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

Modine Manufacturing Company. (NYSE:MOD)

F2Q2011 Earnings Call

October 28, 2010; 11:30 am ET


Tom Burke - President & Chief Executive Officer

Mic Lucareli - Vice President of Finance, Chief Financial Officer & Treasurer

Robert Kampstra - Vice President of Investor Relations & Corporate Controller


Greg William - JPMorgan

Keith Schicker - Robert W. Baird

Walt Liptak - Barrington Research

Greg Macosko - Lord Abbett & Co.


Good day ladies and gentlemen and welcome to the second quarter 2011 Modine Manufacturing Company earnings conference call. My name is Francis and I will be your coordinator for today. (Operator Instructions)

I will now turn the presentation over to your host for today call, to Robert Kampstra, Vice President of Investor Relations and Corporate Controller. You may proceed.

Bob Kampstra

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

We’ll be using slides for today’s presentation. Those slides are available through both the webcast link, as well as a PDF file posted on the 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.

On page two is an outline for today’s call. Tom and Mic will provide comments on our second quarter results, as well as on our strategic overview. At the end of the call there will be a question-and-answer session.

On page 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 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. Starting on page four, I am pleased to announce that we continue to move our company forward with solid performance in our second quarter. This performance gives us increased confidence that we are rapidly moving towards our stated objective of 11% to 12 % return on capital employed by March 2013, inline with our three year plan.

The hard work by all of our employees over the last two years in driving our four point plan framework is resulting in improved financial performance across the Board. Mick will walk you through the financial details in just a minute, but first let’s turn to page five.

I would like to provide some details on key events in the quarter and summarize my thoughts and views on the markets. In September, we presented our latest technology roadmaps that the IAA truck show at Hannover, Germany. This is the preeminent truck show globally and we came away very enthused about the engagement with all of our major truck customers.

The interest in our product offerings was extremely high and provided us further confidence so we can attain our growth objective of increasing our market share for the power tranquilly module business in Europe. To that point, we recently were rewarded an order with a second major commercial truck OEM for year ‘06 emission standards, which underscores our strong reputation and presence in the market enable by the value provided by our Origami technology.

The IAA truck show also provided an opportunity to meet with several of our Asia truck customers. Our team in Asia continues to make great progress in gaining market share in India and just recently we received a significant order for a power tranquilly module with the major truck producer in China.

I want to stress that we are continuing to make the right moves in our cost base and product portfolio to assure we attain and sustain a strong and profitable presence in the global commercial vehicle markets. Our strategic decision is too deep in our focus on commercial trough an also the off-highway markets through the economic crisis that have proven to be very successful.

New business wins and prospects with our off-highway customers continue to provide us with significant growth in China, in India. We forecast that our sales revenue in Asia will grow by approximately 90% this fiscal year, with many launches coming inline, online in both China and India, primarily in the off-highway markets.

Turning to the broader markets, we continue to see increasing sales of commercial trucks in North America and Europe. In North-America we are assuming a total class A market of 149,000 units per calendar year 2010 with medium duty trucks coming at 111,000 units for the same period.

Our current estimates for calendar 2011 are consistent with ACT research at approximately 230,000 units for class A and 130,000 for medium duty vehicles. In Europe, the growth in demand has been slower to response from the economic recession, but we expect it to increase more significantly over the next year.

Our current assumptions are that Western Europe truck and bus sales are reached 320,000 units for 2010 and will increase to 380,000 units for 2011 calendar year. We project the truck sales in Asia market and in South America will continue at their current strong levels through 2011. Nearly every OE off-highway customer in Asia and South America is running at full capacity and high demand also exist in the North America.

We expect construction machine orders to remain strong globally for equipment associate with mining, energy and agriculture. We expect construction machine we demand in North America and Europe to remain at lower levels through 2011, as building and housing starts remain depressed.

In the Automotive segment the vast majority of our sales as you know are with German OEMs, who continue to see strong sales driven mostly by demand from China. We anticipate the demand for German luxury brands coming strong through 2011 will provide solid sales for our European business segment. However, and as we’ve stated several times, we have made a strategic decision to limit our involvement in the powertrain cooling module business. I want to stress that again; just the powertrain cooling module business in the highly competitive automotive segment.

BMW module sales will remain strong till calendar 2012 and 2013, at which point we will begin to transition down over a three to four year period. In conjunction with this transition we will focus our efforts away from modules and concentrate specifically on components of advantage products such as oil coolers, charger coolers and contexture to serve the automotive segment.

Switching to the commercial product’s group segment, we project that our served markets in North America and Europe will remain at stable levels through the 2010 calendar year. We are entering a strong heating sales period in North America and we anticipate solid orders from Effinity93 high energy efficiency heater this winter.

In both our North America and European commercial HVAC business, we are continuing to bring new products to the market. Last month at the (Inaudible) HVAC show in Germany, our AOD team represented two major technical offerings in our data room cooling product line that we will provide further energy savings enhancement to our already market leading line of high efficiency products.

In North America the team is preparing for the Ashray [ph] show in January, where they will introduce some exciting new products for the commercial HVAC market that will broaden our range in this market. The commercial products group is a strategic area that we are emphasizing for strong growth and returns.

Before I turn it over to Mic, I want to make a couple of comments about the state of our manufacturing operations. During the quarter we took further actions related to our European footprint.

We entered into a contract assembly agreement with a company that will take over responsibility for the employees and the assembly of automotive models out of our Wackersdorf Germany facility. I am very pleased with this creative method of improving our European footprint and a potential severance liability, while giving our workforce continued employment opportunities.

Looking broadly at our overall operating effectiveness, we are pleased with most of our segments this past quarter; however, we are experiencing some challenges that impact our ability to fully capitalize on the strong volumes.

Firstly, we’ve experienced some supply chain constraints with the growing sales volumes, requiring expedited rate and other cost to ensure that we continue to meet the increasing customers demand.

Second, we are incurring more overtime several facilities with continued and unpredictable increases in the customer demand and finally we have experienced some in efficiencies as we transition our European condenser business into a new larger facility. This facility will be the first to launch our new Origami technology next year and we are very enthusiastic about this launch and our growth opportunities it presents.

So with that I’ll turn it over to Mic to walk us through the details of the financial of our second quarter. Thank.

Mick Lucareli

Thanks Tom and good morning to everybody on the call. Let’s turn to slide seven and I’ll walk through the income statement. Lots of moving pieces in the quarter, but nonetheless it was a good quarter.

Sales increased by $63.6 million or 23% in the quarter. As Tom said, the increase was driven by strong growth within the commercial vehicle and highway markets in North and South America, as well as European automotive and commercial vehicle markets. Modine Asia also experienced significant growth in the quarter due to numerous program launches. I’ll cover segment results in more detail in just a few slides.

Gross profit increased by 36%, resulting in 170 basis point increase in our gross margin to 16.7%. The strong gross margin improvement was primarily the result of higher volume combined with our lower overhead costs.

As anticipated, SG&A increased by $8 million yet remained flat as a percent of revenue. The increase is due to a number of items; increased employee compensation expense as we reinitiated salary increases this year after holding those salaries flat during the recession; higher net engineering and development expenses as we are absorbing more costs this year in preparation for numerous program launches and higher pension expenses as a result for the current interest rate environment. The lower interest rates has caused our pension liability to increase.

We are continuing to manage SG&A very aggressively and expect to see it decreasing as a percentage of sales as our sales recover from the recession. Income from operations increased by 138% to $11.2 million from $4.7 million in the prior year.

During the quarter we also successfully completed our debt refinancing, which provides us with lower interest rates, greater flexibility and ample liquidity. As a result and as we expected, the interest expense includes $20 million of refinancing costs, made up of a $16.6 million prepayment penalty and $3.4 million of deferred financing costs.

Other income is primarily comprised of currency translation affects on our inter-company loans. During the quarter other income increased by $4.7 million due to the positive translation effects on these inter-company loans.

We continue to have a high effective tax rate due to the complex nature of our current tax situation. Despite the total company’s pre-tax earnings loss, the company is a tax payer in certain foreign jurisdictions such as Brazil, Hungary and the U.K.

Sequentially our EBITDA is down from Q1; however, gross margin is flat with the prior quarter and the decline was due to our expected increase in SG&A. I am very pleased with the results this quarter. Excluding the $20 million of refinancing costs, we would have reported $8.2 million of income from operations or a positive $0.18 earnings per share.

Turning to slide eight, in the press release we’ve noted that we made to other period adjustments and I just want to take movement to address them. First there was a $3.3 million non-cash post retirement curtailment gain related to the closure of our Harrodsburg, Kentucky facility. $1.2 million of that should have been recorded in our fourth quarter of fiscal ‘10 and $1.7 million should have been record in our first quarter of 2011.

Secondly, identified a $1 million gain that should have been recorded last quarter from a commercial settlement with one of our suppliers in July. As a result we made the following positive adjustments to our results. We revised our first quarter results by $2.7 million to reflect a $1.7 million and $1 million adjustment that should have been made in our first quarter and in the current quarter we reported an out of period adjustment of $1.2 million, to correct the post retirement gain that should been recording in our portfolio last year.

Year-to-date results in our press released have been revised for these adjustments. Obviously we are not happy when we estimate prior period adjustments, but new controls will be put in place to address these issues.

The chart on slide eight shows pro-forma results on a year-over-year basis. For bank convents an analytical purposes we’d like to review the adjusted results. It allows us to adjust the reported results for non-recurring costs, so we can look at trends on a pro forma basis.

For a comparison purposes there are two significant adjustments to pre-tax earnings and EBITDA. The first is the $20 million of refinancing costs which I walked through on the previous slide. The second is the $4.8 million increase in other income from the translation impact on a inter company loans, which I also describe in the prior slide.

Also during the quarter we incurred $1.4 million of restructuring and repositioning costs. These costs primarily relate to the previously announced plant closures. This is also offset by a $1.6 million gain related to the post retirement procurement and the closure of our Harrodsburg, Kentucky plant which I just walked you through.

That net and on an apples-to-apples basis, Modine’s pre-tax earnings increased by $8.3 million to $9.4 million from just over a $1 million a year ago and adjusted EBITDA increased to $26.6 million or 17%. If you prefer to look at the business from an operating income level, we can use the same adjustment up above. Primarily the adjustments would be the restructuring repositioning, the impairments and the post retirement.

Operating income would have been $12.1 million, in the quarter which is up 73% from 5.1 million. There is very good gross margin conversion on that, which is partially offset by the higher SG&A as we expected.

Turning to slide nine, we have a summary of our segment results. We experienced strong growth across all fourth of our vehicular segments. As Tom discussed, we saw improving volume in the North American and South American truck, Ag and certain off highway markets. With this incremental volume we saw a nice margin improvement in both of those segments.

Modine European benefited from the continued strong sales of luxury auto exports from Germany and to lesser extent in improving truck market. Our gross profit increased inline with sales. The margin was flat in Europe as the increase in volume was offset by higher operating costs.

The biggest contributor in this regard was a transition to the new condenser facility in Austria. We are moving out of an old lease facility and into our new larger facility which will support our condenser line, including the new Origami design. This comes with some inefficiencies and is receiving appropriate management attention.

Modine Asia is experiencing rapid growth coming off of a very low base and driven primarily by numerous program launches. As volumes increased, Asia is rapidly approaching break-even, which we estimate to be within the next year when annual sales reach approximately $80 million to $100 million.

And despite relatively flat markets are commercial HVAC division showed modest growth and further improvement in gross margin. As most of you know, this segment sells products to a number of diverse end markets and applications. We have experienced strong growth in our coil condenser business which sells a various OEMs in the HVAC and refrigeration industries.

We’re also seeing good preceding stocking orders for our heating products. Chillers and precision cooling for data centers experience more modest growth, but have been negatively impacted by the weaker British pound, and last, sales of HVAC products that used to retrial fit schools have been soft due to state budgetary restrains.

Overall Modine’s growth in this segment has been driven primarily by our new product introductions and incremental market share. The commercial product segment continues to be one of our highest returning business units and remains a focused area for future growth.

Turning to slide 10, we continue to be pleased with the rapid improvement in our gross profit margin. The chart shows the benefits of increased volume on our reduced fixed overhead structure. As a reminder we have closed and exited 12 plants since 2007. As a result, our gross margin is exceeding pre-recession levels, even though our total sales are well below those same levels.

While the gross margin line has a nice flow, we do not expect it to increase every quarter to show a perfect sequential trend. There are several seasonal patterns in our business such as the summer shutdowns in Europe or the holiday shutdown in North and South America and seasonality in our commercial HBAP segment.

We also can have variability in our quarterly manufacturing cost due to program launch activity, plus there are ongoing manufacturing footprint changes that can cause temporary inefficiency. And last, rapid changes in our commodity prices have a lag effect on our gross profit. Bottom line, we are focused on the long-term trend and are pleased with that direction.

As previously stated, our near-term objective is to get our gross margin back in the 18% to 20% range as volumes return to previous recessionary level. We believe that can be achieved with the existing customers and programs and our future manufacturing footprint. The incremental volume will come from a combination new program launches and market recovery.

Turning to slide 11, we have a few summary statistics on the balance sheet and cash flow. I am very pleased to report this quarter the progress in managing our balance sheet and cash flow. First we completed a very successful debt refinancing in the quarter. This entailed a new $145 million revolving credit facility, which was extended to four years from three previously. We also refinanced our long-term debt by completing a 10 year, 125 million private placement with prudential which reduced our interest rate by approximately 3.5%.

For the next several year Modine has plenty of liquidity and no pending maturities. In addition, we have a traditional covenant package that provides significant flexibility to strategically manage our business.

I’m also happy to say their operations generated free cash flow, of $14.6 million during the quarter, excluding the medical payment. This is further evidence of the benefits of Modine’s new cost structure and discipline of our operating units. I expect that the company will continue to generate positive free cash flow in the second half of the year and we remain focused on creating free cash flow to preserve our balance sheet and support our growth strategies.

Now turning to slide 12, for the full year outlook. Overall we are taking in the range of our adjusted EBITDA guidance. We feel that the current environment supports the our brand of our previous $105 million to $115 million range, therefore we are adjusting the range to be a $110 million to $115 million of adjusted EBITDA.

Our confidence in the upper end of the range is driven by the stronger volumes and expectations in our end markets. As a result, we are increasing our sales growth expectations to 18% to 22%.

Year-to-date we have been converting slightly below 25% on our incremental volume and we estimate the full year conversion will be between 20% and 25%. This has been partly driven by higher manufacturing costs in certain areas. For example, the strong volume recovery in North America has caused some supply chain problems leading the higher freight costs. We are also paying more over time than we had budgeted.

In Europe we have some additional costs due to the transition in to our new condenser facility and the expected launch of our Origami products. And last, copper, aluminum and steel increased about 20% in the quarter in Q2 and there will be a slight lag before those changes can be reflected in our current pricing arrangements.

We continue to see SG&A increasing $15 million to $20 million, but decline as a percentage of revenue. As a reminder, roughly $9 million is due to the increase in our net engineering and development costs, approximately $4 million is a result of the actuarial assumptions and resulting higher pension costs.

Interest expense will be approximately $35 million and as a reminder, $20 million of that related to the refinancing in this quarter. We are increasing our cash tax guidance slightly as a result of the increase mix of foreign earnings.

In summary we continue to see a strong full year result with adjusted EBITDA $110 million and $150 million range, which is an increase of 28% to 34% over the $86 million reported last fiscal year and growing at a faster rate than our overall sales.

With that, Tom I’ll turn the call back to you.

Tom Burke

Thanks Mic. I’d like to conclude with a few comments on our strategic outlook. Turning to slide 14, I would like to reemphasis the core element of our strategy. They are designed to ensure the long-term growth in sales and most importantly higher returns for the company and to our shareholders.

First, the fundamental focus on our four point plant strategy remains intact. We have greatly solidified the strength of our product portfolio and we will continue to be aggressive in optimizing our manufacturing footprint per scale and lower costs. Through this goal we have now exited as Mick mentioned 12 facilities in the last four years.

We also remain very aggressive in managing our SG&A cost as a percentage of sales. We are now running at a rate, about 13% of sales versus our three year target of 11% to 12% which we are focused on to deliver and we have prudently managed our capital appetite in the current economic environment with projected annual spend rate below $65 million, focused to keep the run rate consistent.

As I have mentioned earlier, all of these factors together give us full confidence that we will attain our three year objective of 11% to 12% return on capital employed by March of 2013.

Second, we remained very aggressive in our focus on new technology to serve the ever increasing demands for higher energy efficiency in all of our markets. For example, this week the EPA proposed new green house gas emissions and fuel efficiency standards for heavy and medium duty commercial vehicles.

When enacted these proposed standards create further enablers for our fuel management technologies. We believe our focus on protecting critical research projects and technical capabilities through the economic crisis will serve us and our shareholders well into the future.

We expect these projects will expand our market opportunities and provide significant growth in the three to seven year timeframe. This includes project that we’ll build on our new Origami technology, capitalized on adjacent market opportunities in the commercial products business, provide new capabilities to recover and reuse wasted energy, and offer solutions for alternative energy sources. All of these projects were great potential for profitable growth.

Third, we are putting more attention in to buildings strategic relationship with our targeted customers in our growth markets. Our objective is to build relationships so we can collaborate key customers on delivering value through innovation and operational excellence. This is clearly becoming a reality with a handful of critically important customers and exciting new opportunities are developing as a result.

Fourth and finally, we are relentless in our pursuit in improving the effectiveness of all our operations and functions throughout the company, through the principles of the Modine operating system.

We have many challenges in front of us as we aggressively launch new products and make the step-by-step changes that are necessary in improving the cost base for manufacturing footprint. These changes are not with out risk and in some limited cases we are experiencing inefficiencies as we transition to our new footprint, but we remain focused and confident that we will meet and exceed our targets.

Continuous improvement will be the inevitable result of us engaging as a team and building the necessary discipline and capability deeper into our organization with the Modine operating system framework.

In conclusion and as we look back on economic crisis, our goal was to emerge as a stronger company. I am proud to say that we are a stronger company, both in our current condition and our longer range potential. We are excited about the potential of our company that all of our 6000 employees have worked so hard to establish.

With that we will be happy to take your questions.

Question-and-Answer Section


(Operator Instructions) Our first question is from the line of Ann Duignan or JPMorgan. You may proceed.

Greg William – JPMorgan

Good morning. Actually, almost afternoon here you guys. It’s Greg William sitting in for Ann Duignan.

Tom Burke

Hi, Greg.

Mic Lucareli

Hi Greg

Greg William – JPMorgan

Hi. Can you talk a little bit about the margins? You mentioned that the Europe margin’s down a bit from the condenser plan consolidation in Austria. How far along are you with the consolidation efforts? I guess what inning are you in, etc...

Tom Burke

Well physically we are approaching the latter innings. We’ve got the majority of the equipment. There’s four furnaces involved; a significant amount of capital equipment is gone into to make this transition. This is all come out about at a very high peak period in European demand from the premium automotive sales we’ve talked about.

So we have been hitting a high market, launching a new technology and moving equipment, all same time, so we feel that we are now at the back end of the physical moves and now we are bringing that together, driving out the inefficiencies to developed. So it was a major move but we feel well in control. We got all of management to over site in an engagement that we should as Mic mentioned.

Greg William – JPMorgan

Okay and then moving on to Asia. I think you mentioned a breakeven next year. I didn’t catch it all. Was it $80 million to $100 million? That’s an annualized run rate to breakeven or is that what you guys are looking for next year?

Mic Lucareli

That’s our annualized run rate for breakeven, $80 million to $100 million and next year is where we think we will cross that threshold break.

Greg William – JPMorgan

Okay thanks for clearing that up. And Tom you mentioned the success you had with IAH truck show. I know Ann was there in Germany and did you get incremental success in business development from the show directly?

Tom Burke

Well, I mean we did – the orders handed out at the show, when we had the confirmation of the order that I mentioned ahead of the show, so we actually had some great discussions with the second OE, but every truck producer in the world was there. Kind of presenting our technical roadmaps, we laid it out, demonstrated the direct benefits of fuel efficiency and emission reduction. Shared that very cleared up, laid that on a road map and that was taken away.

These relationships that they talked about, this is where you can really bring the right people together at the right time and you have the combination leadership, technical leadership with our business leaders and so on. When we look at those out lying opportunities like what’s going to happen in North Americas with the EPA announcement this week.

So though no order’s given, clearly it solidified what I think is the pursued opportunities and kind of making those a little clear in our steps forward and how are going to coop with those.

Greg William – JPMorgan

Okay, and just move on Brazil we know that you’re a key partner with MAN. Can you talk about incremental opportunities there?

Tom Burke

Yes. Well the MA Volkswagen relationship Brazil is a very, very strong relationship for us. Actually they are our largest customer in that region. It continues to run strong with new opportunities that are followed on with their relationship, so it’s a very, very strong good relationship that we plan. It’s a portfolio with every bit of opportunity with the brand.

Ann Duignan - JPMorgan

Okay. Thanks guys.

Tom Burke

Thanks Greg.


Your next question is from the line of David Leiker with Robert W. Baird. You may proceed.

Keith Schicker - Robert W. Baird

Hi, Good morning. Its Keith Schicker on the line for David.

Tom Burke

Hi Keith.

Keith Schicker - Robert W. Baird

I was hoping you could kind of quantify or give a ballpark range of what’s the additional costs associated with the facility change over Europe or sort of pro-forma margin at that revenue level or where you think you would have ended up?

Tom Burke

Keith this is Mic. We haven’t quantified those; we are not prepared to quantify those at this time. Normally we would see a higher conversion on the incremental sales out of Europe. I mean, I guess the cleanest way to answer that for you is, when we get that plant ready for launch at Origami and we complete the transition, we would expect a more normal conversion rate out of Europe on those incremental volumes.

Mic Lucareli

Yes, I think the key point Keith is, every piece of equipment had to be taken down, moved, set up, capability reestablish, run-off a document and run for it. So as you do that process for -- this is one of our largest facilities with 500 people in the plant and approaching 100 million euros that there is lot of work to be done, so we are getting that work done.

Then you have the volume that you are dealing with at the same has created overtime challenges and the like. So we feel that these are clearly temporary in nature and I don’t like the launch challenges you face when you grow through something like this, but we work, we are focused to get this in control to make sure that the Origami launches to start we will say in the second quarter of next calendar year are ready to go and come on strong so, just to give a little bit more color.

Keith Schicker - Robert W. Baird

Sure and then with some of the issues regarding the supply chain in North America, can you be a little more specific about what’s at your components.

Mic Lucareli

Yes. There’s been both some raw material issues. We had a aluminum raw material supplier out of Europe they had a fire earlier in the year that had some knock on effect through. The courses is either moving around the capacity. That kind of met with the higher demand that hit at the same here, so we had some challenges in raw. We also had some stainless steel raw material challenges as we ramped up, both for the volume and the launch of a 2010 product.

This happened and the same with castings. Castings will go both into the EGR as well as some of a charger cooler business. So it’s a combination of let’s say some issues at our supply base, specifically its like the fire issue I mentioned before towards new launching to its volume market return and also launching at the same time. We just put a constraint, so a lot of your shipments, a lot of overtime.

We’ve been very successful in making sure that we do not constrain our customers for any reason and that parts been successful as we’ve incurred some costs along the way, along those lines. We are still fighting through some of that, although the trend is going in the right direction.

Keith Schicker - Robert W. Baird

If you look at the China order that you talked about or award, what particular type of product is that or could you add a little more detail?

Tom Burke

Could you repeat your question?

Keith Schicker - Robert W. Baird

Sure, what type of product does the China order for that disclosed...

Tom Burke

It’s a commercial truck, commercial truck powder and cooling module opportunity for a Chinese produced vehicle was from a global player, major player. So we are very, very happy about that.

Keith Schicker - Robert W. Baird

There’s going to be vehicle as far the domestic Chinese market.

Tom Burke

For the domestic Chinese market, yes.

Keith Schicker - Robert W. Baird

Okay and then just lastly here. Had a change to look through the green house gas and fuel economy rules on the truck side a little bit. It seems like even beyond waste recovery there’s a lot of opportunities for Modine and low temperature EGR and then other some management equipment around the engine. Can you kind of talk about what’s some of the other opportunities are there, that you’ve identified.

Tom Burke

Yes. You did a nice job laying out some of your thoughts in your release that you put out, but clearly you hit the right ones I think. Waste recovery is going to be a huge opportunity taking the energy that goes out the stack and reusing the energy to bring it back for proportion in the vehicle. Clearly emission standards with opportunities for the more EGR capacity, but then we have other products that can go into this thing.

Even from an here dynamic standpoint to help these truck manufactures get the truck more dynamically of opportunities to bring in heat transfer designs that can help streamline the truck.

We also have opportunities on weight reduction, so there’s several different opportunities and again, what I feel really good about, recent things that we targeted coming into the prices, we wanted to make sure we are ready for it coming out of it, because we anticipated this type of opportunity. To see that it’s going to be moving in that direction is very rewarding, that we are going to be capitalized on those things.

Keith Schicker - Robert W. Baird

Do you think that the release of the proposed rule has accelerate your discussions with customers. It sounds like you have been dealing with them in preparation with the factors some time?

Mic Lucareli

Mic. Again I am not going to speak for him, but I know all the OE’s have been very involved with the EPA and it’s on these changes. Clearly that’s driven some of the projects we are working with our customers on so. So I think the anticipation of this coming was seen and I think the poll of these technologies is going in the right direction. Very similar with what we saw with year ‘06 on European standards with things like Origami, the same thing’s started to happen on this side with other opportunities driven by this legislation.

Keith Schicker - Robert W. Baird

Okay. That’s all I have. Thank you.


The next question is from the line of Walt Liptak with Barrington Research. You may proceed.

Walt Liptak - Barrington Research

Hi, thanks. Good morning guys and good job on leveraging recovery. I wanted to just follow-on to the last question. So for the fuel efficiency mileage standards or changes, your talking about air dynamics and weight reduction as the two primary results.

Mic Lucareli

Well. I think primary would clearly be the waste heat reduction, waste heat recovery and things on the combustion improvement side if we’re directly focused, but I wanted to add things like aero dynamic and rate reduction are other factors that we think will help out well.

Walt Liptak - Barrington Research

Okay. And is it the 2013 that you think the programs that you’ll be on?

Mic Lucareli

Yes, I mean we are going to have to wait to see how the OE's kind of attack these platforms. If we look, the standard need to be in place by 2014, as well as the same with the -- I think what we are saying, the actual targets being in place and delivered by 2017.

So what you are going to see is a lot of activity between now and that 2014 timeframe. Exactly how that’s timed in the platform opportunities will depend on each OE. How they best, they want to go about their solutions. So I think there will be a lot of engineering engagement and development engagement in the next three to four years.

Walt Liptak - Barrington Research

Okay. Okay. Mic I wanted to go back to page eight and just make sure I’m understanding these unusual items.

Mic Lucareli


Walt Liptak - Barrington Research

So what was the EPS impact from these unusual items, and those are in the $0.18 right?

Mic Lucareli

Yes, we it estimated would be $0.18 per share after adjusting for these items on chart eight.

Walt Liptak - Barrington Research

So the chart eight has been adjusted out of the number to get to the $0.18.

Mic Lucareli

Correct. So we took our net reported and added back the items in the chart to get to a $0.18 number.

Walt Liptak - Barrington Research

Okay, got it. Okay, good. Thanks very much.

Mic Lucareli

Thanks Walt.


(Operator Instructions) Your next question is from the line of Greg Macasko from Lord Abbet & Co.

Greg Macosko - Lord Abbett & Co.

Yes, thank you, very nice.

Tom Burke

Hi, Greg. How are you doing?

Greg Macosko - Lord Abbett & Co.

Hi, fine. Just talking, I assume are you in place now in terms of the plants that are closed.

Tom Burke

In place as far as the final footprint.

Greg Macosko - Lord Abbett & Co.

Yes, I mean could there be some adjustments later, I mean other that?

Tom Burke

I think what you’re going to see Greg is that, North America is probably what I would put as 80% level where it needs to go. Europe has just started with the announcement which was made today, what happened this quarter and a previous plant closing in Germany Still more work to do, but what we are looking at is clearly -- the challenge in Europe is a little more difficult with moving a footprint because of the issues that existed in that regions.

So we are going to move what I would say a consistent way forward. We don’t anticipate any wild swings. We’re going to try to manage this thing on what I would call a glide path approach that we can manage appropriately. So we got more work to do in Europe bottom-line, okay, with some fine tuning to do in North America. We are going to try to do that on a dry path as possible.

Greg Macosko - Lord Abbett & Co.

Talk about Germany there too. It sounded somewhat unique what you worked out there. Could you give us a little more color on that with the sort of outsourcing or something?

Tom Burke

Yes. Well what happened was, we found a company that has a core competency and provided more logistical support to vehicle manufacturers like BMW, okay. What we do with our power cooling module business, they do with several things okay.

So they were interested in buying and taking over that operation with that, taking over the responsibility for the employees with an opportunity to take that manufacturing footprint which is ideally located from a BMW supply logistics standpoint, be able to grow on that, convert it through other opportunities they may have with different other modules and that type of things. So it was kind of a unique way for us to transfer the assets over to them on an arranged methodology and get rid of some of some of the risks that comes with that from our standpoint. Mac you want to add anything to that.

Mic Lucareli

Just Greg as Tom said, really the major hurdles in Europe in every case will be major costs involved with the people and then the facilities and that one is a very specific modular facility.

So we are happy with the outcome and that we have a path to a buyer or a path for those assets, plus we are avoiding a potential future large liability related to people there and it works for this company too; its part of their growth. As Tom said, they are looking at this is the way they help to grow their front end module business.

Then just one more thing, in North America, when Tom was talking about that, we have one more plant that we announced previously that had yet to and that’s in Camdenton, Missouri, which should be sometime next year.

Greg Macosko - Lord Abbett & Co.

Okay, good. You talked about Asian, South America and OEM and the trade show etc. How many OEM’s are out there -- there are still a lot of OEMs that you really haven’t penetrated at this point and what’s your kind of feeling about the outlook on that regard with new customer?

Tom Burke

Well clearly, the major global OE’s we know well and we are working with those relationships everything we can and as they grow into the new sector, new regions they are looking at which are well announced and are out there. You can look at for instance your Mercedes. The timer truck going into India and that type of things which we have announced earlier, but we are also looking at supplying domestic commercial vehicle manufactures and inside of China for instance.

Inside of the India there are unique truck producers. Indian we feel very connected with and how we are supporting that market. China we are learning that market. Most of our launching and business has been with the highway manufactures, but as we feel, as the mission standards grow to meet the mission standards that China has set for itself, the opportunity for us to look in to those domestic truck manufacturers are going to be provide an opportunity for us which we are seeing coming our way.

The same would happen with Russia as well, which is projected to grow at a significant rate for the commercial vehicle market. So we put a lot time and thought in to that to make sure we can support that development and relationship building and of course winning that new business is how it’s markets grow.

Greg Macosko - Lord Abbett & Co.

So basically its local OEM’s in India, China and Russia which you have some penetration in the off high way in China and some already in India, but there are more in those three locations.

Tom Burke

Yes, I’d say it’s a good summary Greg.

Greg Macosko - Lord Abbett & Co.

Okay good, and then what about with regards to -- you mentioned liquidity. Clearly your balance sheets in much better shape. Is it a point at which you might be looking at any acquisition opportunities and given your statement about the focus of kind of the future or opportunities with regards to the commercial side of your business; is that an area that you would be more interested with regard to maybe acquisitions or something?

Mic Lucareli

Hi, Greg this is Mic. I think I’ll let Tom address this strategic focus. For sure our priority was to get out free cash flow heading in the right direction. As you commented we’ve got our balance sheet well under control in a very strong position. My priority is to make sure we protect that.

Now that where we saw a good quarter or free cash flow, we can start looking forward to how we can reinvest that in the business and there are a lot of opportunities coming out of this recession and both are vehicular spaces to help us fill out some strategic areas, and then as I mentioned the commercial HVAC segment from Modine is our highest returning business and gives us a lot of opportunities to pursue an organic growth options there. Tom anything you want to add?

Tom Burke

Right point. We’ve got some real strong growth opportunities, commercial products group clearly begin one of those what I would call the core business we have and the adjacencies that they come with. We are looking at that and that is coming in and now that we have the opportunity to consider that because of our balance sheet strength. We are considering those things, but we are going to be very prudent and confident in the steps we do take.

I would say if you look at these emerging market opportunities that we talk about earlier; that would serve the base commercial vehicle and our highway business where we get into the developing markets, but we also would we keep a very strong focus on that area as an opportunity as well.

Greg Macosko - Lord Abbett & Co.

I know you will be prudent and I appreciate that, so the point is that the growth was a good return in the commercial business. The focus at this point I sense your saying is really more kind of organically, so investment in capacity or whatever or locations or on that side and acquisitions may not be as likely in the near-term or as you look out.

Tom Burke

I think the best way to put it is, we have a strong strategy that we’ve developed on how to move the company, where we want to move the company forward, where an inorganic becomes, an opportunity comes up in that strategy, we will be looking at that okay. We are not on a just go and buy stuff. It’s kind of more of what we have.

We are much more on a strategic focus approach and where opportunities come and play that can augment that strategy with an acquisition, I will that’s where we’ll be looking, but that’s just the general statement on how to look at this from an organic standpoint. Mic you want to add to that?

Mic Lucareli


Greg Macosko - Lord Abbett & Co.

Very good, thank you.


And at this time sir there are no other questions in the queue. I’d like to turn the call over to Robert Kampstra for closing remarks.

Bob Kampstra

Yes, thank you everyone for joining us on today’s call.


Thank you all for your participation in today’s conference call. This concludes the presentation and you may now disconnect. Have a great 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 All other use is prohibited.


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

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 All other use is prohibited.


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

Source: Modine Manufacturing CEO Discusses F2Q2011 Results – Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts