Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Modine Manufacturing Company (NYSE:MOD)

Q4 2014 Results Earnings Conference Call

May 29, 2014 9:00 AM ET

Executives

Kathy Powers - Vice President, Treasurer and IR

Tom Burke - President and CEO

Mick Lucareli - Vice President, Finance and CFO

Analysts

Robert Kosowsky - Sidoti

Joe Vruwink - Baird

Shivangi Tipnis - Global Hunter Securities

Operator

Good morning, ladies and gentlemen. And welcome to the Modine Manufacturing Company’s Fourth Quarter Fiscal 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations.

Kathy Powers

Thank you. Thank you for joining us today for Modine’s fourth quarter fiscal 2014 earnings call. With me today are Modine’s President and CEO, Tom Burke; and Mick Lucareli, our Vice President of Finance and Chief Financial Officer.

We will be using slides for 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 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 two is an outline for today’s call. Tom and Mick will provide comments on our fourth quarter results and provide our revenue and earnings guidance for fiscal ‘15. At the end of the call, there will be a question-and-answer session.

On slide three 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 with 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. Our revenues for the fourth quarter were up 9%, the sales growth in each of our segments other than South America, where economic conditions remained somewhat challenge.

Of particular note were our European region which delivered 15% year-over-year sales growth and our Building HVAC segment, which had a record heating season in North America.

In addition, our Airedale subsidiary in the U.K. had a strong quarter despite the challenges of the fire that destroyed our manufacturing facility last year. We also completed the acquisition of Barkell, a manufacturer of air handling units in the U.K.

We delivered adjusted earnings per share of $0.15 for the quarter, which was down $0.03 from a strong fourth quarter last year. For the full year we delivered 7% sales growth and adjusted earnings per share of $0.73, ahead of our previous guidance and up 83% in fiscal 2013.

Overall, I'm pleased with our financial performance this year and in particular with our $51 million of free cash flow generation. Our balance sheet is strong and we have created a financial flexibility to execute our growth strategy. Mick will provide more details on our financial results in a few minutes, but first, I would like comment briefly on our segment results and market outlook for fiscal ’15.

Turning to page six, revenue was up 4% in the North America segment, with higher sales to commercial vehicle and automotive customers, offsetting a decrease in sales to off-highway customers.

Although, gross margin was up in North America year-over-year, operating profit was negatively impacted by a $2 million warranty charge related to unique matter associated with the specific product manufactured in North America for Building HVAC segment. We have identified the root cause and fully address this problem.

Last month we announced plans to close our McHenry, Illinois manufacturing facility and to consolidate all North American Parallel Flow heat exchanger manufacturing into other North American facilities.

Although, making a decision to close the plant is never easy, we believe this move is necessary to maintain the scale that we need in our manufacturing operations to deliver cost competitive products to our customers.

We recorded $2.4 million in restructuring and impairment charges in the quarter, and we expect to incur a total closure cost of approximately $5 million. In addition to some manufacturing cost inefficiencies that are inherent with winding down an operation. Once the plant is closed in fiscal 2016, we expect approximately $5 million in annual saving.

Looking forward, we expect mixed market conditions in North America continued during fiscal 2015. We expect heavy truck production to be up 10% to 15% and medium truck production to be up 3% to 8% versus the prior year. Our outlook for the off-highway is flat to down 10% with agriculture equipment segment of the off-highway market remaining a challenge in fiscal 2015.

Given our current mix of business which -- the good news in the truck market will be somewhat offset by weakness in the off-highway particularly in the agriculture and mining equipment sectors where we have heavier concentration.

Several of our off-highway customers continue to emphasize cost competitiveness and are aggressively seeking productivity improvement from their entire supply base. Despite these challenges, we see opportunities with these customers as we have demonstrated our ability to successfully compete in this region.

In the North America automotive market we are starting to see new opportunities develop with Detroit-based customers resulting from our latest design innovations for engine products and support of the OEs need to improve fuel efficiency.

Please turn to page seven. Our Europe segment sales increased 15% in the fourth quarter driven by higher sales to commercial vehicle customers, higher tooling sales and the impact of the stronger euro. Excluding the impact of currency sales grew 11%.

Sales to commercial vehicle customers are up 25%, driven by higher launch volumes of components for Euro 6 vehicles partially offset by a decrease in sales of Euro 5 components.

We anticipate that overall production volume of commercial vehicles to be flat to down 5% in Europe, driven primarily by the pre-buy of Euro 5 vehicles prior to the January 1, 2014 changeover. That being said, we expect our increased market share of Euro 6 components will result in higher year-over-year production increases for Modine.

Sales to automotive customers in Europe were down slightly in the quarter as higher sales of components were offset by a decrease in automotive modules as the BMW program continues to wind down.

We expect the broad European auto segment to be flat to up 5% in fiscal 2015 and we expect to see smaller declines in sales of BMW modules as the remaining programs near completion. Europe’s gross margin was negatively impacted by a $2.4 million warranty charge in the quarter, which was right across a number of different products.

As you know, our strategic focus over the past two years has been on restructuring this business. We are entering the final stage of this process and I am pleased with the work has been completed so far. We have reduced our assets in the region by $30 million and have lowered our annual costs by $16 million.

During this period we have also ramped up production in our Euro 6 commercial vehicle programs and manage to wind down the BMW module business. We have a few remaining challenge to overcome before to reach our alternate financial goals in Europe.

First, we need to complete the last remaining consolidation of our manufacturing operations in Germany. As I mentioned last quarter, we are combining operations from two manufacturing plants into one.

I am pleased to report that initial phases of the consolidation has been very well and we estimate that the transfer will take approximately 18 months to complete. This is a very complex move and we have a dedicated teamwork that make sure is completed successfully. As with any consolidation there will be some added costs and efficiencies that will impact our results during the consolidation period.

Second, we need to improve the production efficiency of the Origami radiator. As I mentioned during the past several quarters, we have made changes to the manufacturing processes related to our Euro 6 compliant radiators.

Our original Origami radiator plants call for a highly complex automated manufacturing process. We were not satisfied with the consistent -- consistency of this process during the initial launch phase. As a result, we made the necessary changes to the manufacturing process while maintaining a high quality of the product.

However, as a result of these changes, we are not at the margin levels that we initially assumed in our plan. Most importantly though, we are fully meeting customer demand and quality performance requirements, I'm confident we will continue to improve our margins as we move forward with the plant consolidation.

Another obstacle facing Modine Europe is the current level of production volume. Our volume in Europe is still significantly lower than it was three years ago and is lower than we anticipated when we set our objectives for the European restructuring program.

We expect the pre-buy of Euro 5 vehicles to continue to impact our fiscal 2015 volumes and are projecting European commercial vehicle market to be flat to down 5%. Despite these challenges, the team Europe is driving a necessary improvement, I'm confident we will meet our goal in this segment.

Moving to South America on page eight, excluding currency impacts, sales were down 6% with decreases to OE customers, partially offset by a slight increase in aftermarket sales.

Result experiencing declines in our main markets mainly commercial vehicle, bus and off-highway equipment, in particular the drop in agriculture equipment market during the past quarter was primarily due to delays in government-subsidized PSI program, which provides low-cost financing for machine repurchases in Brazil.

Our outlook for fiscal 2015 for this segment is for market conditions in Brazil to continue to deteriorate. We are projecting that the commercial vehicle and agricultural market -- agricultural equipment markets will be down 10% to 15% and for the aftermarket to be flat to down 5%.

We believe that there is a risk of further slowdowns associate with the World Cup this summer, but that the resumption of the government sponsored financing program for commercial vehicles and off-highway equipment may help the markets get back on track later in the year.

The recent slowdown in Brazil economy has challenged our near-term growth expectations. We will therefore focus on reducing our cost base and making it more flexible in order to maintain the profitability objectives at this lower production level. These actions include headcount reductions that will result in some severance costs during fiscal 2015.

Please turn to page nine. Sales for Asia segment were up 19%, once again driven by export sales from India. We saw increases in sales to automotive and off-highway customers along with higher tooling sales in both India and China. Our team in Asia has worked hard to manage our cost over the less several years as the heavy duty market stagnated with the slowdown of construction activity in China.

We're focused on diversifying our business model to become less reliant on the construction markets and are now launching several new products for the automotive and commercial vehicle markets in China, India and Korea. However, in order to be competitive in these markets, we must continue to maintain our intense focus on cost competitiveness.

We plan to use our increasing knowledge of the local markets to guide our decisions regarding growth opportunities in this region. The outlook for markets in Asia has improved slightly. We're beginning to see signs of improvement in India, specifically for off-highway equipment in commercial vehicle.

In China, however, expectations of growth in heavy construction equipment have been somewhat spiteful by recent comments from the government indicating that a short-term economic stimulus may not be forthcoming. In Korea, the strength of the Korean Won has led to softening of the Korean off-highway markets, particularly for export. Our team in Asia will be watching the market developments carefully and will act accordingly.

Please turn to page 10. Sales in our Building HVAC business were up 24% in the quarter. This is driven by $4.6 million increase in sales from our Airedale business in U.K. Airedale is currently producing at nearly pre-fire capacity levels in the temporary manufacturing facilities.

We have worked diligently to reduce their lead times to meet their customer expectations and order levels have remained strong. We will break down on our new manufacturing facility tech center early July and plan to begin production in the latter half of 2015. The quarter includes approximate $2 million of sales of Barkell Limited after our February 28th acquisition.

Barkell is a manufacturer of custom built air handling units located in the North of England. This acquisition allows us to expand our product offering into the air handling segment, further extending our overall business offering to the HVAC markets. Barkell has been a commercial partner with Airdale for some time and we're very pleased to welcome them to Modine.

In North America, our heating product sales were up $3.9 million in the quarter, continuing a record-setting trend. Along cold winter, we extended our selling season and our ability to keep up demand led to an increase in market share. Our building HVAC group has proven that they are truly a growth driver at Modine. The work of this group has accomplished this year with the recovery of the Airedale fire, the acquisition of Barkell and the management of unprecedented volumes in North American heating market has truly been remarkable.

Looking forward, given the elevated levels of heating product sales in North America in fiscal 2014, we do expect this mark to be down somewhat in fiscal 2015. However we continue to see positive trends in U.K. data center at air handling markets and expect these markets to be up 3% to 8%.

With that, I’d like to turn over to Mick for an overview of financial performance and guidance.

Mick Lucareli

Good morning. Please turn to slide 12. As Tom mentioned, we had a strong quarter with a 9% increase in sales. This includes the favorable FX and tooling impact of $5 million. As a result, our core sales were up approximately 7%.

In the quarter, gross margin increased 30 basis points to 15.9%. The margin improved despite large adjustment to warranty reserves in North America and Europe. In total, we incurred approximately $4 million of additional warranty costs. I am pleased that we are able to drive year-over-year growth margin improvement in each of the four quarters.

SG&A was up $9 million with several items accounting for nearly $6 million of the year-over-year change. The major items are as follows, in the fourth quarter of last year, we received an insurance rebate of $1.1 million, in payments received for testing services was $1 million higher.

This quarter includes $2.4 million of higher incentive compensation. Our SG&A in the U.K. was higher by $900,000 due to the Barkell acquisition in Airedale fire related costs, last, the current quarter includes business development activities that resulted in transaction costs and professional fees of $0.5 million.

Please note that we recorded $6.8 million of restructuring expenses and impairment charges. $4.4 million was tied to the consolidation of manufacturing operations in Germany and was mainly severance related. The remaining $2.4 million relates to the decision to close McHenry, Illinois manufacturing facility.

You can see that we had a significant benefit in our income tax line. As a reminder in 2008, we established the valuation allowance against the U.S. deferred tax assets. In this quarter, we reversed valuation allowances based on a variety of factors, including our earnings improvements and expectation that these trends will continue.

The reversal of the valuation allowance resulted in a one-time positive benefit of $119 million or $2.49 per share. While accounting can be somewhat confusing, this is truly good news for Modine. First, the reversal of valuation allowance is recognition of the hard work in previous years to return the region of profitability.

In addition, this means we will not pay cash taxes in the U.S. for the next several years as we realized these significant tax assets. The only downside is that we will now record tax expense in our income tax statement -- I’m sorry, in our income statement relating to the United States. Therefore our tax expenses shown on the income statement will be significantly higher next year.

However, as a reminder this is only a book accounting entry and we will not be paying cash taxes. We reported GAAP earnings per share of $2.49 in the quarter and adjusted earnings per share of $0.15 after adjusting for restructuring related cost and the tax impact.

Turning to slide 13. We generated $51 million of free cash flow during fiscal ‘14. This is our $52 million improvement from the prior year. The cash flow -- free cash flow was negatively impacted by approximately $9 million of cash cost for restructuring activity. So excluding this amount, free cash flow would have been $60 million.

Positive cash flow is continuing to strengthen our balance sheet. Net debt of $77 million is $63 million or 45% lower than the prior year. And our cash balance has increased to just over $87 million. Please note that about $17 million relates to temporary insurance proceeds from the U.K. fire.

Slide 14 highlights the results for North America and Europe. And in North America, fourth quarter sales increased $6 million or 4%. The segment gross margin improved 10 basis points, so negatively impacted by the previously mentioned $1.7 million of higher warranty expenses. As I previously stated, we recorded $2.4 million of expenses related to the McHenry plant closure. Adjusting for the plant closure cost, operating income was $9.8 million.

Now looking at our European business segment on the right side. Europe had a strong quarter with sales up 11% on a constant currency basis and 8% excluding tooling sales. Despite of $2.4 million increase in warranty cost, our gross margin improved 50 points to 12.3%.

SG&A increased $2.2 million, versus the prior year. This was partially due to our lower rate of VAT recovery which actually works as a credit or reduction to SG&A. Excluding the $4.4 million of restructuring costs, operating income increased $1.1 million from $6.9 million to $8 million.

Moving on to slide 15. We have a summary of the South American and Asia business segment. On a constant currency basis, sales in South America were down 6% or $2 million. The gross margin declined 240 basis points to 15.2% on lower sales volume. Overall the lower sales volume and higher SG&A in the quarter resulted in $2.3 million decline in operating income.

As Tom mentioned, we are not expecting economic conditions to improve in Brazil in the near future. For that region, the focus -- for that reason, the focus of the region is on lowering costs to match the lower sales volume. We are anticipating some severance costs in the New Year as we plan to reduce personnel costs. And obviously this will result in lower salary and wage expenses.

Now turning to the right side at our Asia segment, fourth quarter sales increased $3 million or 19%, continuing the trend of the past several quarters. Gross margin improved significantly, 700 basis points to 14.3%. We are continuing to experience good conversion on the higher sales volume.

And SG&A expenses increased $1.3 million, which includes $300,000 of professional service fees in support of our business development activities over there. The results still show an operating loss, but we continue to move towards breakeven and this represents a $400,000 improvement from the prior year.

On slide 16, is the building HVAC segment, sales were up $8 million, or 24% at the Airedale business, has returned to near pre-fire production levels. As Tom mentioned, the Barkell acquisition added $2 million of sales in the quarter. Gross margin decreased slightly 20 basis points to 28.4%, primarily due to sales mix. While earnings are up, there are several items to highlight, which impacted year-over-year comparisons by approximately $1.6 million.

First, we have Barkell expenses, which include $400,000 of normal SG&A costs along with $200,000 of acquisition related services. Also impacting the quarter was $0.5 million of Airedale fire related costs, not covered by insurance. And last, we are preparing for an SAP launch and incurred $0.5 million of related expenses.

On another note, we have not recorded any income for insurance proceeds related to the recovery of lost profits from the fire. We are reviewing our business interruption claim for lost profits, with the insurance company and we're expecting a settlement during the first half of fiscal ‘15.

Now let’s turn to fiscal ’15 full year guidance on slide 17. As Tom outlined, we expect mix market conditions in fiscal ‘15. We see improvements in the North America truck market and stable growth in European autos. We remain concerned about the economic climate though in China and Brazil.

We also anticipate weakness in global ag and mining markets. Therefore, we expect our revenues to be up 3% to 8% from the prior year. This will result in an increased to adjusted operating income, with the range of $65 million to $73 million as compared to $61.3 million this year.

There are several important factors to consider in our anticipated results. First, we are planning to incur roughly $3 million in costs relating to plant consolidations in Germany and North America. These costs relate to salaries of dedicated teams along with expenses related to labor and efficiency, scrap material and inventory builds. Historically, we have not considered this as restructuring costs for adjustments to operating income and therefore, our guidance assumes the absorption of these costs.

Second, as previously mentioned, we are planning to incur some costs associated with aligning the Brazilian business to match lower sales expectations. And third, we are assuming the business interruption claim related to the U.K. fire will be received in the first half of the fiscal year.

We anticipate that SG&A will run in the $190 million to $200 million range, driven by a few key items. First, SG&A will increase in the U.K. by approximately $5 million due to the acquisition of Barkell and the resumption of Airedale to the normal level of operations post fire.

In addition, we estimate that Europe’s VAT recovery, the tax recovery maybe nearly $3 million lower than in this fiscal year, in fiscal ’14. Last but not least, we will not recover as much from third parties who are using our testing facilities in the U.S. and Germany. As a partial offset, we are expecting to sell the German wind tunnel, which will result in a gain in positive cash flow.

Earlier, I walked you through the reversal of our tax valuation allowance, which will have a significant impact on our EPS calculation. While it is good news because there is a significant tax benefit to Modine, we will now have to book U.S. tax expense on the income statement.

We see our full year tax expense in the $22 million to $25 million range. This has roughly doubled the tax expense recorded in fiscal ’14, before the reversal of the valuation allowance. Once again, we will not pay cash taxes in the U.S. until we fully utilized our net operating loss carry forwards, which will cover approximately $130 million of future taxable income.

So just to summarize, we are anticipating a nice increase in operating income but given the higher tax rate, adjusted EPS will be in the range of $0.63 to $0.73. When trying to compare next year’s EPS, we estimate that the tax changes in North America have an $0.18 negative impact on fiscal ‘15 earnings per share. So on an apples-to-apples basis, factoring in the tax impacts the fiscal EPS -- fiscal ‘15 EPS range would be roughly $0.81 to $0.91.

Obviously, there are numerous moving parts and complexities in the tax line, but we are pleased that the underlying income from operations is projected to improve again in fiscal ’15. And as we look farther out, we are quite pleased that our order book remains strong and consistent with the prior year.

With that, Tom, I will turn it back to you to wrap up.

Tom Burke

Thanks, Mick. Can you turn to page 18, please? I’m pleased with the results for the fourth quarter and for the fiscal year as a whole and I’m extremely pleased that we are able to generate over $50 million of free cash flow. As Mick mentioned, this number is even higher when adjusted for tax spend on restructuring.

Operationally, we continue to focus on improving the production efficiency of the Origami radiator and executing the final restructuring steps in Germany. As I mentioned earlier, there will be some additional costs to complete these actions but we are confident in the end, we will reach our profitability goals.

We are seeing improvements in some of our markets, mainly commercial vehicles in North America and affecting Europe for us and also in global automotive. Indian markets continue to improve and we expect this trend to continue. This was partially offset by challenges and others particular at Brazil in the global ag and mining equipment market.

China volumes have held steady but we clearly see that our diversification efforts, particularly our new book of business in the automotive market will be imperative to fuel future growth. And as Mick mentioned, we expect total company revenues to improve 3% to 8% next year.

Strategically speaking, we continue to be guided by our enduring goals, leading us to focus on higher revenue growth, return on capital enhancement, diversification and continuous improvement. This year, we’ve taken several significant steps toward reaching these goals, recognizing that we are on a journey. We assured, we will address any and all challenges we face, while never letting up and are maintaining our position as an innovative leader.

Our innovative capabilities will ensure that we continue to provide our customers with the products and value they expect and generate returns for our shareholders in this increasingly competitive marketplace.

And with that, we’d like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Robert Kosowsky of Sidoti. Your line is now opened.

Robert Kosowsky - Sidoti

Just had a question, I guess, first on Europe. Just curios about the cadence of the commercial vehicle sales because it seems like it was a lot stronger and the March quarter then I thought it was. I’m wondering if you are seeing a slowdown here in the June quarter as the pre-buy starts to impact results.

Tom Burke

Yes. It’s a real mix switch that’s going on. We have much more content on Euro 6 than we had on Euro 5, so the pre-buy affect on Euro 5 gave us a boost coming through last year. But now we have a richer mix, so we are seeing overall increase in commercial vehicle sales year-over-year. But Euro 5 component is lowering, but the mix of trucks has given us the boost on an overall improvement that we see in Europe commercial trucks.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then also switching to North America, that warranty expense, you’ve included that in your, you didn’t ex that out in the adjusted EBITDA?

Mick Lucareli

Yeah. The $2 million in Europe and $1.7 million in U.S. are in the numbers. There was no adjustment to back those out. We just want to point out that the conversion in the margin would have been higher in the quarter if we had those higher warranty costs.

Robert Kosowsky - Sidoti

Okay. And then the one last question, it looks like SG&A in your forecast for this year is going to be up at a higher rate of sales. And it seems to be going higher from higher growth spending and higher SAP. And I’m how long this is going to last and when do you think you can get to return of leveraging SG&A?

Mick Lucareli

It’s Mick. I will take that question and then look to my boss here. No, we’ve had for probably a couple years discussions with investors and analysts. We are still well below, let’s say, pre-recession level. The company was running at a $240 million kind of annualized run rate. But at some point, we tightened down as tight as we can go and we’ve said now for a couple quarters, we see a little bit of the SG&A growth coming back from normal investments we need to do in people and for growth. Really it was -- as a percentage of sales, we really need to have happen is we need the topline to continue to move in the right direction. We’ve had a few years of little bit lower sales growth. So in dollars, SG&A will increase, but to drive it as a percentage of sales back down, we nearly need to move above this kind of $1.5 billion range.

Tom Burke

I think Mick answered that perfectly. Clearly our order book is strong, remain strong, and you’ve got to support that with added SG&A to deliver on that and the growth resources we put into place, but we watch this very carefully and we expect that as a percent of sales we stay under control.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then finally, how much of the headwind do you see from inefficiencies this year between McHenry and Europe?

Tom Burke

Yes. And just again, these will be and -- these will be numbers we will absorb and we will discuss in our public filings, but we estimate about $3 million in the earnings guidance we provided. And that again relates to, we have dedicated, the complexity of these two are pretty big. So you have a dedicated teams of people managing them. And then when you have obviously the wind down of a plan and wind up of a catching plan, the receiving plan, we have laboring efficiencies, scrapping efficiencies, things like that that are very hard to quantify, but they are planned for in our budgets, in our forecast. So that helps you out.

Robert Kosowsky - Sidoti

Okay. So whatever easy comparison we had in the warranties not recurring, I guess given the way this year I guess some inefficiencies from the plans right?

Tom Burke

Yes, and our hope is obviously we work with the teams. We hope to push those -- that $3 million as low as we can, but we think it’s better to head in knowing that we’ve done enough of this that we know there will be some level of it, and then we will follow up with you to let you know how that is shaking out.

Robert Kosowsky - Sidoti

Okay. And if you look at the scope or the size of these projects, would you expect the 2015 to be the bulk of those inefficiencies that you are going to absorb and then 2015 you will see that or 2016 you will see that comparison turn more favorable?

Tom Burke

Yes. It’s also timing and calendar so that most of that cost will be absorbed in fiscal ’15, I mean some will trail out, but we expect the -- again we have good experience doing these teams dedicated and we should hit fiscal ’16 with the majority of that behind us.

Robert Kosowsky - Sidoti

All right. Thank you very much and good luck.

Tom Burke

Thanks.

Operator

Thank you. Our next question comes from David Leiker of Baird. Your line is now open.

Joe Vruwink - Baird

Good morning. This is Joe online for David.

Tom Burke

Hi, Joe.

Joe Vruwink - Baird

I wanted to revisit Europe and just thinking about your revenues, [CV] (ph) revenues up 25% in the market. That looks like production was about a few points. It is that type of outgrowth we should be expecting all of fiscal ’15, or is there any sort of inventory stocking on Euro 6 engines that kind of a base going forward?

Mick Lucareli

This is Mick, Joe. I will give you the kind of the numerical look at and then Tom add more color to what he is hearing. But short answer is, no. We are not anticipating that level of growth. Big picture is we look at the new fiscal year. We do have a sizeable amount of truck business that is growing and that’s just from the gain, our market share again of Euro 6 vehicles. On the opposite side, we’ve got call it 10 million to 15 million of the automotive BMW going down and another 15 million of tooling. So you’ve got a 25 million to 30 million headwind on BMW and tooling revenue. On the positive you’ve got some pickup on the truck business and then that excludes anything of what’s going on with the general, obviously with the market, but we are not going to see that level of growth in Modine Europe next year from the topline.

Joe Vruwink - Baird

Okay. Just from kind of a markets heath standpoint, so we heard that obviously a lot of Euro 5 deliveries taking place, less so it seems like in Q2 and then by the second half, the entire market should be Euro 6. So if you had to take a point on that guidance range for the market today, would you be skewing more towards the high end or the low end?

Tom Burke

I would say we are right in the middle.

Joe Vruwink - Baird

Okay. Safe answer.

Tom Burke

Yes. Safe question, Joe.

Joe Vruwink - Baird

Switching gears to North America, so on the flip side, 4% revenue growth this quarter versus commercial vehicle volumes that were up quite handedly Class A production, the 20% increase. And it seems like just based on what some of the off-highway customers have been saying there might have been some dealer restocking during the quarter. So any color on just the pace of revenue growth in that business?

Mick Lucareli

Yes. Again it’s Mick, I will jump in on the top side and Tom can add color. We really think, I mean you know us well, but we’ve got about 18% to 20% of that business segment is Class A and we are seeing some benefit. Clearly the benefit from the market data, everybody is watching. And then we have our medium segment, but the rest of the business pretty high reliance on service, ag, and construction, and we’ve really from our side, we are not seeing the pickup in order rates in the off-highway space, specifically in the ag market. And then we do have a pretty heavy emphasis at Modine on the really big construction equipment, including mining, and we haven’t been seen a pick up on the heavy equipment.

Tom Burke

No, well, I think, we do -- on the off-highway side, we expect maybe construction or lighter construction equipment to pick up some this year which is in there, but right now that gain in commercial truck has been offset by pretty steep decline in segments of off-highways.

Joe Vruwink - Baird

Okay. Bigger picture normally around the fiscal year end you’ve provided two or three year backlog updates. Just talking to OEMs, visiting you guys, and things like CONEXPO and mid America, there definitely seems to be a greater emphasis on thermal technology now that we are done with the emission side of the equation. So emphasizing the performance of these engines that can bring in the thermal suppliers as a big piece of that. Was that -- in the background what those backlog look like as we get out of fiscal ’15 and you start to look towards ’16 and ’17 horizon?

Tom Burke

We are very bullish on our outlook on the backlog. We gave guidance year or two ago and that guidance still kind of holds forward and consistent. So the activity on development opportunities and supporting new projects is very high. One of those things that’s challenging our SG&A as we mentioned earlier in our previous call -- previous question.

So we remain very bullish on the outlook with just what you said. As the missions changes got contained, there is now big focus on fuel efficiency and that brings in more precise engine management things, challenges that require new innovations that we’re really well-positioned to deliver on it. So we look very positive with the outlook.

Mick Lucareli

In the past, Joe, you know and others know, we’ve tried to calculate backlogs and net order book, to add to what Tom saying, there is some complexity we know is in there. When you have a market downturn or a shift out a delay of, let say Euro 6 production, then also those numbers move and we have to try to reconcile for all of you that we win or loss the program and the answers are normally no with the timing.

But to also add color to your question, we still have, the nice thing about Modine is we have a nice view out the next few years because of the launch cycle and that order book still stays north of $200 million, which is the Tom’s point consistent with what we’ve seen in prior years.

Joe Vruwink - Baird

Great. And then my last question just on the SG&A item. It looks like basically the guidance taking the Q4 spending levels and annualizing that? And obviously, within that it would seem to imply that incentive comp levels stay flat with the Q4 levels? I’m just wondering, how much was the move in the stock price during the quarter impacting that overall $2.4 million amount you touched on?

Mick Lucareli

Yes. So, I mean, good questions. One on incentive comp, year-over-year this year is up. It’s going to be up in fiscal ’14, significantly as you pointed out. Fiscal ’13, there was zero incentive comp payments. The targets in fiscal ’14 were set on return on capital employed and free cash flow, as Tom walked through the numbers at the closing. It’s been a very good year.

So based on the target set by our committee and the Board of Directors, fiscal ‘14 will have a higher incentive payment. And then next fiscal year, we always said into the year, we’re planning for a payment but obviously, we don't know until the year shakes out.

Beyond that really the big drivers if you kind of take the midpoint to the range, there’s just a lot of moving pieces in there, where you’re looking at maybe at the midpoint like a $13 million increase in SG&A.

This year we’ve had abnormally low SG&A due to the fire in the U.K. Those cost just for the non-accounting types. We obviously incur those costs but the way the insurance works is, they are offset portions of those by a receivable, insurance receivable to which really what you see is the lower cost on the Barkell, I mean, the Airedale side.

Then we have Barkell. We’ve had the situation for the last couple of years if you recall. We had a problem, a few years ago with VAT in Europe. Then we had a large accrual set up to as a potential liability to settle those. The good news is the last few years we've been going and cleaning up all of those and settling them and they’ve actually been working in our favor.

So we've been able to reduce that accrual and that’s up to a $3 million impact. And then the last big one is the -- the wind tunnel in Europe. The good news this year is it has been pretty heavy demand. It’s been fairly well utilized while we've been marketing it for sale. Our plan is to sell it in the new fiscal year. So we won't have those testing income.

But again, we know the trend in the region there and it’s the right time to diversify on non-strategic asset and generate the cash and reduce the cost going forward. So long answer to your question but I want to touch on a few of those items that are really just things we need to kind of get level set here as we’re completing our restructuring.

Joe Vruwink - Baird

Okay. Now that’s all good color. I’ll leave it there. Thanks very much.

Tom Burke

Yes. Thanks, Joe.

Operator

Thank you. (Operator Instructions) Our next question comes from Shivangi Tipnis of Global Hunter Securities. Your line is now opened.

Shivangi Tipnis - Global Hunter Securities

Thank you, guys for taking my question. I wanted to ask about the China excavation market and your concerns there. And what kind of trends are you actually seeing specific to China?

Tom Burke

As you know, we have a heavy concentration in the China excavator market. And we’ve obviously, are looking to diversify there. But specifically, on excavators, we anticipated sales growth this year and had came out to chute strong in the calendar year, year-over-year basis. But in April, there was some comments by the government on not putting forward the stimulus package for increased infrastructure and that seem to have stymie the growth. So it’s kind of flattish right now.

And our outlook for the rest of years is kind of -- that the market will remain kind of on the flat sales level. So that boost we probably might get with added infrastructure investment from the stimulus is not going to happen, that’s how we’re planning that going forward.

Shivangi Tipnis - Global Hunter Securities

Okay. Thank you for the color. My other question is actually on the insurance claim. Can you just talk about exactly, how much do you actually expect in insurance proceeds in 2015 and is it like a part of your 2015 forecast as well?

Mick Lucareli

Yes. So in our outlook and in our guidance, we are assuming that we’ll receive an insurance settlement, the payment for lost profit. Going through the balance sheet all in most of fiscal ’14, is a sizable amount of receivables and payables. We estimate that the total cost of this, when we finally have our new facility up and running, we will be in the $50 million range.

But the big piece that we want to make sure, that all of you understand is we also get reimbursed. So those would be traditional cost of operations. We’re in a lease facility, a new facility. We have to build the new one. In addition, we get reimbursed for the lost profits, while we were shutdown. And right now, we estimate that that’s going to be in a $3 million range. So we’ll follow-up with you once we finalize that discussion with the insurance company and we receive the payment then that would be booked through SG&A and show up in income.

Shivangi Tipnis - Global Hunter Securities

Okay. And so the $0.5 million of insurance that was not actually covered by the insurance, that one is not included, right?

Mick Lucareli

No. Now it’s just, we had an asset on the balance sheet for construction and progress that was linked to the facility before burn down. So we needed to write that asset down. We’re actually looking at expanding before the fire happened, that’s what the $500,000 relates to.

Shivangi Tipnis - Global Hunter Securities

Okay. Thank you for the color guys.

Mick Lucareli

All right. Thank you.

Operator

Thank you. I’m showing no further questions at this time. I’d like to turn the conference back to Kathy Powers.

Kathy Powers

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

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Modine's (MOD) CEO Tom Burke on Q4 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts