Brad will review those results in detail with you in just a few minutes.

I do think it's very important to note that in spite of these adverse operating conditions, Modine's year-to-date operating cash flows were strong, up nearly $20 million versus same period a year ago. Further, our debt has decreased by more than $5 million over this period, reflecting strong cash flows and our commitment to reduce our overall debt in the current market environment.

I assure you that more Modine is not standing idly by but rather we've been taking and will continue to take aggressive actions to respond to the changing market demands. As we do so, we're supported by newly amended credit agreements. These amendments have been based on our assumptions about operating and a recessionary environment. We believe the agreements as amended will provide Modine sufficient liquidity to execute our restructuring plans and maintain our day to day business.

Let me make this clear. Contrary to published reports bankruptcy has not been contemplated and the amendment process as approved gives the company the ability to operate during this deep recessionary environment. As we take a number of difficult actions we are also actively re-focusing our product and technology portfolio to protect and leverage our core thermal management expertise.

We are encouraged with the many new programs wins across all regions and market segments. We believe the combination of near term focus on preserving cash and liquidity, while focusing on the right product processes and technology for the future, solidly positions Modine to weather this procession and emerge on the other side of it as a stronger leader, a leading thermal management innovator.

With that, I would like to turn over to Brad to give you a full assessment of our financials.

Bradley C. Richardson

Good morning everyone and thank you Tom.

Slide five shows the outline that I would like to follow for the financial section of the presentation, starting with the third quarter highlights, focusing in on our segment performance, our cash flow as Tom referenced, our liquidity update and then follow that up with a market outlook.

So, turning to slide six; and as Tom pointed out, it is very clear that the global economic slowdown, but in particular, the precipitous fall in Europe has had profound impact on Modine. The economic slowdown hit Modine right at a point when the company was under going significant restructuring and cash burn, associated with that restructuring, which was necessary to permit us to achieve scale in our manufacturing operations and refocus the product portfolio that Tom will speak to.

As you can note, walking down the P&L Modine's net sales declined by $115 million or 25%. Excluding the impact of foreign currency translation, the sales were down 73 million or about 15%. The gross profit declined by nearly $28 million and the gross profit as a percent of sales was 11.5%, driven by the impact of fixed cost absorption and a negative product mix in Europe.

The company recorded $27 million in repositioning and restructuring charges and $27 million in impairment charges. The SG&A expenses, largely within our control, declined by $14 million and will decline further as the impact of staff reductions globally that are being taken right now will begin to flow through in terms of lower SG&A expenses.

The overall impact of these factors resulted in a pretax loss of $63.6 million and a negative EBITDA of $42.3 million. Despite these negative results, the company has generated relatively strong cash flow from operations of $80 million and has actually reduced net debt over the period.

The objective of slide seven is to show you the underlying results of the company, excluding the unusual items. In the quarter, Modine recorded $27 million in restructuring related cost associated with staff reductions here in the Racine headquarters and costs associated with significant reductions that are planned in the European headquarters and manufacturing operations.

Further, we recorded impairments in Europe, including the complete write-off of the goodwill and certain fixed assets write-downs on manufacturing plant assets. We also took impairment charges here in North America, associated with one of our facilities that is focused on the North American automotive market. In aggregate, the impairment charges were $27 million.

Adjusting for these factors plus, excluding the one time gain on the sale of the last corporate aircraft and foreign exchange loses, the company's core underlying results were a pretax loss of $10 million and positive EBITDA of about $11 million.

A similar adjustments schedule is shown for the prior year's third quarter. Comparing the adjusted results for the two quarter presented, Modine's adjusted pretax profits and EBITDA are down about $20 million, again on a $115 million drop in sales, or about an 18% downside conversion as the variable profit decline was offset by manufacturing and SG&A reduction.

Turning to slide eight, the left side of the table shows the change in sales by segment, on an absolute basis and without the adverse impact of foreign exchange driven by the strengthening of the U.S dollar, vis-à-vis the currencies in Europe, South America and South Korea. Most notable is the decline in sales out of Europe, resulting from significantly lower automotive volumes and lower commercial truck build rates.

In the European automotive market, we are heavily dependent upon BMW. Shipments of modules to BMW's were down 36% in the third quarter versus the comparable prior year quarter. I would also draw your attention to the fuel cell revenue lines, which reflected the agreement to license certain fuel cell technology to Bloom Energy.

From a segment operating income standpoint, the far right column shows the change in profit ability, again by segment, excluding the impact of foreign exchange and other unusual items. The driver of the decline in operating income was Modine Europe.

If you look at the change in profitability for Europe of 28.6 million relative to the decline in revenue of $65 million, the downside conversion is nearly 45%, which is clearly unacceptable. Tom will speak to our plan to aggressively take costs out of the Europe organization, both at the SG&A level and the manufacturing operations.

On the positive side, we continue to have very solid performance out of South America and commercial products. And I would also note we've seen a stabilization of the North American original equipment business, albeit there is still a long ways to go to return this business to historical profit levels.

On slide nine, you can see the cash generation from the business during the first nine months of this fiscal year. As Tom mentioned there has been a lot of speculation and misinformation communicated about the company's liquidity situation which is unfortunate given that the 12b-25 SEC form filed last week, incorporated the critical elements regarding the company's cash position and status of our amendment process.

As shown on the table, despite the losses the company has generated approximately $80 million in cash flow from operations, largely due to significant effort to free cash up from working capital. $61 million of the cash flow was reinvested in the business, leaving free cash flow of $19 million. We ended the quarter with $73 million in cash, the highest level in several years.

There is no doubt that the cash flow from operations is going to come under pressure as the economy remains depressed and the progress on working capital becomes more challenging. Therefore, it is critical that the company have has access to liquidity to ensure that we can carry out the funding of our restructuring activities and run the company on a day-to-day basis.

On the next two slides I will give you an update on the amendments that have been undertaken to ensure the company has access to liquidity.

Slide 10 shows the pre-amendment covenant and debt structure for the corporation. Under the three primary debt instruments with the company the $175 million revolving credit facility and private placement notes Modine was required to maintain a debt-to-EBITDA of less then three and than EBIT-to-interest coverage ratio of greater then 1.75. Given the adverse performance of the economy and its impact on the company, we tripped both of these covenants at December 31, 2008. The defaults under these covenants were waived and new covenants were put in place with the amendment to the primary debt instruments with the company. To be clear, at no time did Modine missed a principal or interest payment.

As identified on slide 11, we're very pleased that the company has secured amendments to give us the borrowing capability to maneuver through a deep recessionary period. As of December 31 with waiver the total available to borrow on existing lines was approximately $104 million. Through this amendment process, we've obtained the specific ability to borrow additional money in Europe of €35 million, and the ability to put $10 million in incremental borrowing capacity in place to fund the global operation for the company. With the amendments in place we have approximately $150 million in borrowing capacity, which we expect is more then sufficient.

The borrowing requires the company maintains certain levels of minimum EBITDA on a cumulative basis as shown on the schedule. Based on our internal forecast of how the company is going to perform, even with the significant tract... contraction in the market place, at each quarter end, we estimate that we've between 10 and 20 million of cumulative cushion in comparison to the minimum levels of EBITDA as shown on the slide.

Obviously, the access to this credit comes at a price, with the interest rate stepping up in accordance with the schedules shown on the table. We've also agreed to certain additional terms, including the suspension of our dividend and moving from an unsecured to a secured facility with security being pledged on certain worldwide assets.

Further, we've agreed to minimize, the cash balances of the company and reduce our capital spending to $65 million in fiscal 2010. We incurred approximately 3.1 million in upfront fees to consummate the amendment.

In summary, we believe that the company has sufficient cushion in its forecast to stay in compliance with the minimum level of EBITDA in order to ensure access to sufficient credit during the recessionary period.

Turning to slide twelve, with the current volatility in the global economy and the impact on the market that Modine serves we're withdrawing our fiscal 2009 guidance and do not plan at this point to provide guidance on our fiscal 2010, which starts April 1.

However, I do want to provide some outlook on the market place, which is the basis for calculating our EBITDA levels for purposes of covenant compliance.

Modine's EBITDA is highly dependent on the North American truck market, and Western European automotive volumes. We're not dependant upon the North American automotive, which is why we do not have a market update for that segment on the slide.

As you can see, for calendar year 2009, we are estimating Class A truck build rates of 135,000 units. Rate demand is down. Credit availability has been restricted resulting in reduced Class 8 build rate assumptions.

Although not shown, we do expect that class five to seven built rates for trucks will be down to approximately 95,000 units for calendar year 2009. In Western Europe, we are now projecting total unit sales of 11.1 million units off about 25% from the 2006 to 2007 levels.

Let me now turn it back to Tom.

Thomas A. Burke

Thanks, Brad. I'd like to spend a few minutes with you reviewing our strategic business segments, including important work we are doing assisted by an outside advisor to actively refocus Modine's product and technology portfolio, to ensure we have the right products, processes, and technologies moving forward.

Additionally I would also like to review the continued aggressive actions we are taking as part of our four point plan, which again focuses on our manufacturing realignment, our portfolio rationalization, SG&A expense reduction, and capital allocation discipline.

Turning to slide 14. Despite the global recession that has occurred in the past year, we have continued to achieve good growth results in our various regional business development activities.

In North America, we have continued to grow share in our bus and specialty vehicle markets despite already having a dominant position. Our commercial vehicle position going into 2010 and this will grow in content as the significant exhaust gas recirculation cooler business comes on line off setting some truck module loses. We believe Modine will continue to be the single largest supplier of cooling systems and components to the North America Truck and specialty vehicle market.

We're also seeing good growth in our Ag and construction equipment markets as major OEMS gear up for the Tier 4 emission levels. This is where our technology, global footprint, and long standing customer relationships has helped us be the right partner for many of these companies as they seek to find a common solution across platforms and regions.

In Europe, we continue to execute our growth strategy for the commercial vehicle market in advance of the EURO-6 emission law changes, which are scheduled for 2012 and we continued our push towards obtaining a 50% market share.

We have several active development programs with new customers and receive great interest in our Origami product offering as a solution to the more stringent emission laws. As with North America, our support of regional and global manufacturers in Off-Highway segment has given us a good... has given us good business prospects hoping to fill new Hungarian facility.

Asia is still a development project for Modine. However, we've already seen good success in the commercial vehicle market in India. We've already obtain two serial orders with leading OEM's and have been named the development partner on two other programs.

Our plant in Chennai is perfectly located to serve the growing vehicle production in the fast growing India market... economy. In addition we have launched a full technical center in our Chennai facility, which is now providing low cost engineering support to all of our global products groups.

In China, while we're disappointed that the initial rate of growth was local national customers, we have been successful on developing our growing Off-Highway business, a business that is well integrated with our global OEM customer strategies.

We continue to explore opportunities with local and national commercial vehicle customers and see good prospects for our strong line of engine components with the local engine customers.

South America continues to build on a solid base where we are the dominant supplier to the growing commercial and Off-Highway markets.

Our Brazil team has become a key part of our multi-regional car development process, able to fully support the local market. Net new business launches in fiscal 2010 almost offset the 20% overall drop in a market that we're seeing there.

On slide 15, you will note that our Commercial Products group continues its good growth trajectory both here in North America and in Europe. In North America, we launched our new R-410A, ground source heat pump unit for schools in December of 2008. Reception has been so good that we've already exceeded our original sales plan for next fiscal year. We showed this product at the AHR Show in Chicago in January to great enthusiasm from engineers and contractors.

In addition, we've secured a contract with a large school district for the supply of vertical heat pumps for fiscal year 2010.

Lastly, in December 2008, we've launched production capability in Mexico for a new micro channel or parallel flow heat exchanger or coil product for the commercial HVAC market.

This product line has significant growth opportunity in the very large commercial HVAC market as it converts from a traditional round two plate pin design to the highly efficient PF design that Modine invented over 20 years ago.

In Europe, our new Turbo Chill commercial chillers have far exceeded expectations in sales and beat forecast by over 50% in a down market. The Turbo Chill product line is the most efficient, specialty chiller a market and its acceptance is offsetting the super cool market declines of our other products.

Slide 16 shows our six natural vehicle business segments today. Automotive Powertrain Cooling, Components and Systems, Powertrain Cooling systems for commercial vehicle in Off-Highway, engine cooling products for all three market segments, EGR components for automotive and all super commercial vehicle in Off-Highway. And finally passenger thermal management systems for HVAC units that mostly span the commercial vehicle and Off-Highway markets.

The natural business segment is one wherein we have an advantage in the market from our combination of either market share or technology or manufacturing footprint or other barriers of entry that allow us to see a viable business development strategy.

The products in these business segments are generally available across all of our regions and we enjoy varying levels of market share among these businesses from a stronger dominant position in the automotive vehicles worldwide, the truck cooling modules in North America along with developing positions in commercial vehicle in Off-Highway business positions in various regions.

As we have executed in our four point plan we have taken a close look at all of these segments through our product rationalization process with the support of an outside advisor. We did so in order to understand which ones offer us the maximum value for investment focus. In doing so we have determined that several of these traditional segments for deferent reasons no longer offer us the returns on invested capital that our share holders and we expect.

Resulting changes in our product approval strategy now serve a base for all of our restructuring investment and re-sourcing decisions.

So going forward, our focus if you now look at slide 17 will be on three natural vehicular business segments involving product platform that would primarily serve the commercial vehicle in Off-Highway markets worldwide.

Additionally we will continue with select product components that are proven across market segments successfully in the automotive markets such as our oil cooler, PF condenser and charger cooler lines.

Our product platforms will consolidate within the powertrain cooling and engine products groups.

As previously announced with the internal sales of our South Korean operations, we will be exiting the passenger thermal management platform.

Our lack of scale in supply chain complexity provides a barrier for entry requiring significant investment and resources to attain a natural business position in this market.

Rather than waste time, resources and capital we have selected to exit this product segment. We will continue to seek to be a preeminent player in each of the segments and platforms that we see as a core focus. Modine has historically being well known for technology in these areas that our future efforts will be even more targeted towards utilizing the demonstrated strengths we already have on our portfolio.

As you will see on slide 18, we are also aligning our core process to promote a leaner yet more nimble approach to product and process development as well as engineering and research.

Over the last years, we have been working on our value stream for the product development through this manufacturing process. We call this process concept-to-customer seeking to ensure that our investments in new technologies results in products that markets need and want.

To that end we have now also reorganized our technical organization structure to streamline this process and to make sure we have good forward-looking capabilities tied to quick feedback loops. We are moving our R&D closure to the markets and to our key customers recognizing that the best technology cannot be developed in a vacuum. It takes input from many sources combined with our unique talents.

Going forward, our focus will be a tighter but also more aligned with a strategic business interest as we focus on the key product and market segments. We'll be looking for more rapid incremental improvements rather than long step changes reflecting the fact that the pace of technology change is becoming quicker and also more variable. We believe that by doing this we can remain flexible and responsive to our markets, while maximizing return on this investment for our shareholders.

I am very excited with the new products that have been developed within our technology roadmaps. For example, the Origami, Heat Exchange designed and process technology is bringing significant interest from all targeted customers as a means to improve fuel efficiency and improve emissions.

We are accelerating knowledge that will help support wastage recovery systems that will lead to new product offerings that will improve fuel efficiency in commercial and Off-Highway vehicles.

What's important to note is that despite the challenges we faced, and difficult actions we've undertaken to weather this economic storm, Modine will remain a leader in thermal innovation. This is what has defined in our past and will continue to define and drive Modine going forward.

Turning to slide 19, even prior to the global recession Modine was executing in our four point plan to attend a more competitive cost base, improve our long term competitiveness, more effectively capitalize on growth. Since the most severe economic decline, we have been actively building on accelerating those efforts.

You can see in a highlighted column on the right that we're committed to make the tough decisions to ensure our future viability. We will be aggressive the managing our product portfolios as I described earlier leading to decisions on where we investing in and to best firm our product segments. We will be significantly deemphasizing automotive PTC business globally and we'll participate only where we have components they can cross from other market segments. We have hibernated our fuel technology and resources there so that we can redeployment later when these highly promising markets mature.

We have been extremely aggressive in SG&A reduction. With the last changes, we have reduced our global senior leadership structure by 30%. And we're seeing... we have reduced our headcount by 25%. We're nearing a similar reduction our European headquarters in Germany, and all of our manufacturing plants in North America and Europe are reducing their overhead by 20%. We're driving the Modine operating system which is based on same principal used in driving efficiency in our plants to other key business processes. And we're using our product rationalization and new product development processes to drastic reduced capital expenditures.

Finally, as mentioned Brad mentioned, we'll be... we will suspend our dividend for foreseeable future. These are difficult decisions especially the personnel reductions, they test the strength of the organization and the resolve of the leadership team. With our approach that we've utilized I am highly confident that our teams focused and our leadership team is aligned to make it through this challenging period.

Finally, in summary, we're ninety three old company with world renowned expertise in thermal management technology and solutions, facing a worldwide economic financial and credit market turmoil has challenged the company during a period of heavy restructuring. We've reached a critically important agreement with creditors and have the liquidity support to company through this recessionary environment. We're refocusing our product and technology portfolio to leverage core thermal management strengths in meet continuing worldwide demand for emission compliance fuel economy and efficiency.

We are pro-actively addressing the company performers to strategic realization initiated in 2006 and accelerated in 2008 through a new leadership and adoption of the four point plan. We have in place the right leadership, the process, the governance structure to respond and insure effective execution of our plans.

As we pro-actively address our considerable near term challenges, we're continuing to improve significantly our operating efficiencies while also positioning the company for growth. With our credit agreement, with out focused product portfolio and with our down sized cost structure and with our continued commitment to technology development, with the invaluable capability of the men and women of Modine, we will make it through this period and are sure that Modine is well positioned for the future.

With that Brad, and I are happy to take your questions.

Susan H. Fisher

Jamali, we're ready for the question-and-answer period, please.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Andrew DeAngelis with KeyBanc Capital Markets. Please proceed.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Good morning guys.

Thomas Burke

Good morning Andrew.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

First of all, I just want to touch on the state of your restructuring activities prior to these latest actions that you've taken to deal with the effects of the credit crisis. Could you may be walk just through the state of the plant closures et cetera going on in North America at this point.

Thomas Burke

I mean I think as we've announced we've got the plant closures still in process.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

All right.

Thomas Burke

We've got a separatist discontinued operations team that is providing oversight of that. We're on schedule to that plan. We're obviously are evaluating each change for improving or optimizing how we can move that forward, faster than our targets. We still remain on track, and there is no change in outlook for projected cost or savings at this time. So, I mean, other than I guess if you want to dive down in more detail, we can, but I'd to say that we're on track, on schedule to what we're doing in North American and clearly as we mentioned before we've got some work to do in Europe in the same fashion.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Great. And then in terms of your anticipated divestiture of the Korean business. Could you maybe take us through where you stand relative to that process given the dynamics in the markets?

Thomas Burke

Andrew let me just respond to that question. Certainly the economic environment globally, but also in particular the significant drop in the Korean economy is making that process challenging. But we do have a third party advisor engaged who is actively working with the company and working with prospective Korean, primarily Korean based buyers to evaluate this business and we do at this point still remain confident that we will be able to find the right buyer and move forward with that transaction. We're certainly not exactly on the timeline that we had previously laid out, but we will provide updates as they become available.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Great. And then I guess, could you maybe highlight, I know you guys talked about expanding your share relative to the EURO-6 mandate. That's kind of been out there for sometime. Have you guys received any specific orders relative to the EURO-6 standard yet?

Thomas Burke

There is a lot of development work we're going on of, which we are development partners with one of the majors. Right now we also have significant work going on with other, what I would say the big commercial vehicle manufacturers in Europe. So, we feel very confident about that opportunity, we've got coming off. That's a hard objective we have internally and we see a map to attain that.

Clearly our Origami product offering is providing us very much advantage in that position, because of the cost benefits and performance benefits mostly there and its value to the OEM customer. I also will say that we're looking at expanding an opportunity with a major Russian OEM customer as well. It's recently come on the scene, it's been may be a player in the European market. So, we are extremely confident with that objective and clearly it's a critical one for the European team.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

I see you guys are still comfortable with that shared goal that you have out there?

Thomas Burke


Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Great and then I guess, Brad moving over to the financial side of the house. Could you maybe talk about coincident with this latest amendment, did you extend the time period of the facility at all or is that still in place and can you remind us what that time period is for the facility?

Bradley Richardson

Yes, to answer to your first question, the revolving credit facility, we have not changed the maturity of that. That will expire in July of 2011. So that is in place.

We have agreed on the note that we have outstanding. Those were bill of maturities, maturing in 2015, 2017 and 2018 and we have agreed to amortization schedules commencing December of 2011, which quite frankly from my perspective is a better course to go versus having big bill of maturities staring us in from a financial perspective.

I would also note, Andrew, again that the 10-Q was filed this morning, which will have significant details on the amendment and also the documents themselves will be filed via Form 8-K and those are being filed this week. So, there will be more significant disclosure on the exact term and conditions.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Maybe quickly along those lines, are there any pre-payments following these... associated with the notes?

Bradley Richardson

With the note, to the extent that they are under the amortization schedule, those are prepaid at par but to the extent that the company voluntarily prepaid the notes or and you'll see in some of the detail there was significant divestment activity requiring a prepayment, those there are make whole provision under other norms.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Okay. And than I guess just lastly from me. Obviously, the cash flow has been very good here in near term as you guys are focused on running the business for cash. Just wondering if the market, I guess stabilizes at these low levels, do you guys foresee any ability to extract any additional working capital beyond what you already have outstanding?

Thomas Burke

Yes, clearly that's a major objective and yes the answer... to answer your question. And we are working all over... on working capital equation and that will only net us (ph), some are easier than others but nothing is off the table and we see a clear focus to be cash flow neutral in this next fiscal year. We are very confident we'll attain that.

Bradley Richardson

And Tom, just add to Andrew's point. Clearly, we're very, very pleased with the amendments but we're going to be working with our customers clearly to get their support, specifically in the accounts receivable area to support the company.

I mean the creditors have clearly come to the table and we're going to work and are working quite frankly and have already have some near term success in the customers supporting us in terms of adjusting our payment terms for purposes of working capital management.

Andrew DeAngelis - KeyBanc Capital Markets, Inc.

Great, very helpful guys. Thank you so much.

Bradley Richardson


Thomas Burke

Thank you Andrew.


Your next question comes from the line of David Leiker with Robert W. Baird. Please proceed.

Keith Schicker - Robert W. Baird

Hi, it's Keith Schicker. Good morning.

Thomas Burke

Hi, Keith.

Keith Schicker - Robert W. Baird

Just wanted to start up the impairments in Europe, there was some goodwill and some asset impairments. Can you just offer a little more color on what exactly was impaired over there?

Bradley Richardson

Yeah, I mean we basically took total $20 million in impairment charges in the European business, nine million of that 20 was goodwill and this basically comes from the acquisition of Längerer & Reich which occurred back in the 1990's and we also impaired a couple of the manufacturing facilities, one of those facilities, we've talked about this product mix issue and the wind down of the Volkswagen exhaust gas recirculation program. And so therefore that the outlook for one of the facilities has been reduced and therefore we've reflected that as an impairment charge.

I think what's behind this is clearly I mean you've seen and have your own path around the build rates for both the automotive side, but the commercial vehicle side of the business and the projections that we're seeing at this point are saying that its going to take a long time for the build rate to come back up to the levels that the company was running at and the industry was running at in 2007, 2008 period. Therefore, again our market assumptions are reduced from what we had seen previously and therefore needed to reflect that in terms of a write-off of the goodwill in the business.

Keith Schicker - Robert W. Baird

That's great, thanks. And if you look at the sort of minimum adjusted EBITDA requirement under the new credit agreements and if we look at that in relation to what your macro-assumptions are, your macro-assumptions are somewhat mixed versus what we're expecting higher and in one instance lower then other, your EBITDA target for fiscal 2010 of $35 million is well above our estimate of $21 million. Could you talk qualitatively or quantitatively about what you are assuming in some of the other areas of the business as well as what's happening internally to drive $35 million of EBITDA at a bare minimum in fiscal 2010?

Bradley Richardson

Again just to be clear, I mean these minimum EBITDA's they start on an absolute basis in the fourth quarter with a minus 25 and the key motive affect begins to build mainly in the 22 negative and Q1 is the reflection of both of the fourth quarter and the first quarter and it built throughout that period.

What I can say and Tom will certainly comment, you know as you look at again our build rate assumptions, we have done quite a bit of work on assessing, obviously you can have a different view but I think that I would point to a couple things that again have not even began to come through the P&L that you are looking at in our third quarter, that has to do with the significant reductions that we are taking in the manufacturing plan on the fixed cost side. And we basically are affecting here in North America have already affected a 20% reduction in our fixed overhead cost associated with our employment for both, here in North America and we got a similar reduction in Europe.

Also, if you look at the SG&A run rates of the company and if you look at the progress that we have made, you saw the SG&A come down from 61 million in the previous year to 47 million and yet that does not yet reflect the action that we've taken in this current quarter, i.e. our fourth quarter with the 25% reduction and we're seen head quarters and similar reductions that are been affected in Europe. So this run rate on SG&A is going to continue to comedown significantly. In addition to that, and I'll let Tom speak to this. So we've got raw focus on manufacturing cost reductions achieve yet see come through the cost structure. A real focus on SG&A that you have yet to see come through the cost structure. And then clearly there is large commercial element of this and I'll let me Tom kind of speak to what we're looking at commercially with the customers from a pricing standpoint.

Thomas Burke

We've been working out of price rationalization process for while that's been churning Keith and we're now very happy looking at every product every SKU we've Europe both going through make sure that we are having what I would say appropriately priced position with our customers will that be a current model service or whatever. So we're being responsible in our pricing arrangement with our customers that's clearly a very engaging process and one that I am directly involved in it, what we see a significant upside to gaining on that ground.

And I'd say the other part as they goes with this is that we don't have a inflated top line that goes along with that number, our top line assumptions are very conservative, so if you take the elements that Brad talked about on SG&A the fixed cost reduction in our plans, the pricing rationalization that we're gaining around with in our targets and you couple that with what we say is conservative below very much below consensus on the normal volume predictors that are out there. We feel very confident with our model.

So and we also need to know that we have significant new business launching in the fiscal 2010 period. We're seeing just I would say on a fiscal 2010, we have about somewhere approaching $40 million worth of new business coming in that period of time initial investment out that right now, and that's in various areas in each region, and that again is giving us a lot of outside support.

Keith Schicker - Robert W. Baird

Okay, thank you, and Brad if I understand you correctly, there is several actions on the SG&A line that if you have to flow through, we can expect that run rate to go lower going forward. I mean we're at about $50 million or so in the fourth quarter if I exclude the gain on the airplane. Is that something that can fall another 10% on a run rate basis?

Bradley Richardson

Yeah I mean if you call it 205 million annual run rate right, because 51 if you exclude that gain on the aircraft. So call that 205 million and what we - - what Tom showed in his schedule on the four point action plan is all of the steps that we're taking are designed to take another 32 to $40 million of SG&A out. And so that's going to get you down to an SG&A level or a fiscal 2010 in that 170 to 180 level just using very, very rough math.

Keith Schicker - Robert W. Baird

Okay, and that can be fully realized in fiscal 2010?

Bradley Richardson

Yeah, again the reductions have occurred here and we've seen they have occurred in the manufacturing plants in North America for the most part and the target for effecting the reductions in Europe is to be done by April 1.

Keith Schicker - Robert W. Baird

Okay, that's great. And then if we look at from the manufacturing side. It sounds like you're reducing fixed costs. Have you identified sort of a detrimental margin that you're targeting on a lost dollar of sales or declining dollar of sales?

Bradley Richardson

We have... on a down side normally you would expect just on variable contribution is that for a dollar drop in sales that we would lose roughly about 30%. But you can see again in the third quarter that we only... bottom line reduced by about 18%. And that's obviously a combination of multiple cost control actions taken. I really don't have therefore a good estimate as to what, how this is all going to fall for the bottom line, but the variable contribution without any self help around our manufacturing cost SG&A and commercial actions as well as commodity pricing normally you'd see about a 30% down side.

Keith Schicker - Robert W. Baird

And is there unreasonable to expect that to improve as we go through fiscal 2010?

Bradley Richardson

Certainly again with the... again on the variable side, I think that's a good rule of thumb. I think what you've got a factor in though then is all of the help initiative around our cost, the pricing issues that Toms spoke to and the benefit that we're seeing on commodity pricing.

Keith Schicker - Robert W. Baird

Okay, and then just a couple of quick house keeping items. D&A just comments on where you think that's going to fall in fiscal 2009 and than as we've had some recent impairments here, directionally how do you see that trending in fiscal 2010 and on the second part if we look at the capital expenditures, your credit agreement limits you to certain level. Are you trying or able to come in below that level and you built in some cushion there as well from the cash side?

Bradley Richardson

Well specifically to the capital investments which again we've limited that in agreement with our creditors to $65 million. Our annual operating plan that we have set for the business is $60 million. So, and that again that those are hard fast targets that each of the businesses will live within. I think as it relates to your question on depreciation and amortization for fiscal 2009, it's going to be roughly in that $75 million level and that's all I can say at this point.

Keith Schicker - Robert W. Baird

Okay. That very helpful. Thank you very much.

Bradley Richardson



(Operator Instructions). Your next question comes from the line of Robert Wahayi (ph) with Modine Manufacturing Company. Please proceed.

Unidentified Analyst

What's the liability of the pension fund?

Bradley Richardson

The question is the liability of the... are you talking about the liability of the current funded status of the pension plan?

Unidentified Analyst

I think I am talking about current funded liability as I expect to be drawing pension for sometime, I just wonder how assured you are that will continue?

Bradley Richardson

Yeah, the pension plan is... we haven't updated our disclosures at this junction on the pension plan, but the pension plan is at what I would say is adequately funded at this point and if you look at our disclosures that we've had in our prior 10-Q and in our annual fillings, again there is the plan, the U.S. plan is adequately funded and we don't expect at this point to have to inject significant cash on a go forward basis to keep that plan funded and allow you obviously to get your retirement benefits.

Unidentified Analyst

Thank you.

Bradley Richardson

Thank you.


You have no further questions.

Susan Fisher

Okay, thank you very much for joining for our Q3 call. We very much look forward to updating you on our next call in July.

Bradley Richardson

Thank you very much.

Thomas Burke

Thank you.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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