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Modine Manufacturing Co., (NYSE:MOD)

F1Q11 (Qtr End 06/30/2010) Earnings Call

July 29, 2010 11:30 am ET

Executives

Robert Kampstra - Vice President and Chief Accounting Officer

Tom Burke - President and Chief Executive Officer

Michael B. Lucareli - Vice President of Finance and Chief Financial Officer

Analysts

Walter Liptak – Barrington Research

David Leiker – Robert W. Baird

Adam Brooks - Sidoti & Company

Ann Duignan - JP Morgan

Good day ladies and gentlemen, and welcome to the First Quarter, Fiscal 2011 Modine Manufacturing Company Earnings Conference Call. My name is Chris and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to our host for today, Mr. Bob Kampstra, Vice President, Corporate Controller and Chief Accounting Officer; please proceed.

Robert Kampstra

Good morning. Thank you for joining us today for Modine’s first quarter fiscal 2011 earnings call. With me today are Modine’s President and Chief Executive Officer, Tom Burke as well as Mick Lucareli, our Vice President of Finance, Chief Financial Officer and Treasurer.

We will be using slides with today’s presentation. Our slides are available through both the webcast link as well as a PDF file posted on the investor relations section of our company website, modine.com. Also should you need to exit the call prior to its conclusion, a replay will be available through our website beginning approximately 2 hours after the call concludes. On page 2 is an outline for today’s call. Tom and Mick will provide comments on our first quarter results, our outlook for the remainder of the year and our strategic overview.

At the end of the call will be a question-and-answer session. On page 3 is our notice regarding forward-looking statements. We 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?

Tom Burke

Thanks Bob and good morning everyone. Let’s turn to slide 4, as Bob mentioned in a few moments we will be reviewing our financial and operating performance for the first 3 months of fiscal 2011. Before we do so however, I want take this opportunity to formally introduce you to Michael B. Lucarel, who we appointed Chief Financial Officer earlier this month. I am delighted to be working with Mick in this new and well earned capacity. As many of you know, we evaluated numerous high quality candidates over the past several months. A very deliberate search process served us well. I had an opportunity during this press as to also work very closely with Mick, who emerged as a clear choice for the job because of broad financial background, in-depth knowledge of our business units and markets and perhaps most importantly, a consistent ability to link our financial and operating objectives with our primary goal of creating long-term shareholder value.

Also, many of you have gotten chance to get to know Bob Castro over the past 8 months. I am very pleased that Bob will continue to have a significant investor relations responsibility so you will continue to see in here for him in the future. I look forward to working with Mick and Bob and the other members of our senior leadership team as we continue to move our company forward to our long range objectives.

Turning now to slide five, we had a very strong quarter. Our performance reflects the significant progress we have made in transforming our company and delivering it through the economic downturn.

Our sales have improved dramatically since this time last year. The pace of the recovery is in fact more rapid than we had previously anticipated, even a few short months ago. During the quarter we saw broad based improvements highlighted by a noticeable recovery in the off-highway in commercial vehicle markets in North and South America, and strengthening based on rising export sales within the premium automotive market in Europe.

In terms of the bottom line, we reported a net earnings of $3.1 million or $0.07 per share which compares to a loss of $0.18 per share at this time last year. With these significantly improved results, we have turned a meaningful quarter corner as we move towards improved profitability.

The strategic decisions we made over the pasty 18 months are clearly beginning to produce results and with the higher sales volumes, we are seeing the benefits of our improved operating leverage. Mick will review this in greater detail in a few moments.

We are definitely building momentum in all areas of our company; our relationships with our strategic customers are leading to significant long term opportunities. Our refocused portfolio and developing technologies are delivering results. For example, we expect that our new Origami technology will assist us in achieving our stated growth objectives in the commercial vehicle market in Europe.

Our expansion of businesses in Asia is doing well as our team to China and India are delivering under many programs in our new facilities, and our commercial products group is building on the success of their recent new product introductions and laying the groundwork for significant growth in this highly profitable business segment.

In summary, we had a very strong quarter and are highly encouraged by the recent market and performance trends that we are seeing. This transforms the basis of our decision to raise our full fiscal year 2011 guidance and also provide us further confidence that we are track to attain our mid-term goal of 11-12% return on capital by the end our fiscal 2013 year.

I will now turn this call over to Mick for a more in depth look at our financials and our outlook. Mick?

Michael B. Lucarel

Thanks Tom and good morning to everybody on the call. Let’s turn the slide to 7 and I will walk through the income statement. First we are very pleased that Modine turned a profit in the quarter and we can begin to talk once again about positive earnings per share.

Sales increased by 91.6 million, or 36% in the quarter. This was driven by strong growth in North America, Europe and South America. I will cover our segment results in more detail in just a few slides. Gross profit increased by 20.1 million resulting in a 210 basis point increase in our gross margin. This margin improvement was driven by the higher volume combined with our higher operating leverage. This represents Modine’s highest gross margin since the first quarter of fiscal ’09 despite volumes being 107 million below that period.

As a percentage of revenue, SG&A declined to 12.1% from 15.2%. In dollars, SG&A increased 3.3 million as expected due primarily to higher pension expense, higher net engineering and development expenses and increased employee compensation expenses.

It is also important to note that income from operations increased to 14.1 million from a loss of 4.9 million in the prior year. Other income swung from 5.8 million of income in the prior year to 3.6 million of expense or a $9.4 million decrease.

Approximately 9 million of the 9.4 million decrease was the result of foreign currency impacts of Modine’s inter-company loans. We continue to have a high effective tax rate due to the complex nature of the current tax situation. Despite the low relative level of total earnings; the company is a tax payer in certain jurisdictions such as Brazil, Hungary and the U.K.

On slide 8, we have a comparison of Modine’s pro forma results on a year-over-year basis. For banking analytical purposes we like to review the adjusted results, this allows us to adjust the reported results for non-recurring items, recurring costs such that we can look at the trends on a pro forma basis. And during the most recent quarter, we incurred 1.7 million of restructuring and reposition costs. These costs are primarily related to the previously announced plant closures in North America.

We also added back 5.2 million to the first quarter results which related to the currency losses on inter-company loans. It is important to point out for this slide and for the income statement the adjustment for inter company loan is a non-cash impact.

On an apples to apples basis, we are pleased that adjusted EBITDA increased by 15.2 million or a 90% increase during the first quarter of 2011. Turning to slide 9, we have a summary of our segment results, a year ago the economy was still in the heart of the recession. By comparison, our revenue this year is up across all business segments. North America and South America experienced strengths across all their major markets including agriculture, construction and commercial vehicles. Revenue increased in North America by 42%, while South America increased 63%.

A portion of the corresponding fixed cost absorption was offset by higher year-over-year commodity prices. However, we also recently entered into core contracts that heads a portion of the North America aluminum usage. Europe benefited from strong export sales in the premium model market, the segment sales increased 26% year-over-year. Excluding the declining euro, Modine’s European sales were up 35%. Gross profit increased by 7 million or 8.6 million when excluding the impact of foreign currency. And gross margin increased by 270 basis points in Modine Europe.

While Asia’s growth is impressive, they are coming off a very small base and the growth is primarily due to ongoing product launches. Our commercial products business is up primarily due to new product introductions and further market penetration despite the relatively flat markets. Slide 10 shows sequential improvement in Modine’s results over the last nine quarters. Sales continue the upward trends but are still far below where we were 2 years ago as the recovery of our markets continues. Gross margin on the other hand, has returned to a level close to where we were at in the first quarter of 2009. This is due to the numerous actions taken over the last few years to lower our cost base.

The gross margin has almost returned to pre- recessionary levels despite the fact that our revenue remains far below those levels. And again we are pleased that adjusted EBITDA continues to show steady improvements, the lower manufacturing costs combined with lower SG&A structure has driven the first quarter EBITDA margin to the highest level in two years.

Turning to slide 11, we have a few summary statistics on our balance sheet in cash flow. The cash flow was negative in the quarter and below prior year. The current quarter results were driven primarily by a $31 million increase in our working capital. This was due to the strong revenue growth in the quarter and a return to traditional payment terms with select customers.

Also during the quarter, we elected to make a $10.5 million pension contribution in an order to stay above an 80% funded level in conjunction with The Pension Protection Act. We anticipate though that free cash flow will remain positive to neutral during the remaining three quarters of the year as we work down some our working capital. Modine’s total debt balance remains relatively low with the leverage ratio below two times.

We anticipate that we will refinance our North American credit facility and expect that this will close in the second quarter of this year. We are also considering the repayment and replacement of our long term senior notes. Should we decide to refinance those notes, we would be required to make a 14 to $18 million make all payment in the second quarter as well. This is essentially a prepayment penalty on those long term notes. It is important to note that these activities are being considered proactively by our management team and would result in reduced complexity, greater flexibility and a substantial reduction in our interest costs. And we look forward to reporting progress on that in the next quarter.

Now turning to full year outlook, we realize that Modine can be difficult to model so we’ve to include more details in our outlook section. Based on the strong first quarter and better visibility, we are increasing our revenue forecast to a 16-20% improvement from prior year versus the previous guidance of 8-12%. We are expecting all the vehicular segments to benefit from continued market recovery, with some offset due to the typical seasonal shut down through the remainder of the year. North America is showing continued recovering in commercial vehicle and off-highway markets, with some offset by the wind down of certain automotive, passenger thermal management and commercial vehicle programs.

We expect the European premium automotive market to remain strong, while commercial vehicle and off-highway markets are indicating the early stages of a recovery.

After a strong Q1 in South America, we expect sales to level off during the remainder of the fiscal year. And we are maintaining our commercial products outlook for approximately 5% year-over-year revenue growth, while expecting the underlying markets to remain relatively flat.

From a gross margin standpoint, we anticipate we will convert at approximately 25% on the incremental sales. This is based on our forecast to commodity prices remaining stable also the current mix of fixed and variable costs in our product mix.

SG&A expenses will be up by 15 to 20 million over the prior year but will decline as a percentage of revenue. The largest drivers in there are roughly $4 million of higher pension expense and approximately $9 million due to the net increase in engineering and development costs. And the remainder is employee compensation related and plus additional new hires to support growth in commercial products, Asia and our commercial vehicles in Europe.

As I discussed on the previous slide, we may refinance our credit facility in long term notes, if we prepay the long term notes, there would be the one time make all payment of approximately 14 18 million; which would be included in the interest expense from an accounting standpoint. We expect taxes to be approximately 10 to 14 million for the full year. At the current time, it’s nearly impossible to model an effective tax rate.

In summary, based on the current conditions, we now see adjusted EBITDA in the 105 to $115 million range, this will include total lab backs of approximately $10 million, for the fiscal year as we complete some of our remaining plant closures. And with that I’ll now turn the call back to you Tom.

Tom Burke

Thanks Nick. Turning on to slide 15, as pleased as we are with our near term performance, I think it’s important to view this quarter, or any quarter in that matter in context with our longer term strategic objectives.

As you know, we entered the economic downturn with a mission to not only survive but to truly transform our company and emerge stronger with regard to a balance sheet, product portfolio, and cross position. As our research performance indicates, we are well on our way to achieving this objective. Looking to the midterm, we have stated our goal to attain 11 or 12% return on capital by the end of our fiscal year 2013, and are increasingly confident these goals are within our grasp.

This would be a significant milestone in view of the challenges we have faced. To be clear we see the 11 – 12% return on capital not as our ultimate destination, but rather as our way point to our longer range objective of delivering sustainable, profitable growth and even higher returns thereafter.

Turning to slide 16, I would like to walk you through our progress and prospects along each of these three strategic objectives. First, we have made tremendous progress in re-shaping and rebuilding our company. This started in 2006 with the new organization structure that has enabled us to align with our global customers, standardize our best practices and establish clear accountability toward achievement of our long range financial matrix and operating objectives.

Next, we’ve introduced and are passionately driving our culture of continuous improvement through the Modine operating system, which threw a focus on critical leadership behaviors and mentoring principles, rooting out waste, driving efficiencies, and streamlining critical processes both on the production flow and in our administrative functions. I expect these to benefit Modine for many years to come. At the same time, we have transformed and aligned Modine’s leadership team, which in my view has been a critical X factor in the company’s near term success, it will play an even more pivotal role in our future.

Finally, we adopted and are successfully implementing a 4 point plan strategic framework. Through these elements, we have identified and secured a much more advantage product portfolio and have significantly reduced our fixed cost structure. We’ve established a strategic manufacturing presence in low cost countries and dramatically reduced our capital intensity. Our execution of this plan, which guided Modine through the worst of the academic downturn, will continue to drive us forward in the attainment of our mid and long range objectives.

Turning to the next slide, on page seventeen, as I stated earlier, we are focused on achieving11 to 12% return on capital by the end of fiscal 2013. In fact, our performance objectives and incentive structure are aligned toward achievement of this critical matrix which should putting us on our path to generate consistence profitable long term growth.

While we still have a lot of work to do to achieve this goal, I would note that many of the key enablers that is sales growing at a faster pace than our SG&A cost and our asset base, along with the improved operating leverage in the beginning stages of the global market recovery already underway as can be seen in our first quarter results. Attaining this midterm objective is our top priority for Modine.

Turn to slide 18, Modine is extremely well positioned for the future. As we move behind our midterm objectives, we will continue to capitalize on the significant regulatory industry and technological growth drivers we had before us to generate above market growth. These drivers include the world’s growing demand for reduced emissions, ready to fuel economy, higher energy efficiency and infrastructure investment. They also include Modine’s own internally generated growth through product in geographic expansion and core product advancement. During even the darkest days of the economic downturn, we never lost site of the importance of protecting Modine’s technological core, which is our rock bed of our company’s heritage and existence.

I am proud to note that our core is as strong as ever, and trading at a whole range of leading edge offerings, from our patented new Origami next generation’s heat transfer technology, which is now gaining traction on both the commercial and light vehicle markets to our work with the US Department of Energy, and a growing number of global commercial track vehicle manufacturers on the innovative waste recovery technology.

This technology offers significant pure efficiency benefits to track manufactures. Additionally, our growing range of high efficiency heating and air conditioning products serving in the commercial, industrial and data room cooling markets.

To this list of core product advancements, we also continue our important work; a host of alternative energy applications in the stationery power, wind, solar energy and hybrid electric vehicle markets. Suffice it to say we are very excited by these technologies and our prospects for bringing increased value to our customers globally.

In Summary on slide 19, we have made considerable progress in transforming our company. We are emerging from the economic downturn even stronger both competitively and financially. We are well positioned to achieve our mid-term objective of 11-12% return on capital by the end of our fiscal 2013 fiscal year, and we are prepared to capitalize on the significant growth drivers to achieve long term profitable growth and drive our return on capital higher thereafter. We have a strong, energized and highly experienced leadership team supporting a highly engaged workforce.

We recently have strengthened our corporate governance structure through newly appointed directors and a new technology committee advisor with proven technical expertise. Based on these factors and a growing evidence of the global recovery in our markets, along with our meaningful improved sales outlook and strong operating leverage, we are focused on the future and look forward to appraising you on our progress.

Now with that, Mick, Bob and I would be happy to take your questions.

Question-and-Answer session

Operator

(Operator instructions). Our first question comes from the line of Walt Liptak of Barrington Research, please proceed.

Walter Liptak – Barrington Research

Hey, thanks, good morning guys and

Tom Burke

Good morning Walt

Walter Liptak – Barrington Research

So, the first thing I want to ask about is North America and the revenue that you got this quarter, and I wonder if you could provide some color on what happened, and I think, if I understand the guidance you said that revenue is not going to -- that we were going to see sequential down from here throughout the rest of the year, is that right?

Mick Lucarelli

Yeah Walt, this is Mick, that’s correct, first quarter a lot of strength and Tom will add to that in a minute, but a lot of strength especially in the off-highway markets drove the North America results in Q1. We also traditionally -- that’s the strongest quarter for that business segment, with some seasonality in Q2 and Q3.

Tom Burke

Exactly right, the number of production days are up in Q2; they follow up with summer holidays and Christmas breaks; typically with fewer days in the outgoing quarter as well.

Walter Liptak – Barrington Research

Ok, is there something about the off-highway business whether it’s like inventory, building -- I would think about these lines of sequence -- whether you get the product --

Mick Lucarelli

Obviously, I think there is a bullet effect that’s going a little bit with inventory levels being so low, some of our OE customers and coming back to that, the natural level that the market pulled. But there are clearly also increases in the market segments as you know, so we -- the last two months have really seen the -- is our typical look of really rising, releases have gone on but it occurred or are typical releases, so we are seeing both a rise in increase in actual orders and the feeling of inventory needs of our customers.

Walter Liptak – Barrington Research

Okay, got it, and then at the gross margin, in North America, it’s nice seeing the number but I would have felt that the gross margin in North America would be higher as a result of more volume going through. Is there something unique about the first quarter or the North American gross margin that gave you 12.5 which is down year-over-year?

Mick Lucarelli

You are right to identify that. Both North America and South America had a heavy impact in Q1 year over year from commodity prices, and two different reasons; in North America we have a few large customers that still have semiannual and annual price agreements, and unfortunately those kicked in prior to the Q1 so we -- as raw materials increase we were still charging the lower price. In South America, it’s traditional not to have the formal pass to agreements, there they have to watch much more closely what the competition is doing, and also there is a piece of our business in South America that’s after market product. It’s clearly based on what’s going on with the market in catalogue pricing. Sure answer is the commodity impact for those two businesses.

Walter Liptak – Barrington Research

Okay, so I wonder if you could just talk about what gross margin might look like. When do you get the price increase? Is it in the back half of the year?

Mick Lucarelli

There is a shift going on in North America as we try to guide to. We definitely see some strength in the core markets, but that would help. We’ll also have the price as well adjust throughout the year, commodity prices. But we also have some volume adjustments which we signaled there, which were due to plan program whine down. For example one of those is our passenger thermal management business, which we exited last year is winding down, and then there’s another one; it’s an automotive program that we mentioned in the press release. There’s a little bit of volume impact there also.

Walter Liptak – Barrington Research

Okay, and the aluminum hedge, how much of the aluminum are you going to be hedging with the impact?

Mick Lucarelli

We look right now at the processes, we are looking specifically at customer GAAPs, so I can’t give you a fixed percentage of a buy that we are going to hedge. I think for those that have been following Modine for a while you know certain of our businesses tend to be more naturally hedge or have better pass through agreements. The hedges that we put in this year were specific to those customers that have the long term price arrangements, the semiannual and annual price arrangements who put the hedge in last month. So those were tied to those specific customers.

Walter Liptak – Barrington Research

Okay, great. Okay thanks. I’ll get back in queue.

Operator

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

David Leiker – Robert W. Baird

Good morning. How are you all?

Mick Lucarelli

We’re doing well David, how are you?

David Leiker – Robert W. Baird & Co.

Doing great. I first have to offer some compliments on the press release in presentation. Fantastic; great job on that.

Mick Lucarelli

Thank you

David Leiker – Robert W. Baird

Secondly, as we look -- I want to focus on the SG&A line here first. You upped it from the previous guidance of 10 to 15 million to 15 to 20. You may have said that incremental trend is coming for while?

Mick Lucarelli

Yes, two areas primarily, David, some of the costs are just up due to the higher volume and the results; one of them is the management incentives are up due to the higher volumes and performance. Another one is foreign currency related and then there’s just some other areas of SG&A that will tend to be a little bit more variable like our commissions in the commercial products, travel, entertainment things like that, but the bulk of it was in those items that I have just walked you through.

David Leiker – Robert W. Baird

It doesn’t look like we saw much of that in the first quarter of yours is that right?

Mick Lucarelli

That’s correct, and the other thing I wanted to point out is that the salary increases that were budgeted in this fiscal year have not kicked in across the globe. Those will be patterned in through they are the remainder of the fiscal year.

David Leiker – Robert W. Baird

Okay great, and then in Europe, the premium order in Europe are clearly you see in the strength there from these other folks who have commercial vehicle exposure in Europe, you didn’t seem to call that out yet, that almost seemed as they’re just not larger than in your earlier [multiple speakers].

Mick Lucarelli

Yeah it’ we are forecasting that up to be 13% over last calendar year date are impacted and we did not call that out in the management review but you’re right; we are seeing that showing signs of strengthening, we are seeing that in order books and the off-highway is gone from a flat to slightly up mode as well, so in both case in Europe we see an off-markets in Europe, we’ve seen some improvement but clearly the automotive premium market is the strongest.

David Leiker – Robert W. Baird

And then you must -- by that comment, I am guessing that your exposure in Europe on the commercial vehicle side is more off highway and medium duty and less than heavy duty?

Mick Lucarelli

Right, that’s right. Our exposure on commercial truck is obviously lower than it is in North America equivalent to state of objective to grow that, we feel very confident about that with the Origami technology, but right now it’ a little bit less than it is typically on the medium duty side.

David Leiker – Robert W. Baird

Okay, a clarification item on the guidance, the adjusted EBITDA 105 to 115 you have 10 million in add backs, does that include any potential make whole payment that you included in the interest expense number? I just want to reconcile that.

Michael B. Lucareli

No, David. That would be, that whole make whole payment would be interest expense and not included in an EBITDA number.

David Leiker – Robert W. Baird

Of course.

Michael B. Lucareli

But our interest guidance would include the make whole payment in there, that was 30 million range.

David Leiker – Robert W. Baird

And then in that if we pull that out it looks like the interest expense number that would be left is comparable to what you current report in your Q1, it doesn’t look like you are putting in there any benefit from lowering interest cost or anything along those lines.

Michael B. Lucareli

We knew you would ask that question, and it’s a good question. Since we are in the middle looking at those options I think all we can tell you at this point is what we stated publicly is one of the key reasons why we would do it, would be to capture the lower interest expense from Modine, but at this point we are just in the middle of doing all of our analyses.

David Leiker – Robert W. Baird

And then one last item here, this inter-company loan and the currency impact on that, is there any way for us on the outside to try and have a better handle on how to model that at all because it’s becoming a pretty big swing factor what’s going on in the currency market these days?

Michael B. Lucareli

Yes in our Q David, we’ll schedule out inter-company loans in the currency. From that point on what it really depends on is what foreign currency rate you want to model. Bob, anything you would want to add to that?

Robert Kampstra

The biggest loan we have with our exposure is our loans with Europe about $41 million worth of loans at this point David and so as you look at the movement in the Euro and model at the movement in the Euro you can see how that might impact that $41 million balance.

David Leiker – Robert W. Baird

As you go through re-negotiating your credit agreement do you have any intention of putting in a European piece of that that would provide natural heads for you on that?

Michael B. Lucareli

The real issue of what we do is that allows us a tax efficient repatriation belt. There they are really as a matter to move money around our different regions in a tax efficient matter, that’s the driver of it.

David Leiker – Robert W. Baird

Okay.

Michael B. Lucareli

And just a little more color on that because the way the Euro has been moving, it’s become a bigger number. Modine’s always has the inter company loans but we’ve looked at hedging but it’s just why I wanted to point out it is literally a non cash item, these are long term notes and if we thought there was a large bullet payment coming due, we may look into a hedge, but on the hedge we will be paying a counter party in a case where we are paying but there is no movement in cash around the globe. We just think it would be an inefficient way to try to manage that.

David Leiker – Robert W. Baird

Yeah okay. I understand, thank you.

Operator

Our next question comes from the line of Adam Brooks with Sidoti & Company; please proceed.

Adam Brooks- Sidoti & Company

Yes real quick, let’s talk I guess on Asia, kind of jumped out in the quarter gross margin hoping up to 9.2 and I guess my question is, I know you have that plan capacity for about 200 million annually, what are you doing as far the work force over there I guess kind of where SG&A is going to shake out and do you need to add anybody back and what run rate do you need to get to before you start adding more workers over there?

Michael B. Lucareli

Clearly we are on a pretty fast launching and growth rate in China and not quite as fast in India, we have -- our growth rates are well mapped out by hiring leads. Management has a pretty good handle on that, so it’s not a constrain for us that we see on being able to march that growth rate in the midterm. So I just want to make sure I am answering your question; the growth rate is steep, the contribution and performance of the division is running at a level that we’re satisfied. We feel very capable of being able to match that --the need over there, plus we are supporting -- we have a lot of corporate support going into Asia, not necessarily a full expat support we have travelers to make sure that the transfer of knowledge process capabilities and those things are there and again we feel very satisfied with that system we’ve put in place.

Adam Brooks- Sidoti & Company

And one more question, as far as the contribution margin I guess what do you see going forward beyond this year’s sustainable -- what kind of earnings I guess would you see as being sustainable as far as the contribution margin?

Michael B. Lucareli

In Asia?

Adam Brooks- Sidoti & Company

No, in general, consolidated.

Michael B. Lucareli

And you are talking about income from operations?

Adam Brooks- Sidoti & Company

Yes.

Michael B. Lucareli

I think what we like to do is just reference you back to the guidance we have -- we stated we think 25% or so conversion on the volume, we feel very good about the SG&A and I prefer to let you do your modeling on the volume but if you roll those through that’s really what we are seeing for the remainder of the year and then it’s below the line but we wanted to point out we potentially have the make whole payments and the tax situation is a very unique situation right now.

Adam Brooks

Alright, thank you very much.

Operator

Our next question comes from the line of Ann Duignan of JP Morgan; please proceed

Ann Duignan - JP Morgan

Hi guys, it’s Ann Duignan.

Michael B. Lucareli

Hi Ann.

Ann Duignan - JP Morgan

Hi. Most of my questions have been answered at least detailed ones, just a point of clarification in your interest expense, you’ve included the cost of this potential make whole payment but you have not included any benefits, is that the way that I interpret all of that conversation?

Michael B. Lucareli

Correct, our current assumption is the rates we are paying today.

Ann Duignan - JP Morgan

But you have included the cost?

Michael B. Lucareli

Yeah we’ve included the cost.

Ann Duignan - JP Morgan

Okay I just want to make sure that I interpreted that correctly, and then just taking a step back and looking at some of the end markets, can you talk a little bit about are you seeing any significant strengths within any particular OEMs; something like a John Deere on the ag side or Navistar on the truck side? I mean are there specific OEMs sort of driving some of the acceleration in demand that maybe you didn’t anticipate a quarter ago?

Thomas A. Burke

Well I think we’ve been receiving feedback from the bulk of our OE’s; Caterpillar, Deere, Freightliner, Daimler and so on that -- and Navistar that there was a, and Volvo as well, that there were signs of improvement and orders going up. And so what’s really happened in these last two months is we’ve seen just clear visibility going forward. I mean that’s the big difference from two months ago is that it’s gone from ‘Hey there’s good news in the market anticipating increases to clearly what we are seeing is long term visibility that we are seeing through our releases both in Europe and North America for really each segment. So I feel really there’s no one in particular I can say; it’s just a broadness where we use term a broad -- strength going across all of our customers and really in each segment in each regional segment as well.

Ann Duignan - JP Morgan

And then the releases, can you talk a little about that, what kind timeframe are they giving you, are they giving you three months kind of early releases and then are they kind of lock them in two weeks ahead of time or?

Thomas A. Burke

Our release is very -- for each segments, we issue in region. Typically we are giving a twelve week release for material protection in North America and what we’re seeing is those -- instead of that release is coming out and they are adding to over the course of the month additional orders, that’s the difference in the dynamic in North America.

In Europe, we have a very integrated ERP system which really shows our order book releases from our customers and that’s still back out to pre-recessionary levels with the releases going out into our Q4 and Q1 of next year. So again it’s that just confidence building in the last couple of months that the order books are just filling more robustly.

Ann Duignan - JP Morgan

And kind of counterintuitive I think that premium automotive would be accelerating in Europe, given the current macro environment over there, is it just that you’re got -- I won’t say lucky but let’s call it lucky, that you’re on the right platforms at the right time or is it exports or what’s you sense of what’s really going on over there?

Thomas A. Burke

My understanding, I can’t really describe what’s happening in Europe from a macro economics standpoint. However, we do know that the exports to Asia specifically China are way up. An article recently I saw in Wall Street Journal 900,000 millionaires in China really wanting to have German cars. Okay, I mean specifically so -- I guess you can call it a lot but I think it’s a measure of our respect technically within our European team that they have the ability to have product on the kind of customers we do in that region. So I think it is a tribute to our team rather than just fate.

Ann Duignan - JP Morgan

I appreciate that. I didn’t mean to insinuate that it was fate alone. I don’t want your team in Europe getting upset with me. I think that that was it in the big scheme of things, I thought it was a good, clean quarter and I think the outlook we understand. This is a little interesting to me that you would cut the cost of make whole payment into your outlook but not the benefits but I thought that’s just being conservative so we’ll take it as that.

So I will take any other questions I have offline, appreciate it guys.

Thomas A. Burke

Thank you

Ann Duignan - JP Morgan

Thanks

Operator

(Operators instructions) Our next question comes from the line of David Leiker of Robert W Baird. Please proceed.

David Leiker – Robert W Baird

Yes its, its two last items here. We’ve heard -- follow up on this particularly in German, the Germany automakers, it sounds like some of them are going not shut down over the third quarter summer.

And insuring from some of the truck makers that they are increasing their build rate in Q3 so that you would feel today is the build rate is higher. Just curious whether your guidance incorporates those two elements.

Michael B. Lucareli

Yeah what we really did was we approached the latest forecast cycle which is built into our guidance to everybody, David. We looked at our Q1 run rate and the best we could say at the time was if that continues at those levels and then adjusting for any known seasonal shut downs or program wins or losses. Well I guess what we did is we looked at Q1 and looked at that current run rate without trying to build then a drop or an increase in any of our core markets. Tom, would you said --

Tom Burke

No, you’re exactly right. There’s been a lot of time, which we’re really analyzing it deeply. You are right we are seeing that impacted a little bit of the season we would see in Q2 is being taken out of our forecast because of what you just said.

David Leiker – Robert W Baird

Okay, and then lastly there increase in truck and the truck side of the world of fuel economy, CO2 emission, things along those lines, are you seeing more folks on that part of the industry coming to you to help with solutions on that or do you think the pace about it -- I know you’ve been talking about that for a while, just curious whether you are seeing that accelerated all, and then (multiple speakers) keeps up.

Michael B. Lucareli

We clearly, and we call it our growth drivers and it is [indiscernible] even more than the opportunities we are seeing, the technology we have and we said it in one example of the waste recovery example we teamed up with an engine manufacturer and -- the DoE funds and super truck and we were working off that base with several truck OEs, both North America and Europe now on [waist deep] recovery so we see this is a very -- and its grown from what I would call an interesting thing to a fast attracted technology that’s being pulled forward by the OEs themselves and not just trucks by the way so [indiscernible] some OE automotive people that really are interested in that technology.

So we are very excited about this. As a matter of fact, if you look at our total research dollars being spent, it’s a high proportion that is focused on that technology by itself because of the demand from the market and from the customers.

David Leiker –Robert W Baird

And with your relations that you have or development work that you are doing with [Comments] do you have any restrictions on using that with any other engine manufacturer, any other OE?

Michael B. Lucareli

No, the restriction was part of the arrangement going in and out. They have their opportunities and we are enabling and helping them as well as other truck producers that may produce engines internally.

David Leiker –Robert W Baird

Okay, great. Thank you very much.

Operator

(Operators instructions) Our next question comes from the line of Walt Liptak of Barrington Research. Please proceed

Walter Liptak – Barrington Research

Thanks again. I wanted to ask a question about page 13; when you were talking about the outlook. In North America, you talked about the wind down of some automotive and commercial vehicle business. Can you give us an idea of the revenue that is going to be rolling off or winding down?

Michael B. Lucareli

No. Walt, it’s Mick. We prefer not to do that. I can tell you it’s beefed into our budget, into our plan -- the programs are not surprises but there is so many moving pieces so whether there is the -- David was asking how the shutdown is going to happen and the strengths in the markets in the second half, I just would prefer not to try again on that level.

Tom Burke

Walt, we don’t -- and I’ve made this comment a couple of times now, that we don’t single out specific customers on the either the, let’s say the opportunity side or the loss side but as Mick said, there is no surprises here. What I would call it is there is normal switching that happens in the industries we plan. Some of those by design, some on our own choosing actually that we may elect to make a move one way or the other [indiscernible] making sure our mix of product in that particular segment is as healthy as it can be and I can qualify that, we’re saying I am very happy with our mix of product as we are moving forward in our targeted markets.

Walter Liptak –Barrington Research

Okay I appreciate that but let me ask the question this way then. Say you’ve got the revenue guidance of 16 to 20% , will North America be within that range or will North America be lower and you get higher growth rates in the rest of the world?

Tom Burke

No, we see North America in that range; we were just trying to work through and make sure everybody understood there was some seasonality impact to that business and a few other moving factors other than just the construction [indiscernible] taking off. We want to make sure everybody knew that there is a blend in that business going on this year.

Walter Liptak – Barrington Research

Okay, and with North America up 42%, without the commentary that you’ve made about that, it would look -- if we were just going to model that out, we think that the growth rate would probably be higher than 16 to 20% for the full year.

Tom Burke

Exactly

Walter Liptak – Barrington Research

Okay, right so you’d be at least at the high end of the revenue guidance in North America?

Tom Burke

We’ll let you put the pencil to the paper

Walter Liptak – Barrington Research

Alright, okay, thanks for the help

Operator

There are no further questions at this time.

Tom Burke

Okay, thank you everyone for joining us for this morning’s call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect.

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Source: Modine Manufacturing Co. F1Q11 (Qtr End 06/30/2010) Earnings Conference Call Transcript
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