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

Modine Manufacturing (NYSE:MOD)

Q1 2013 Earnings Call

August 7, 2012 09:00 AM ET

Executives

Kathy Powers - VP, Treasurer & IR

Tom Burke - President & CEO

Mic Lucareli - VP, Finance & CFO

Analysts

Mike Shlisky - JPMorgan

David Leiker - Robert W. Baird

Adam Brooks of Sidoti & Company

Operator

Welcome to the Q1 2013 Modine Manufacturing Earnings Conference Call. My name is Robin and I will be your coordinator for today. (Operator Instructions). I would now like to turn the conference to Ms. Kathy Powers, Vice President, Treasurer and Investment Relations. Please proceed.

Kathy Powers

Thank you for joining us today for Modine’s First Quarter Fiscal 2013 earnings call. With me today are Modine’s President and CEO, Tom Burke and Mic Lucareli, our Vice President, Finance and Chief Financial Officer.

We will be using slides with today’s presentation; those lines are available through both the webcast link as well as a PDF file posted on the investor relation section of our company website modine.com.

Also should you need to exit the call prior to its conclusion a replay will be available through our website beginning approximately 2 hours after the call concludes. On slide two, is an outline for today’s call, Tom and Mic will provide comments on our first quarter results and review our fiscal 2013 guidance.

At the end of the call there will be a question and answer session. On slide three, is our noticed regarding forward-looking statements and 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 filing with the Securities and Exchange Commission. With that it is my pleasure to turn the call over to Tom Burke.

Tom Burke

Thank you Kathy and good morning everyone. As expected we continue to see weakening in our served markets during the quarter resulting in a 16% decrease in sales volume as compared to the prior year. Adjusting for the impact of a stronger U.S. dollar and a negative impact on currency translation, normalized sales volumes were down 10.5% year-over-year. The sales drop includes the plant wind down of automotive programs in Europe, North America and Asia and the impact of volume declines in the commercial vehicle markets in Europe and South America and in the construction equipment market in Asia.

We reported operating income with $3.9 million and a $0.03 loss per share. Our earnings during the quarter include a 4.5 million in restructuring charges against our European segment which equates to approximately $0.10 per share.

As previously announced we have embarked upon a restructuring program in Europe with a clear goal of reaching a target return on average capital employed at 15% by the end of our fiscal 2014. During the quarter we took charges related to headcount reductions in our European regional headquarters. We are in a process of finalizing options for our manufacturing operations and administrative facilities in Europe and we’ll provide updates on decisions as appropriate.

Our European team is highly focused on executing the plan and providing the required results effectively and on time. Before reviewing the segments I would like to highlight some important management changes we announced during the quarter.

Holger Schwab is doing Modine as our Regional Vice President of Europe, Holger is responsible for leading Modine Europe’s restructuring program and we will manage the multiple high value launches that are important component of our growth strategy.

Holger has a strong track record as an executive at a major global automotive supplier. Scott Bowser previously a Regional Vice President of Americas is heading over to Shanghai to take responsibility for the Asia Region. Scott is a proven leader who guided the rationalization of the manufacturing footprint in North America and previously served as a Managing Director of Modine in Brazil.

She has built strong relationship with our global customers and is a right person to lead this important region to profitable growth. Scott Wollenberg, our Vice President and Chief Technology Officer has assumed a responsibility for the North American region after effectively leading our global product organization for the past four years. Scott will retain his position as Chief Technology Officer.

Ralf Beck, a proven Senior Leader at Modine and previously the Managing Director of Sales and Engineering in Europe has been promoted to Vice President of Research and Engineering on a global basis.

I am excited about these changes and about the full alignment of our leadership team, we have worked hard over the past several years to rebuild this company and are well positioned to bring solutions to our customers and grow our business profitability.

Mic will provide a full financial overview in a few minutes but first I would like to comment briefly on our segment results. Turning to page six, the North American segment had another solid quarter with higher operating income on slightly lower sales. As mentioned during our last call we have seen some slowing in the commercial vehicle market and have lowered our outlook in the heavy duty truck segment.

Domestic construction market has continued to be stable but current drought conditions have added uncertainty to the outlook for the agricultural equipment market. Sales in our European segment were also lower than prior year down 16% excluding currency; this decrease was primarily due to the continued wind down of the automotive module business but was also impacted by weaker end market demand in light of the economic uncertainty in the region.

This uncertainty in weak market demand have caused delays in the launch of certain commercial vehicle programs and slower than expected ramp rates in the programs that we have launched earlier in the calendar year.

Moving to South America, sales continue to be impacted by lower commercial vehicle demand and weak Brazilian market conditions.

Excluding foreign currency translation, sales decreased 20% from the prior year. We have seen reduced production levels as manufacturer’s attempt to reduce inventory levels. As reported last quarter we believe it will be late 2012 before we see a recovery in these markets.

Now moving to Asia, on page seven, we continue to see lower excavator sales during the quarter as compared to the prior year. Forecast indicate demand from our highway customers could be approximately 25% to 30% lower than last fiscal year. This weakened demand along with a Phase out of non-strategic (inaudible) HVAD business led to a 26% reduction in sales versus the prior year.

Progress is continuing on a transformation of our Shanghai plant for module assembly operation into an engine products manufacturing facility which we anticipate will be completed by the end of the fiscal year.

Our code activity in this region has been strong and we are expecting that slowdown in the off-highway market trend and will reverse course later in the year. In our commercial product segment we saw lower sales of our data center cooling products in the UK as data center operators have stalled construction projects due to the recession and into run up to the London Olympic Games. This is consistent with our expectations for the quarter. In North America, our heating and cooling sales were essentially flat from the prior year. I am very pleased to announce that we have completed the acquisition of Geofinity manufacturing during the quarter adding an important products to our commercial HVAC portfolio. Geothermal our ground source heat pumps are very efficient method of heating and cooling building significantly reducing energy is in carbon emissions.

This product line has tremendous growth opportunity fits well into our portfolio, we currently sell heat pumps into the school market but this acquisition will allow us to expand into the residential market and broaden our commercial market coverage. With that I would like to turn over to Mic for a full overview of our financial performance and guidance.

Mic Lucareli

Thanks Tom and good morning everyone. Please turn to slide eight and I will walk through the income statements. As Tom mentioned this was a very challenging quarter, we experienced weaker customer demand in our end market, to wind down of automotive programs in Europe, North America and Asia and the impacts of the stronger U.S. dollar on our foreign sales. So first quarter sales decreased 68 million or 16% excluding the foreign currency impact which was 22 million, sales decreased 46 million or 11%.

All four of our vehicular segments experienced flat to down revenue and revenue in our commercial product segment was down 12%. We were able to reduce the volume impact somewhat by limiting the downsize gross profit conversion to 27%, despite the manufacturing cost control gross margin decline due to significant drop in volume.

Given the current economic environment, we remain focused on SG&A which decreased by 6 million or 13% and please note that the income tax rate was extremely high in the quarter and was driven by our global mix of earnings. I also want to point out that we reported 4.5 million in restructuring charges relating to head-count reductions at our European headquarters, this negatively impacted the EPS by approximately $0.10.

Now turning to slide 9, we have a summary of the European restructuring cost for the quarter as you know and as Tom mentioned we are in the process of shifting our European focus away from high volume automotive module program and towards a better balance of heavy duty programs especially commercial vehicle. During the quarter our restructuring actions were primarily related to salaried headcount reductions in our Bonlanden in Germany, headquarters and these cost totaled 4.5 million as previously mentioned and negatively impacted EPS by approximately $0.10.

These actions will result in an annual SG&A savings as we move forward and we will continue to provide updates on our progress in upcoming quarters. Moving on to slide 10, operating cash flow increased in the quarter improving by 19 million year-over-year, this was driven by our lower investment and working capital and the delay of certain employee benefit contribution. Free cash flow improved by 18 million while capital spending of 12 million was consistent with the prior year. We remain comfortable with the balance sheet with the net debt to capital ratio of 31% and $43 million of cash on hand.

Moving on to slide 11, let’s take a closer look at our North America segment, where sales were down 2% due to several factors, first sales as a whole were down 3 million consistent of a $9 million increase in commercial vehicle and off-highway sales. That was offset by 10 million decrease in auto and military sales as certain programs are winding down.

There was also a decrease in sales that was impacted by 2 million from a drop in tooling sales; gross margin improvement reflects better plant performance, lower material cost which continued from last quarter and given the higher gross margin in lower SG&A operating income improved by 3 million or 28%.

Our calendar of 2012 market outlook is for growth in all targeted markets, however, the level of growth in the Class Eight market was lower from the 17% growth assumption provided in our last earnings call.

Moving on to slide 12, we have our European segment, the first quarter sales were down 25% from the prior year also reflecting the negative impact from foreign currency, excluding foreign currency impacts sales would have been down 16%. We continue to see weakness in the commercial vehicle market especially on the engine side, our sales into this market were down 7% versus the prior year and as Tom mentioned we have seen a delay in launch activity as our customers are adjusting production and response to end market demand.

Also automotive sales were down 22%; this includes a $22 million impact from the wind down of the BMW business. While it's a relatively small piece business of our business we continue to see an increase in off highway which was up 12% year-over-year. The European gross margin declined 350 basis points on lower sales volume and launching efficiencies and SG&A decline by 3 million benefiting from first to know cost reductions and from foreign currency translation of 2 million.

Looking ahead we anticipate the continuation of weak markets for autos commercial vehicles given the current economic situation in Europe. Turning to slide 13, we have a look at our South America segment, sales decline in the first quarter is compared to the prior year as we continue to see the impact of the pre-buy of commercial vehicles ahead of the January 2012 change in the mission standard. In addition, the weakening of the Brazilian reals had a significant impact on sales.

On a constant currency basis, sales would have been down 20% rather than the 35% as reported. With that gross margin declined 360 basis points on the lower sales volume and again SG&A declined by 2 million due to a focused on controlling cost and including a benefit of currency translation of about $900,000. As for the 2012 outlook we see the volumes in our commercial vehicle market remaining down, however, our forecast includes a mass recovery later in our fiscal year. In addition, we have lowered our forecast for the agricultural equipment and aftermarket business as our outlook now shows volumes declining 2% and 3% respectively.

Slide 14, highlights our Asia segment with first quarter sales were down significantly from the prior year as order rates in the China excavator market that continued decline sharply over the last three quarters.

We are continuing to launch new programs; these new volumes cannot offset the weakness in the excavator market which is declined 40% year-over-year.

In addition, this region is impacted by the loss in the vehicular HVAC sale which relates to the sale of Modine Korea and a portion of the BMW wind down. The margins were down due to lower sales volume and also the continuing impact of converting our Shanghai plant to the new engine products facility.

As we look ahead we have lowered our outlook for India in 2012, however the largest challenge remains our heavy reliance of excavator sales in China given the current expectations for that market.

Now turning to slide 15, we have our commercial product segment, as Tom mentioned first quarter sales were down 12% from the prior year, this was driven by lower sales in the UK as precision air conditioning and chillers were down 23% year-over-year.

Our business in the UK has been challenging given the current economic environment and as a slowdown due to the summer Olympics.

We expect to see market growth of 2% to 5% for our North American building HVAC products and with regards to the UK in the slow economic environment we are lowering our expectations in the server markets.

Lastly, we are very pleased of completing the acquisitions of Geofinity, a technology leader in residential and commercial heat pump systems.

Now let’s turn to our fiscal 2013 guidance on slide 16, as previously guided the first half of fiscal 2013 is proving to have difficult year-over-year comparable due to currency, economic conditions and wind down of programs. While we are still projecting to be in-line with the EPS range of $0.60 to $0.70, there are a few critical forecast assumptions that I want to highlight. Firstly anticipate that our second quarter will be impacted by slow market demand and summer shutdowns especially in Europe, then we expect to see some sequential uptick in our Q3 and Q4 revenue. The biggest drivers will be higher truck launch activity in Europe, some commercial vehicle improvement in South America and excavator market improvement in China.

In addition, the negative foreign currency comparable should diminish as we proceed through the year. So at this time our fiscal ’13 earnings guidance calls for the following. Revenues down 5% to 10% versus the prior year. Operating income margin excluding restructuring expense will be I the 3.5% to 4% range, EPS in the range of $0.60 to $0.70 also excluding restructuring charges and similar to this quarter we will continue to provide summaries of our restructuring expenses and the progress on the execution of our restructuring plan in Europe.

Clearly the global economic markets are creating some volume challenges and at the same time we are trying to roll off our remaining automotive module business. However, we have a very strong three year order book and all of our businesses have solid plans to hit their return on capital targets as we go forward. With that Tom I will turn it back to you.

Tom Burke

Thanks Mick. Please turn to page 17, last quarter we outlined our near term challenges which have indeed turned into three significant head winds for us. First lower sales volumes due to economic conditions in our major markets particularly commercial vehicles in Europe and Brazil construction equipment in China and the data center cooling market in UK. Secondly, the plant wind down of automotive programs in Europe, North America and China all of which are been phased out effectively while we remain a top line channel engine in near term and third the continuing impact of the strengthening U.S. dollar on our revenues and earnings.

We knew that these conditions would lead to difficult year-over-year comparisons and this was built into our expectation for the year. We believe these conditions will continue in the second quarter and then improve in the second half of our fiscal year. As a result as Mick noted we are reaffirming the full year guidance we have provided in June.

In conclusion, I want to confirm that remain on track and committed to our growth strategies. We have made key important changes to strengthen our leadership team and we are beginning to implement key aspects of our European restructuring program. A program we expect to be largely complete within the next 18 or 24 months and I am confident that by that time we would have achieved our objective transforming our global manufacturing footprint. Our new business launch activity is robust and we are currently quoting a high level of new business in all of our segments.

As a result we are excited about our net new business wins which currently totals over $250 million of net new business over the next three years and with that we would like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Ann Duignan of JPMorgan. Please proceed.

Mike Shlisky - JPMorgan

This is Mike Shlisky filling in for Ann this morning. Firstly just wanted to ask about the North America and European truck markets, we have been hearing from some OEMs that there may be some cut backs in production if they happened already in the I guess the calendar third quarter, there may have be some layouts at some of those OEMs, just wondering what you guys anticipate happening sequentially in both North America and Europe on the heavy duty truck side.

Tom Burke

Well as I mentioned in my comments Mike like in last we anticipated this profit and we have kind of lowered our expectations and leveled that out based on some of the things you just said. We have got kind of a run-rate that’s dropped down for us and starting Q2 and balancing that through North America, so we are ready to react to any adjustments and are anticipating that we are at the right level from our standpoint. In Europe, our smaller market share as you know we are about 10% to 15% market share and outgrowing significantly and what we are seeing there is the impact on these launches that I mentioned, Mick as well. The ramp up rates are slower and in some cases being slightly delayed so we are seeing up the impact of the truck market grow the market share a little bit slower than we anticipated coming into the year but we got that take care as far as our forecast is concerned.

Mike Shlisky - JPMorgan

And if I can just perhaps follow-up on that. I noticed you had some delays launching some new products over in Europe. Just wondering how much feasibility you currently have on those launches and whether there could be any further delays or are you pretty set now with how things are going to unfold on all those new programs?

Tom Burke

They are rolling forward. So I am mean there is no doubt that they are launching. I just think, I can't speak for the OEM but I am sure there is a case you are looking to balance out inventory and trying to hit the right target volume to ramp up. So right now, clearly these are major (inaudible) are going to produce. I just think that they are adjusting to optimize there to balance out in market demand. Also, we don't see any, what I would call permanent changes from those launches. They are on track. They are just a matter of getting a full strike.

Mike Shlisky - JPMorgan

And just quickly ask you about your guidance. Maybe it’s a two part question here. So, it's as if though you guys kept your revenue and your EPS guidance the same, but you did raise your tax rating guidance so if you back that out, that might imply that you have maybe a better pre-tax income, but your previous quarter's guidance. And I was wondering if that's what should be sort of ringing into or if it's just really not a very big change there. And then so, I guess what's your biggest risk to the full year guidance given what we saw so far in the first quarter?

Mick Lucareli

We did have a small increase in our effective tax rate that we don't see that as the biggest driver in the year from a dollar standpoint or from an EPS standpoint though we did bump this from 25 to 30% effective tax rate.

Your question about the biggest risk in the year is clearly this is for us is kind of a tail of two halves. It sounds that we knew heading into the year. We knew Q1 and Q2 are going to be weak and primarily due to the foreign currency comparables from a year ago, the wind down of programs and then the ramp of our other programs. The biggest factors we really need to make sure, we deliver on from our side and we need to markets to cooperate. We have some margin improvement in South America region in the second half of the year best as we completed our restructuring in that facility there. We've completed the launch of the new aluminum products with the truck commission standards. So we see some margin improvement in the second half of the year in South America.

Tom and me were just talking about Europe. We have some modest increases in volume in Q3 and Q4 in Europe that is as the launch volumes continue to increase even though they've been slower and behind schedule, we do have projections for those and orders from the customer that they will continue to increase volumes.

And then Asia, we've got a little bit stronger Q3 and Q4 on the excavator side and we are continuing to launch programs in Asia. And last but not least, our commercial products group is more of a seasonality, has more of a seasonality to it. So while we're looking for a little bit of uptick in the server market in the UK, that really halted all construction in London and the UK during the Olympics, so we've got to push out some orders there. But also, a very profitable piece of our business in our North American heating and cooling, really starts to kick in this fall.

Operator

And your next question comes from the line of David Leiker of Baird. Please proceed.

David Leiker - Robert W. Baird

Mick I want to first, on the cash flow, great performance there. In your slide, in your comments you talked about it being more non-operating items but it make take receivables, payables and the inventories that number, you're down $20 million year-over-year. Is that just the revenue, it seems like it's more than just a revenue line is being the weakness in the revenue line. Is there any other color you can get there?

Mick Lucareli

No, even I have talked in the past. Most of that improvement in working capital is volume driven. I would tell you, we've got a significant focus on inventory and actually we think we've got more room to go with regard to improving on our inventory. That decrease upon us all last year with the stronger volume. So, yes, short answer is with volumes David, but we still think we've got more room to go.

David Leiker - Robert W. Baird

And then on the capital spending line, I don't think you've put a number out in terms of what you think that is for the year.

Mick Lucareli

Yes, I think we see CapEx very similar to last year. We've been targeting 60 to 70 million. Obviously with volumes down, we're going to focus on keeping it at the lower end of that as the lower we can.

David Leiker - Robert W. Baird

And then as we look at Asia, understandably you have very tough end markets there, you exited the year generally around this 100 million revenue number that you’ve talked about for getting breakeven. Given the business that you’ve picked up, if those normalized I would suspect that you're about that 100 million. Can you give us any sense of how much above that you might be given those new volumes have been.

Mick Lucareli

With our order book David, that's kind of what you're thinking.

David Leiker - Robert W. Baird

Yes, with the new business you picked up, your run rate with normalized markets is north of a 100 million I would guess.

Mick Lucareli

Yes, and we've talked about this on other calls that we've got three facilities in Asia and at full capacity, we see ourselves at $200 million run rate in that region and you're right. We have enough order book over the next three years to approach that. We'll approach our full capacity. So at least it is easily between 100 and 200 million.

David Leiker - Robert W. Baird

Okay and that on the European restructuring, the 4.5 million, given its headcount reduction, I'm presuming that's all cash.

Mick Lucareli

Yes, that's all cash.

David Leiker - Robert W. Baird

And guess as we talked about the restructuring, you focused mostly on the manufacturing operations. It looks like you're doing some fixed cost reduction there as well from a headquarters perspective. How would you characterize that mix between those two going forward?

Tom Burke

Yes, we're reshaping the base in Europe David, so from a standpoint of our new focus on being commercial truck off highway focused, is a different requirement as far as European headquarters. So we'll be downsizing that facility to match it quarterly with our new scope of business on an SG&A basis and then obviously the additional manufacturing restructuring that we talked about quite a bit. So, it’s a complete reshaping of the European business model.

Mick Lucareli

Yes and David, when we ticked off that project in last quarter, we looked at this as similar to the 4 point plan we did for North America. Not only are we targeting the gross margin, the manufacturing that you laid out, but we've also set a target of 5 to 7 million euro savings, there's a restructure.

David Leiker - Robert W. Baird

Then on Brazil, we're hearing from some of the companies involved down there that the end markets kind of stabilize in terms of demand and inventory has been brought to more normalized levels, that there is some sequential uptick in the production rate. Are you seeing that at all?

Tom Burke

We're hearing the same things, okay. And we're told to be ready for the second half of the year and so that's why we are pretty confident about our outlook as far as sales gross. So we're hearing those same things David and feel good about it.

David Leiker - Robert W. Baird

One is big question (inaudible) in Europe between the end market demand is whether there is a pre-buy or not with the euro sticks. It sounds like some of these new launches being pushed later in the year, your customers aren't really expecting that there is much of a pre-buy over there. Would that be a fair characterization?

Tom Burke

That's fair. We're not hearing that at all. I just think they are being cautious on managing their inventory, ensuring these launches are robust and that's everything I am picking up. So, everything we're on track from all our initial engagements on production validation and stuff. We feel very confident that these are going in the right direction and we don't sense that pre-buy effect over there.

Operator

And your next question comes from the line of Adam Brooks of Sidoti & Company. Please proceed.

Adam Brooks of Sidoti & Company

Just wanted to head to North America quickly. Can you maybe quantify the impact of raw material costs in the quarter?

Mick Lucareli

Adam that's hard to do, to quantify for you. It’s a fairly small impact. The biggest driver of the margin improvement for this segment in the last three quarters in year-over-year has been the manufacturing realignment. The metals have been more stable and with our past due agreements and our hedging activity, it’s a very small number. If I had to guess, I would say it’s a million or less impact.

Adam Brooks of Sidoti & Company

And what utilization rates are you going to get now in North America?

Mick Lucareli

I would guess 70%. We still have leg room to go.

Adam Brooks of Sidoti & Company

So I guess the question becoming, can you hit double digit margins as markets continue to recover over the next few years in North America?

Mick Lucareli

Operating margins?

Adam Brooks of Sidoti & Company

Yes.

Mick Lucareli

Yes, well that's our target.

Adam Brooks of Sidoti & Company

And then quickly looking at South America. Can you maybe talk a little bit about the after-market, you gave a little bit of color. I know it’s a nice chunk of business down there. Can you give us a stance of where you think that goes over the next few quarters?

Tom Burke

Well it’s a great solid business for us and so we have a leading position down there. So we anticipate that, they continue to do well. There is a demand for servicing past monstrous vehicles continues. So we leverage that, everything is worse. So as far as direction, I think from a macroeconomic standpoint, macro to market standpoint, the big box pressures that have hit the aftermarket segments in North America are not relevant and South America and conversations with other suppliers in that market. So we think this is going to be a stable and profitable business for us for some time.

Mick Lucareli

And Adam, just add to what Tom was saying, that business ebbs and flows a little bit and what we're keeping our eye on is in the last year, when the reais strengthened, it seemed like that's when more competition comes in from Asia. There is a lot of protection that the Brazilian government has in place but we found that the reais really made a run, that's when there was some more competition. Also believe it or not, there is some economic sensitivity to that market. There is always the replacement for an accident where you don't have a choice on your radiator but there are a lot of people that, it’s a market where you're looking at optional repairs and it's not a true crash and repair situation. People delay that believe it or not, when the economic times are slow.

Operator

And you have a follow-up question from Ann Duignan of JPMorgan. Please proceed.

Mike Shlisky - JPMorgan

First on Ag outlook, I noticed that you did bring down as you mentioned in the South America Ag outlook I guess I was curious, given what we saw yesterday from the tractor sales in Brazil and of course the outlook for increased planting of soybeans right around this year, given the job we have here. I was wondering what caused you to take that outlook down a bit and then in North America I was just wondering what is behind your Ag outlook. Do you actually talk with the OEMs, do you get that or is that more just a feel for how the drop might impact things?

Mick Lucareli

From South America you're right, we were looking at a plus kind of 3%. We're a little bit I think like everybody else. We saw the same numbers come out that everybody did this week. Our reaction and the downgrade in our expectation of minus 2% was really based on the severe weakness we saw in our Q1. Obviously we're coming up right on another forecast cycle in August that we do every month. We're going to roll in any new news we have but I think ours was a reaction that how slow things were in the June quarter. Tom on North America?

Tom Burke

North America really is BoEs signaling, there's been a couple of signaled risk, one I think was down 5% potentially as a risk, one just cautioned. So I think we're just preparing for that, that's all we picked up on that.

Mike Shlisky - JPMorgan

And I just want to talk with you on a second topic and that is your outlook that you've mentioned in India. That's also down, down a bit. Just wonder if you can give a little more color on what's going on over there both with your business and just maybe the overall market. What's changed over the last couple of months. It seems relatively steady. I want to know what your thoughts are.

Tom Burke

In India we have a multi-market approach, we have both (inaudible) and commercial truck in our focus and the truck launches we've been on it just been slow to come together. I think we're in the recession, there was delays and launches that a couple OE programs. There's a major European OE that's launched now that we have some excitement above supporting and we'll see where those volumes materialize later in this calendar year. But everything just hit a slow down over the last couple of years from the launching.

On the highway side, their mechanization that was growing, as they are growing to a larger piece of equipment and we have business going and I say that in a more traditional excavator market and real order business that again is getting up the ground but just slow to materialize. So it just feels like that in every front in India there is this slowness that is coming together. This economy is challenged right now. We've all read about, so on top of those things, so I think there is a challenged market demand for India as well.

Operator

(Operator Instructions). You have another follow-up question from the line of David Leiker of Baird. Please proceed.

David Leiker - Robert W. Baird

As we see these automotive revenues wind down, that those look, that have been in North America and also in Europe. Is there an inflection point at some point where you see the margin impact of that in the numbers, I realized the end markets are volatile and there is a visibility maybe somewhere around that.

Mick Lucareli

Are you thinking about like a mix-up in margins?

David Leiker - Robert W. Baird

Yes.

Mick Lucareli

Yes, I think other than we've absorbed a pretty big hit this quarter in North America on the lying down on the auto end on the military program, I'm just grabbing my notes to make sure I give you the right number, what we had in there that was 10 million and we're talking about a 15 million negative for the year. So kind of that we took in Q1 here. But we've got most of the manufacturing right sized in North America. So I would say, you are not going to see a lot additional margin improvement there just from those issues. And Europe is the big question and we have a more even ramp about 10 to 12 million euros. Every quarter BMW this year and the issue there is while its low margin, those are fairly dedicated facilities and this restructuring in the second leg of our restructuring, we really need to come up with strategy to address those manufacturing facilities. We're putting the truck volume and the heavy duty volumes in different locations for many parts, still we're adding capacity to support heavy duty application and at the same time, as automotive winds down, we'll have to come up with our strategies to take those big cost sell before you'll see the margin improvements there.

Tom Burke

And David, those exactly are the options that I referred to in my comments that are being evaluated fully right now that with all the right constituents, we need to do that with, that we anticipate completing that over the next 18 months or so.

Mick Lucareli

I don't think you'll see a short answer this year. You're going to see much margin improvement just from the auto lying down.

David Leiker - Robert W. Baird

Will that potentially get worse before it gets better?

Mick Lucareli

No I don't think materially. Every quarter it's just lying down, it's becoming less of an impact.

Mick Lucareli

And then as we look at your second quarter versus the first quarter, it looks like currency is going to be worse North America, truck is going to be worse, but it sounds like most of the other markets sequentially are in Q1 are a whole lot different than Q1. Is that fair?

Mick Lucareli

Yes, I think the best in the way we are looking and trying to guide for Q2 is going to be very similar to Q1. A lot of moving pieces that you nailed were not out of the currency issue. We're not out of a lot of the market weakness and we still have some lying down. So it's going to be very similar quarter to Q1.

David Leiker - Robert W. Baird

Out of this (inaudible) shareholders, can you think the future earnings potential on at the back end of that? It hit that 11% return on capital. There's a 5 to 7% margin target in there. And somehow I have a recollection that that number was higher in the past. Has there been a tradeoff between the margin and the capital turn in there? Or am I just not recalling that correctly?

Mick Lucareli

No I think, we'll take another look at and make sure we're comparing apples to apples for you. I think what we're trying to do is say step one, we absolutely need to get to a 11 to 12. We just need to get our margin to that 5 to 7. And then for the question earlier, do we think we can go higher beyond that, absolutely. So that was kind of meant to be next step for us in the next couple of years, if it gets to that far I guess and we like to go higher. It's possible we have before was a little bit more of a long-term vision of the company.

Operator

There are no further questions. I would now like to turn the call back over to Ms. Kathy Powers for closing remarks.

Kathy Powers

Thank you Robin. This concludes today's call. Thank you for joining us this morning. Good bye.

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 CEO Discusses F1Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts