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

Executives

Susan Fisher - Director of Investor Relations and Corporation Communications

David B. Rayburn - President and Chief Executive Officer

Bradley C. Richardson - Executive Vice President Finance & Chief Financial Officer

Analysts

Andrew DeAngelis - Keybanc Capital Markets

Analyst for David Leiker - Robert W. Baird & Co., Inc.

Gordon Bergren - Industrial Land Holding

Modine Manufacturing Co. (MOD) F3Q08 Earnings Call February 4, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2008 Modine Manufacturing Company conference call. My name is Carmen and I’ll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. {Operator Instructions} Now I’d like to turn the call over to your host for today’s call, Ms. Susan Fisher, Director of Investor Relations and Corporation Communications. Please proceed, Ms. Fisher.

Susan Fisher

Thank you, operator, and welcome, everyone to Modine Manufacturing Company’s third quarter fiscal 2008 earnings call. Joining me on today’s call are Modine President and Chief Executive Officer David Rayburn and Modine’s Executive Vice President and Chief Financial Officer, Brad Richardson. Our format for today’s call will include approximately 20 minutes of prepared remarks followed by a Q&A session at the end. Before we begin I would like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Modine’s current expectations and the company’s actual results, performance, or achievements may differ materially from those expressed or implied in these statements based on the risk factors that are outlined in the company’s filings with the SEC. So without delay I’d like to turn this call over to Dave Rayburn. Dave.

David B. Rayburn

Good morning and thanks Susan. Brad will be reviewing the financial details of the quarter, quantification of the additional restructuring actions and earnings guidance but first I would like to discuss our business strategy which is evolving and the key messages from today’s release. Our business strategy is focused on thermal management and heat transfer and technology is a key element of our strategy. As we’re demonstrating in our engine products group, our exciting new technology for power train cooling called Origami which I’ll discuss later and continued progress with our fuel cell group are just three terrific examples of technology differentiation. Diversification model continues to be a strength. We are diversified in our products, our markets, our customers. Our largest customer is only 11% of our total sales, and geographic diversification, and that is certainly changing as we move more rapidly into Asia. We’ve had a small plant [inaudible] for many years and that has served us very well. Certainly having a competitive cost base will drive profitable growth. As we’ve dicussed on past calls and today we have a number of strategic actions in process to support this strategy. Our strategy has to evolve in order to be able to meet the global challenges that we have in an ever-changing business environment.

An example of strategy change is a small plant philosophy. We’re going to manage scale. As a result of lean activities, robust quality systems, and product standardization, we’re able to now leverage up our plants to a larger size called managed scale and thus have better fixed cost absorption. But these facilities will still have the strong attributes of our small plant philosophies of good, strong employee relations focused on specific operations and processes, and very visual factories. But our strategy will continue to evolve.

So what are the key messages for today? We’re very pleased with the strong profitable growth and performance in Europe, South America, and our commercial products group. Our OE business in North America has significantly underperformed and a very large frustration for myself and a disappointment that we are addressing. We are down 27% on a year-over-year basis in volume. The truck market has been slow to recover and margin compressions continue to be an issue within this segment. The most important message I want to leave with you is that we are addressing these performance issues aggressively with leadership, incremental resources and skills and metrics and additional restructuring. The Board has announced additional restructuring actions and we anticipate closing three US additional plants as well as the two Tubingen, Germany facility. This will yield within 18 to 24 months $20 million to $25 million worth of annual savings. Our debt agreement has been amended and Brad will discuss that further. We are implementing a capital allocation process which is aligned with our new organization structure, our product organization structure, and we will be working diligently on more capital management and working capital. We have excellent technology which is driving growth. As we discussed in previous calls, the environmental changes both legislative as well as oil shortages et cetera are driving Modine into great opportunities as thermal solutions are part of that environmentally driven opportunities. We are also moving into new regions.

So what is our restructuring activities? We will be finishing up shortly in the next two quarters the initial four facilities that we announced last year which will yield a gross margin improvement of 0.6. It’s very difficult to make these decisions, these incremental decisions, especially for me as a former plant manager, but we intend to close a facility in Europe and an additional three facilities in North America. We will be consolidating most of the manufacturing in existing floor space, although some products will move to low cost countries and outsourced. This is all the result of past lean activities and quality systems. To reinforce the scale concept, the North American sales when completed will double on a per plant basis from current levels but again maintaining those attributes that I talked about before.

A key element of our plant rationalization activities is rationalizing products. We will be rationalizing products from our sending plants, the plants that are to be closing, as well as rationalizing products in those receiving plants, and we have demonstrated before that that does not have a significant volume impact but it has a significant improvement impact in reducing complexity in our facilities. We do have additional restructuring activity under review in Asia due to the lack of meaningful profitability. Tom Burke, our Chief Operating Officer, is driving the Modine production system. I’m very excited about this new system. It’s a top down system that will accelerate the deployment of lean strategies. It will drive further asset utilization.

Last quarter I talked about new appointments and new regional leadership in North America and in Asia. We certainly with these most recent restructuring activities stretched our North American management team and unfortunately it was obvious in our numbers. So lessons learned in regards to our incremental activities we are going to have a dedicated restructuring team that will be focused on these closures and product transfers while a separate team will be focused on the ongoing business and product launches. We also engaged in a third party, The Highland Group, to help us plan and also execute these important plans and they have brought excellent skills to Modine. Additional actions are focused on allocation of capital and product portfolio rationalization process that Brad will further discuss. We are near completion of the divestiture of the electronics business. We are now evaluating non-core joint venture structures and we continue to have multiple activities in review in regards to rationalizing our overall business.

Finally, further SG&A cost containments are underway and an example would be offshoring business processes. Our new plant in Chennai, India will have a engineering design center as part of that and that will allow us to leverage that low cost country to support our overall global engineering activities.

Finally, growth. By having the right cost base we can grow this business very profitably. As we’ve talked in the past, we have four new plants under construction in Mexico, China, Hungary, and India. They will all be operational this next fiscal year and in fact the new China plant is shipping product this month.

We are funding new business wins in both Europe, Asia, and North America. An example is eight programs for EGR coolers for the 2010 engine launches in North America will add $125 million of incremental business and that will create a scale facility in Joplin, Missouri. We are capitalizing on these new series of emission laws. A number of them are listed on the slide and that will increase content like EGRs and we expect to have incremental penetration, excellent penetration growth in Europe, leveraging our North American reputation.

As we’ve talked in the past we’ve introduced a number of new technologies for our vehicular segment. A new offering that we announced six months which we call Origami is a new set of components and processes for our traditional radiator charger cooler and condenser business. These are patented designs and processes and improves the performance of these products. They will work at higher operating pressures and temperatures and they’re much lighter, and all that means is differentiation. We have active programs for a number of select customers that appreciate new technology. We’re very pleased with the progress in our commercial products group immediately and long term. They’re working very hard on expanding relationships and expanding their product portfolio and we’re doing a better job of transferring the technology from our vehicular segments to this business.

Finally, fuel cells. We’ve talked about it in the past. I continue to be very excited. We’re now entering the pre-production stage ramp up for these stationary power units and we’re going to see incremental resources deploy both capital and people into the segment in order to be able to support it’s outstanding log term opportunity.

So with that, Brad, would you make some comments in regards to the quantification of our strategies and some further detail on our actions?

Bradley C. Richardson

Thank you very much, Dave, and good morning to everyone. Let me, before I get started, is just recognize that the announcement that we had on December 13th where we identified the potential impairments as well as the potential for additional restructuring and we certainly recognize with that announcement that that was clearly a destabilizing event for the investors. It was though something we had to do as our obligation to you as the investors as we see things in our business of being full in our disclosure. We believe with Dave’s comments, the release today, as well as the agenda that’s laid out here is that we’re focused on providing greater clarity as to the issues and our response to address the underlying business performance which is primarily related to our North American OE business and our Asia business.

The agenda laid out here in front of you will provide an update of the third quarter financials, action plans to address business performance, an update on our financing activities, earnings guidance, and finally a summary. If I can turn to the next slide here titled “Third Quarter Highlights” it does provide the highlights of our third quarter fiscal 2008 results. I would note that the results are from continuing operations and therefore exclude the electronics cooling business which is in the final stages of being divested. Key themes for the quarter include an overall increase in sales of $37.2 million or 8% as Modine continues to benefit from broad geographic diversification with strong sales outside of North America and within our commercial products group offset by the sizable 22% decline in the North American OE business due to significantly lower truck build rates. The gross margin as a percent of sales declined to 15.5% from 17% reflecting a mixed impact as we experienced lower North American truck build rates impacting fixed cost absorption. In addition, we have experienced ongoing operating inefficiencies within this segment. The financial results also include asset impairments and a deferred tax valuation allowance which will be covered on the next slide. All in, Modine lost on an after tax basis $47.5 million compared to $16.4 million profit in the previous year’s equivalent period.

Turning to the next slide, let me orientate you to this side. The top line shows the all-end financial results from continuing operations for the quarter including a pretax loss of $15.7 million, EBITDA of $7.8 million, and an earnings per share loss of $1.49 per share. Again, these results do exclude the electronics business which is shown as a discontinued operation. The reported results include $31.5 million in impairment charges. Let me walk through those for you. First we impaired 23.8 million in goodwill in our North American original equipment segment. Although we remain very confident in the turnaround of this business, our expectations for growth in this mature market have been tempered and we are not has optimistic on the margin levels of this business given industry wide issues including cost pressures and customer pricing pressures. These factors obviously impact the value of the business leading to an overall impairment of the goodwill. A $3 million fixed asset impairment charge was also recorded in the quarter due to a specific program in the North America original equipment segment that is not able to support the invested capital in support of this program. The $4.7 million impairment in Europe is associated with Modine’s intention to close it’s Tubingen, Germany manufacturing facility. So you can see that adjusting for the total impairment charges, the pretax and EBITDA are $15.8 million and $39.3 million respectively.

Moving to the far right column, the EPS for the company is a loss of $1.49 per share. If you adjust for the impairments and a $40.4 million deferred tax valuation allowance, the underlying EPS is approximately $0.50 per share. I would note that the $40.4 million reflects a valuation allowance that was applied to the US deferred tax asset base reflecting that it’s more likely than not that the US deferred tax asset will not be realized based upon the reduced outlook for the North American original equipment segment.

The table shows the performance of our business segments both in terms of sales, the change in US dollars, and the change excluding the impact of exchange translation. The table also presents the change in operating income by segment. Briefly let me walk through the segments. Our Europe original equipment segment continued to show strength with the launch of new condenser programs, the continued strength of the heavy-duty business, and a moderate increase in the automotive business. The operating income of $27.8 million was an all time record for this business and does include the $4.7 million impairment charge previously discussed. Excluding this charge the incremental sales in Europe converted into operating income at a very healthy 28% rate.

The Original Equipment - North America segment was impacted by the significant decline in the build rates for the North American truck business with the class 8 truck build rate down 50% and the medium duty truck build rates down 30%. As you know we have meaningful market shares in both the heavy duty and medium duty markets. The results also reflect manufacturing inefficiencies associated with plant consolidations, new product launches, and quite frankly inefficiencies that are created by the [peak to trough] nature of the truck market. South America on an absolute basis performed well. This reflected the strength of the agricultural and truck markets where we have significant market penetration. I would note we continue to be very pleased with the buyout of our partner giving us 100% equity in this business. The commercial product segment which consists of our specialty heating and air conditioning business showed very meaningful 12% revenue growth and an overall respectable margins reflecting strong heating product sales in North America.

This slide provides the key profit factors for the third quarter that contributed to the variance and pretax earnings from last year’s pretax earnings of $19.1 million to this quarter’s loss of $15.7 million. Looking at the key operational factors we experienced a significant decline in the North American volumes as we’ve discussed contributing to a $15.4 million drop in profitability. Partially offsetting were strong volumes outside of North America. Also contributing favorably to the results was the positive impact of materials as we have gained traction on pass through of underlying commodity prices for copper, aluminum, and nickel which had been stable to declining for the last several months. Negatively impacting profitability and as Dave mentioned disappointing to all of us are the continued operating inefficiencies in our North American original equipment business related to product transfers resulting from previously announced closures. We are also launching new engine products and gain as I mentioned earlier as you can appreciate we are experiencing inefficiencies that come from the [peak to trough] demand for our products driven by the North American truck market.

Shown in the other miscellaneous is a very positive story as performance improvements outside of the North American OE segment offset pricing and mix issues. As previously discussed in the last two bars we also had impairment that negatively impacted the quarterly results. As you know since late 2005 the company has been buffeted with multiple macroeconomic issues starting first with the rapid rise in commodity prices and most recently a material drop off in the North American truck market. What we are announcing today are further actions that the company is taking to ensure that we achieve the financial framework that we have been consistently targeting all designed to get the company to an 11% to 12% return on capital employed. The plans include the closure of an additional four plants, three here in North America and our Tubingen, Germany facility. We expect these closures to be completed over the next 18 to 24 months. These decisions no doubt have a significant impact on our employees who have worked extremely hard to ensure the viability of our North American and European manufacturing base. However, to be responsible to you, the investors, we believe that the program has very strong returns with the expectations that the total cash cost for this program to be approximately $30 million to $35 million and when completed will save approximately $20 million to $25 million per year. Included in the cash costs are expenditures for severance, equipment transfer costs, as well as productivity and scrap related costs which occur when products are transferred. As Dave mentioned we have retained an outside consultant to ensure that we properly plan and execute in order to minimize disruption and overall cost. The benefits we expect to achieve factor in labor savings but also scale benefits from operating our facilities at higher levels of utilization.

I would also note that the total cost of the program includes approximately $10 million which will be recognized in Modine’s fiscal 2008 fourth quarter. Other elements of our plan include reducing our overall capital investment into the business to $70 million to $80 million which is below depreciation rates. Other factors include rationalizing the portfolio of which specific dollar amounts are still under review. We also continue to focus on our target of driving the SG&A levels of the company down to 11.5% of revenue.

So how do these actions impact the overall margins of the company? Most of you will recall the left hand portion of this slide from our last investor presentation where we estimated on a normalized gross margin relative to the 18% to 20% target that we have established for the company. On the left hand portion of the slide you will see that we are estimating for fiscal 2008 a gross margin of 15%. If you assume a more normalized [class 8] truck market of 280,000 units this would add about 1.1 percentage points to our margin. Getting the North American operating inefficiencies and previously announced facility closures behind us as to the normalized margin bringing our estimated normalized margin up to 17%. The benefits of the foreclosures that we are announcing today will add an additional 1 percentage point to our margin when completed. Over the next two years we do see some pressure on our margins from product mix but we expect to offset those through exiting low margin product lines that is portfolio rationalization and we also see the absorption benefits if the company continues to grow. Therefore, with what we are announcing today, we see a relatively clear path over the next two years on driving our margins up to 18% to 20%.

Two critical elements of the plan that we are laying out today for you are capital allocations and portfolio rationalizations. As Dave mentioned, our new organization structure that has been in place for just over a year now is organized around global product lines and a regional operating model. We have a structure that now aligns with strategy, thus enabling us to now look at our product lines within and across our regions and assess them relative to the framework that you see on this slide. We are assessing our product lines strategically, that is, understanding Modine’s competitive position and the overall business [tractiveness]. Product lines in the red area will be divested or exited. We are also looking at the product lines relative to financial metrics which are directly linked to the overall financial framework that we are using to run the company. It is the combination of strategy and the financial framework that is driving decisions on the overall $70 million to $80 million in capital that we can’t afford to invest in the business and decisions regarding which products will be retained and developed for growth and those that will be exited.

All of these actions that we are taking and discussing today and the strategic thinking within the company are designed to achieve the 11% to 12% return on capital employed goal. It is the combination of the gross margins, driving the SG&A from 12.9% today to 11.5% over the next two years, and increasing the capital turns to 2.5 to 3 that yield an 11% to 12% return on capital. The improvement in the capital turns which is an increase from previous guidance is a function of holding the capital investment at $70 million to $80 million below depreciation rates and very tight control over our working capital.

In support of these objectives, I would note that the company’s cash bonus incentive system is being changed and will compensate the eligible employees based upon performance in the areas of gross margin percent and working capital management. I know there’s been concern raised regarding the amendment process that the company has gone through which was driven by significant non-cash charges that were not contemplated when certain of these agreements were put in place. You can see on this chart the primary credit facilities of the company. I would note that under the $200 million revolving credit facility we had drawn at the end of the third quarter approximately $80 million. Under the amendments we clarified covenant definitions to permit the add back of non-cash charges as well as certain cash restructuring costs that we expect to incur resulting from the manufacturing realignment program that both David and I discussed. We also amended the interest coverage ratio, that is EBIT to interest, to reduce the ratio during the heavy restructuring period between now and the second quarter of our fiscal 2010. Bottom line, we believe we have obtained the financial flexibility to carry out the restructuring program while still funding highly strategic programs that support our 4% to 6% organic growth target.

As you would expect me to say, however, this financial flexibility is dependent on a balanced view of the macroeconomic environment and our ability to execute and deliver on the business plans that were utilized to set the revised interest coverage ratios.

Let’s turn to the guidance. We are in the last two months of our fiscal 2008 and this slide provides the final guidance for this fiscal year as well as some initial thoughts on fiscal 2009 expectations. I would draw your attention to the yellow highlighted columns. Excluding impairments, the deferred tax valuation allowance and restructuring costs we are expecting for the full year approximately $1.8 billion in revenues of 15% gross margin and $35 million of pretax earnings which equates to approximately $1.10 per share in line with our previous guidance. The fourth quarter is typically our weakest and we are projecting an approximate $3 million pretax loss. On an all-end basis under the column called “Unadjusted’ this includes all the special factors that we’ve been discussing today plus $10 million in fourth quarter restructuring costs. On an all-end basis we expect a full year loss of $1.33 per share. As we turn to fiscal 2009 we do expect continued strength in Europe, South America, and within the commercial products group. We are seeing in our order books a gradual recovery in the North American heavy duty truck market with builds increasing from the current annualized rate of 202,000 units to 240,000 units for our fiscal year or 228,000 units for calendar 2008. Fiscal 2009 will be a heavy year in terms of restructuring as we have previously discussed and we do expect the company’s effective tax rate will be much higher than historical levels until such time as the US tax jurisdiction returns to profitability.

So in summary there is no doubt that we are extremely disappointed in the overall performance of the company and the impact that that’s had on the share price performance relative to our peers and relative to the market. Our commitment to you is to turn this around and regain your confidence in the company and its prospects which we believe are fundamentally solid.

In summary we have very, very strong performance in Europe, South America, and commercial products. We have strong growth coming and we’re recommitting to our 4% to 6% compounded annual growth rate. We understand we have underperformance issues in North America and those are actively being addressed and we believe we have the financial strength or the financial liquidity in place to support the funding of growth and support of the 4% to 6% compounded annual growth target. The action plan that we’re talking about today to address the underlying business performance include the manufacturing realignment that is the closure of four facilities saving when complete $20 million to $25 million in costs. The capital allocation discipline reducing our capital investment to $70 million to $80 million we certainly we have significant activity underway in terms of portfolio rationalization and the commitment to reduce and control the SG&A to 11.5% of sales.

So this is our plan and at this point we’d like to open it up for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll wait one moment while questions compile. The first question comes from the line of Andrew DeAngelis from Keybanc Capital Markets. Please proceed.

Andrew DeAngelis - Keybanc Capital Markets

Good morning guys. First of all I just wanted to dig in on your expectations relative to North America, relative to the change that’s occurred. Could you talk about the mix of the inefficiencies that are currently occurring and the changes in the external environment that has prompted the changes in your expectations going forward for that segment?

David B. Rayburn

Let me talk about the operating side and then I’m sure Brad will have some additional color. From an operating side and certainly as I mentioned we had a lessons learned in regards to the consolidation work that we went through. Some of it has gone very well, some of it candidly had some frustrations with it. Coupled with that we’ve had a number of new product launches and as I mentioned that management team was really stretched very, very heavily and so that’s why we are taking the actions to put incremental resources both from an internal reprioritization as well as bringing The Highland Group in. So I have a lot of confidence in the execution of these plans based on what we’ve learned and some of it was very positive but also some things that we’ve learned that was not so positive. Brad, any further color on that?

Bradley C. Richardson

Yeah, Andrew, and I think it’s clear to point out here that we do see continued growth from where we are in the North American business as the truck market recovers and also because of some of the engine programs that Dave mentioned in his prepared remarks, but as we look at the overall growth rates to what we had previously thought, again the growth rates have come down. In addition I think there are some what I would call... You specifically asked about the mix issues and certainly with some of the automotive business that we have here in North America. It is not as profitable as we had expected so our overall margin expectations for the business have also come down and finally as it relates to the margins and overall revenue in the North American business, some of our business is moving to other Modine facilities, in particular in South America, which does impact obviously the value of the Original Equipment - North America segment that is offset obviously by enhanced value in our South American business.

Andrew DeAngelis - Keybanc Capital Markets

Okay maybe just a couple of follow ups there based on our response. Can you maybe first speak to the progression of the inefficiencies that you experienced within the quarter? Are they getting better as we exited the quarter and maybe a little bit more recent update into January?

David B. Rayburn

Yeah the primary issues that we have right now that we’re experiencing is actually related to product I would say. We’re probably in a 75% of our variances today are related to some product launches that we’d gone through and we have very aggressive activity in addressing those issues, which are solvable, but you do have to go through a product validation process with the customers when you make process changes. I am pleased that those variances from the product launches have been well insulated form the customer and that’s very important, that our relationships continue to be very strong with the customers that those programs are involved in. We are winding down the last two plants of the first four. It is critical, on one of them that we get some product up and running which has been validated or is being validated at two of our facilities and I think we have a very focused activity on that and good leadership on that.

Andrew DeAngelis - Keybanc Capital Markets

Are we at a high water mark in terms of the product launches in terms of the North American region?

David B. Rayburn

No, I think we’ve turned the corner on it and it’s getting to where that light at the end of the tunnel is certainly light.

Andrew DeAngelis - Keybanc Capital Markets

I guess just moving on to the actions that you announced this morning. Obviously the extent of the time involved running up to 24 months kind of brings you clearly into the next prebuy that we expect to occur in ’09. How do you guys kind of think about the impact that the restructuring activities will have kind of in the out year as --

David B. Rayburn

I can’t at this point get specific on the plants that are going to be impacted as we work through our finalization activities and deal with our employees and unions but I would say that most of the activity would not be influenced by the ramp up of the heavy truck.

Andrew DeAngelis - Keybanc Capital Markets

But clearly that will create some pressure internally as you guys I would expect ramp volumes ahead of that.

David B. Rayburn

Absolutely, Andrew, that’s why I think it’s a very important structural change that we’ve made is that we do not want to take the focus off of the everyday operating. Any further launches that we have in this period that those will actually be two separate management teams that will be reporting to Jim Rossi who is responsible for the region and I can’t underestimate or reinforce the value that The Highland Group is bringing to us in regards to thinking things through in a very disciplined manner.

Andrew DeAngelis - Keybanc Capital Markets

Okay. Could you guys maybe speak a little bit more in depth in terms of the strength that you guys clearly experienced in Europe this quarter. I meant, the 28% incremental obviously being pretty notable there in terms of maybe product mix and just general demand trends?

David B. Rayburn

I’ll comment and then I’m sure Brad will have some additional comments. We have a strong management team in Europe. We do have some very strong programs in multiple segments. The truck market is very strong there. I would say a large part of their performance is as a result of what we’ve done over the last couple of years in that region in regards to bringing programs on responsibly with what’s called an AP-QP process, et cetera. I would be remiss to say life is wonderful and there’s no problems in Europe. Every one of our regions has, you can’t enjoy the sunshine and not look deep into the organization in regards to what are the issues that need to be addressed and despite their very strong performance, it is time that we deal with the [tubing] facility as that is manufacturing product that is very old technology, copper, brass, and some high labor content product that needs to be made in other regions. So it’s very important for us as we look at our business, as we look at every one of them in the detail to ensure that we’re not being mislead by maybe a volume ride or other success that we have in the short term.

Bradley C. Richardson

Andrew, I’d just add again, it’s mentioned kind of in the prepared remarks, the heavy duty market as Dave mentioned continues to be very, very strong but the automotive business that we have also continues to be strong. We have had some program launches in particular in the area of new condenser program that we’re bringing online that has contributed to growth. As we, kind of forward-looking as we start to look to 2009, clearly we’ve been quite open about the continued strength that we see in the business and in particular with the next round of emission law changes that are coming. The opportunity that the company has to significantly increase it’s penetration or market share in the Europe medium and heavy duty truck market and that obviously, our confidence in that continues to grow as we continue to secure new business and that underpins the overall 4% to 6% growth that we’re talking about here today.

David B. Rayburn

And the new facility that we have that’s coming on this next fiscal year in Hungary which is our second facility in the northeast corner of Hungary will help support that growth that we are going to secure incremental penetration in that commercial vehicle market.

Andrew DeAngelis - Keybanc Capital Markets

Have we had any other announcements in terms of incremental penetration there in terms of product wins on the heavy side?

Bradley C. Richardson

You know we haven’t, Andrew, it’s really, there will be some things as we go forward here. Given that we’ve been in this period here, what I call quiet period post our December period as we have not had any as you know any significant material press releases but again we will announce as we go and the opportunities do underpin again the 4% to 6% growth target.

David B. Rayburn

Andrew, the Origami technology that I mentioned that we’re very pleased with which we’ll see in a launch and then the ’09, 2010 time period, that’ll actually be initially manufactured for the European market place and as I said we have a number of specific development programs going on with targeted customers.

Andrew DeAngelis - Keybanc Capital Markets

And then just one lat one for me before I get back in queue. In terms of a tax rate, Brad, both over the short term I know you said it’s going to be elevated here over the next year, and then over the long term, what you expect the rate would be.

David B. Rayburn

I think clearly Andrew the heavy restructuring that we’re going to have in the North American business is going to result in continued kind of losses if you will, book losses, on our US tax jurisdiction. This program, as you pointed out earlier, is an 18 to 24 month period so I think over the next 18 to 24 months until we can get the restructuring and all the costs associated with that behind us we’re going to have a very, very high tax rate and so I would say once you get beyond kind of the 2011 time frame then you’ll see the company return to more of the kind of 30% tax rate that we had been enjoying.

Andrew DeAngelis - Keybanc Capital Markets

Okay but I guess up to 2011 it’s somewhere north of 30% and you have no quantification there?

David B. Rayburn

I think it would be meaningful to be north of 30% and Andrew as you know what’s happened this year, if you exclude the deferred tax valuation is our losses and our US tax jurisdiction and the benefit that’s realized from that has approximated the expense that we’ve had on our earnings outside of North America so we’ve enjoyed effectively a very, very low effective tax rate with the deferred tax valuation that we have been recognizing effectively gets reserved and so as we go forward we’ll have no benefit from the losses herein North America but we will be paying taxes obviously in the foreign jurisdictions so that mathematically will give us a very, very high effective tax rate over the next couple of years.

Andrew DeAngelis - Keybanc Capital Markets

Understand. Thanks a lot guys.

Operator

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

Analyst for David Leiker - Robert W. Baird & Co., Inc.

Good morning. This is Keith. If we look at kind of fiscal Q4 versus Q3, was there anything in Europe other than seasonality that’s going to change versus those two quarters? The guidance seems to imply either North America gets a lot worse sequentially or Europe does.

Bradley C. Richardson

Keith, the Europe profitability and I think you’ve heard us say this before is our businesses for the most part outside of North America are recorded on a one month lag basis meaning that the third quarter of our fiscal year has September, October, and November results. Then as we get into the fourth quarter for our foreign locations you’ve got December, January, and February. Well as you know December in Europe as well as other locations, but December in Europe has significant shut down period for holidays so what you see is the company typically the fourth quarter is a very low profit quarter because of the shutdowns from our highly profitable European business coupled with the shoulder period for our commercial products business where the heating business is ramping down and the air conditioning is just tin the ramp up stage so those factors that cause the company to go into this loss position not too dissimilar to what we saw in the previous years’ fourth quarter.

Analyst for David Leiker - Robert W. Baird & Co., Inc.

Okay, thanks and then if we look at North America it seems like production levels and the heavy trucks, medium duty trucks are going to be roughly flat quarter-over-quarter. Is there anything other than some of these inefficiencies that go away in the fourth quarter?

David B. Rayburn

No.

Analyst for David Leiker - Robert W. Baird & Co., Inc.

Okay, thank you.

Operator

The next question comes from the line of Gordon Bergren from Industrial Land Holding. Please proceed.

Gordon Bergren - Industrial Land Holding

Hi, I’d like to inquire about the dividend. Right now it’s at $0.70. Does that look secure in the near term?

Bradley C. Richardson

Let me just give you a little background on the dividend. Our stated long term pay out ratio 35% to 45% of our net income and clearly the last couple years and with what we’ve announced here today is we’ll be substantially above that. We do look at our dividends though, not on just a short term basis, we look at it on a long term view of how we expect the company to perform. You will have noted that the Board did declare a dividend on January 16th and every May the Board looks at the long term view of the business and looks at the earnings potential of the business and assesses the overall dividend level so it will be at that time that we will re-evaluate the dividend. I would say this, that again it’s looked at over a long term, long period of time and it also, we believe as we’ve said before, is that dividends are an important component of our total shareholder return so that’s all we can say at this point.

Gordon Bergren - Industrial Land Holding

All right. That was my only question. Thank you very much.

Operator

The next question comes from the line of Andrew DeAngelis - Keybanc Capital Markets. Please proceed.

Andrew Dialgis - Keybanc Capital Markets

Hey guys. Just wanted to follow up on your kind of preliminary fiscal ’09 expectation of 240,000 units in the North American heavy market. It looks like right here you’re looking for 228,000 over calendar year ’08. Actually seems a bit conservative, I guess could you maybe talk to what’s driving that assumption and maybe how it lays out over the calendar year?

Bradley C. Richardson

We had actually had our fiscal, our calendar number of up 240,000 and brought that down not too long ago to the 228,000. Actually for the last three months the order rates have been pretty strong, over 20,000 units I believe in the [class 8] side. We actually have seen a few line rate increases at some of our customers but their visibility is not that long, what we call line sequencing is relatively short and actually we’ve had a couple of shutdowns, customers with little notice, so I think there is pent up demand in regards to the used equipment inventory is down. The new vehicles are performing well but ton miles are down, so that forward or softening of the economy is certainly out there and so I would say at this point our assumption is responsible but we’re going to monitor that very, very closely.

Andrew Dialgis - Keybanc Capital Markets

Okay, that’s helpful. Thanks.

David B. Rayburn

Well with that I think we’ll wrap it up. We did spend considerable amount of time in our presentation portion of the call and as Brad said our intent was to provide more clarity in regards to what is going on in the business, the areas that we feel positive about and the areas that we are addressing and hopefully that increased clarity today will help you all in understanding Modine.

So I look forward to our year end call. We have a lot of work to do. We know what we need to do and we have the right team to do it. So with that, thank you.

Bradley C. Richardson

Thank you very much.

Operator

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful week.

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 Manufacturing Co. F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts