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Modine Manufacturing Co. (MOD)

F4Q08 Earnings Call

May 27, 2008 11:00 am ET

Executives

Susan Fisher - Director of Investor Relations, Corporation Communications

Tom Burke – President, Chief Executive Officer

Brad Richardson - Executive Vice President Corporate Strategy, Chief Financial Officer

Analysts

Andrew Deangelis – Keybanc Capital Markets

Analyst for David Leiker – Robert W. Baird

Operator

Good day ladies and gentlemen and welcome to the Modine fourth quarter earnings conference call. (Operator instructions) I would like to turn your call over to your host for today, Ms. Susan Fisher, Director of Investor Relations, Corporate Communications, please proceed.

Susan Fisher

Good morning everyone and thank you for joining us today for Modine’s Q4 and full fiscal year 2008 earnings call. With me on today are Modine’s President and Chief Executive Officer, Tom Burke and our Executive Vice President Corporate Strategy and Chief Financial Officer, Brad Richardson. As most of you know, both Tom and Brad moved into expanded roles with the company upon the retirement at the end of our fiscal year 2008 of our former CEO David Rayburn.

Our format for today’s call will be approximately 30 minutes of prepared remarks followed by a question and answer period. We will be using slides with today’s presentation. Those slides are available through both the webcast link as well as a PDF of the PowerPoint posted on the investor relations section of our company website, Modine.com.

Also, should you need to exit the call prior to its conclusion, a replay will be available through our website beginning approximately two hours after the call concludes. Before we begin, a brief reminder 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 & Exchange Commission. And with that said, it’s my pleasure to turn this call over to Tom Burke. Tom.

Tom Burke

Thank you Susan and good morning everyone in this my first earnings call with you as President and CEO, it is very difficult to have to report our largest loss in our company history. Although this was a difficult year, it also sparked important and pivotal changes as we move forward into fiscal 2009.

Simply put, 2009 is going to be a year of blocking and tackling to build a foundation so we can attain our goal of top tier earnings performance by 2010, 2011. We are making the necessary changes now to ensure the future viability of Modine.

To put 2008 in perspective, we had a continued strong growth in Europe, South America and our commercial products group as you can see in the year over year percentages over Q4 of 2007. This growth was largely offset by significant underperformance in our North American and our Korean business operations.

As we have been actively transforming the company from a regional base component supplier to a global thermal solutions provider, we’ve had our challenges, specifically and most notably the slow recovery in the North America truck market, the rising input costs and recessionary pressures in North America.

And while business conditions have been challenging, we’ve also had internal execution issues as well, namely around the inefficiencies of our plant closures and product transfers from our earlier announcement, restructuring in 2006 and some new product launches earlier last year.

We’ve also suffered from not moving fast enough to a greater scale positions in our North American operations and facilities. This is now changing. And lastly, underperformance in Korea where the profitability and customer diversification that we envisioned when we bought the business in 2004 have not been realized and we are moving decisively to correct this problem.

While our financial results are disappointing, Brad and I are here today to affirm that we know the issues. Our plans are well designed and the Modine leadership team is aligned and committed to accelerate the pace of improvement in the company. Our actions fall into the same four point strategy that we’ve communicated on prior calls and discussions and this is shown on page 4 under “action plan to address business performance.”

First, manufacturing alignment, we are moving very aggressively to address our manufacturing footprint issues globally. Secondly, portfolio rationalization is an effort that we have undertaken recently to ensure our current product portfolio is properly assessed and optimized to return the maximum earnings potential.

Capital allocation is a critical process that’s been deployed that uses the product portfolio assessment and anticipated market opportunities to ensure we are putting our hard earned capital and talented human resources to work on the best return opportunities. And finally, SG&A cost reduction, simply put, we need to drive continuous improvement into our administrative processes just as we do our factories.

So let me talk about manufacturing realignment. In Q3 we announced three additional plant closures in the US and one in Europe to right size our manufacturing footprint through higher utilization and to take advantage of the increased scale of efficiencies that will result.

To ensure we get this right and a lesson learned from our last round of restructuring, we have formed a dedicated internal team to focus solely on the plans and needs to successfully accomplish these projects. This team will be supported with full time resources from a reputable outside firm that specializes in plant consolidation and closures.

At this point we are about two months into this project since our formal announcement of the plant closures and I will tell you that we are on track to our schedules and feel very confident with our plans. The level of success will be directly related to the level of leadership intensity, committed resources and detailed planning that we’ve put in place and we have not taken any shortcuts and we are going to attain our objectives.

The forecasted savings from these projects will save the company approximately $20-$25 million annually when completed over the next 18-24 months. At the same time, we’ve announced that we’re launching new plants in India, China, Hungary and Mexico to serve our global customers in these fast growing markets.

These are state of the art facilities with enthusiastic teams and the appropriate level of leadership experience. Our resulting manufacturing footprint will be highly competitive and globally positioned to ensure success in competing in our targeted markets.

Finally I’d like to say I’m a big proponent of global capability and consistency to ensure we learn from each other around the globe. This has been accomplished through the launch of our Modine production system in which the regional leaders drive continuous improvement through combining our clear leadership behaviors with the core continuous improvement principles.

Next, we’d like to talk about the portfolio rationalization and is another key cornerstone of our profitability restoration plan. As part of this focus, we just completed the sale of our electronics cooling business early in May. The product focused organization structure that we’ve put in place in 2006 is providing global accountability for our product and technology strategies.

This focus is providing much improved speed to market for our new products and is enabling more informed choices as to where we invest our capital. We are seeing results. Beyond this, we are conducting and in depth product by product analysis of our entire product portfolio with our initial focus on our North American OE, Korea and commercial products segment.

We are being very methodical in this approach, using what I call a red, yellow, green framework which assesses each of the products for market attractiveness and profitability. We are accelerating the assessment of all of our products for market attractiveness and profitability.

Where a given product program or strategic customer relationship meets our financial hurdle rates, we are actively reinvesting in this business. Conversely and just as importantly, where a product line or a non-strategic customer relationship fails to meet our financial targets, we’re moving decisively to improve, exit or divest those product lines.

This kind of blocking and tackling is a pivotal component of our plan to turn around the company’s performance and achieve our stated growth and profitability objectives. The portfolio analysis provides a framework then for our capital allocation process. Through it we are better to identify the optimal areas, that is the green areas depicted on the chart for reinvestment as we reposition the company to capitalize on significant growth opportunities.

These are areas assessed with high market attractiveness with growth, technology and competitive assessments and high gross margins that will ensure we attain our financial objectives on our new investments. We call these optimal areas advantaged positions that provide the opportunity to offer our customers higher value and premium pricing.

We are now able to strategically and more effectively allocate our capital in terms not just of dollars invested but also the human capital of our workforce. It is brining a lean or continuous improvement focus on our product development processes that aligns leadership and prioritizing our research, new product development and application projects with a return on investment mentality.

Simply put, we are making better bets as we invest in our future growth opportunities. With the capital allocation process in place, we are better aligned for reinvestment in our growth. The fundamental growth drivers in our business remain intact, emission regulations increasing engine content significantly around the globe.

A good example is 2010 in North America where we landed $125 million of very profitable business with the 2010 regulations. The same is happening in Europe with Euro 6 and of course in off-highway with tier 4 and other regulatory changes globally.

We’re building stronger relationships with our targeted customers leading to more opportunities on top of this. Innovations in fuel efficiency driven by soaring energy costs is another key driver. This is setting up a great opportunity for our technology such as Origami which is our next generation heat exchanger which reduces weight significantly while providing a more robust and stronger product.

Waste heat recovery projects are again with targeted customers where we’re working to develop systems to extract waste heat from the exhaust to be reapplied to the power train system thus improving efficiency. These are great examples of Modine’s technology that are positioned well for the market in the future.

Increased market penetration in Europe is also a significant driver, both in automotive where we’re receiving significant business wins with premium automotive suppliers and premium high performance automotive suppliers in products such as condensers and power train cooling modules, but also very importantly in the truck market in Europe where we see a very great opportunity to increase market share with the Euro 6 2011, 2012 sourcing.

Additionally, with our expansion into China and India and other regions we’re seeing new business growth with the opportunity of these positions and we’re seeing very significant wins in these markets at our targeted customers. I am extremely excited with the quality of our order book globally, both in terms of the win rate and gross margin expectation exceeding our hurdle rates.

We also see a great opportunity beyond vehicular. We’ve talked a lot about fuel cell, but our stationary power applications in the alternative energy space are very promising. We’re working with two great customers in Bloom Energy and [Serious] Power on stationary power applications both in the distributed power and generation and in the micro CHP process and we’re very excited with those opportunities in our five year plan.

Additionally, the commercial products group is brining great technology to market in the near term through Airedale in the UK we have a turbo chill product which will be the leading, most efficient chiller in the market that’s being well received in the market today.

And in North America, both the school conversion in high efficiency unit heater development projects are looking to really boost sales as well. We are focused on converting on these growth opportunities. This is indicative of the kind of growth that continues to accrue to Modine based on superior technology and operational excellence.

As I mentioned before, 2009 will be a year that clearly sets the foundation for our future: the restructuring of our manufacturing footprint, driving the product portfolio rationalization, ensuring that we launch flawlessly with our new programs and targeting customers and of course brining new technologies to the marketplace on time.

These are the actions that will ensure Modine will be well positioned to return our company to top tier performance by 2010 and 11 while steadily enhancing returns to our shareholders. With that, I’ll turn the call over to Brad Richardson for a review of our fourth quarter and full year fiscal 2008 financial results.

Brad Richardson

Thank you very much Tom and as seen on slide 9, you can see the format that I plan to cover, as Tom mentioned: the fourth quarter highlights, the fiscal 2008 highlights, an update on our action plan to address the business performance and our guidance.

I think of those of you who have read our release, this is certainly a very, very complicated year in trying to understand the underlying performance and so what I’d like to do is to turn to slide 10 and start to walk you through the overall performance.

This slide provides the highlights of the reported financial results for Modine’s fourth quarter 2008 and again I’ll just repeat, you know we recognize the difficulty in trying to understand these results and therefore have provided additionally clarity in subsequent slides to demonstrate the underlying earnings level and momentum of the company.

As identified on this slide, sales were quite strong with the continued strength in Europe and South America and recent strengthening of our commercial products segment. On an underlying basis, excluding the favorable foreign currency translation benefits, sales were up 9%.

The gross profit conversion on this increase in sales was adversely impacted by $3 million in repositioning costs and $2 million in an out of period adjustment as well as ongoing operational inefficiencies stemming from the restructuring of the North American OE business.

The results were also impacted by impairment related charges associated with Modine’s operations in Korea. The outlook for this business has been reduced due to continued pricing pressure from the key customer for this business and the current inability to effect a manufacturing related cost reduction necessary to make this business successful.

Also, as part of our product line evaluation process, we cancelled our development of the PF squared or PF 2 product line in the commercial products business resulting in an impairment charge of $3.5 million. And SG&A, while up on an absolute basis reflected the impact of executive retirement charges and foreign currency exchange rate changes.

Excluding these factors, SG&A was actually down. As if this understanding of these results couldn’t get any more complicated, I would draw your attention to the difference between the $27.5 million in pretax loss and the after tax net loss of $40.3 million. The difference represents the impact of accruing taxes on our profitable European and South American business and the inability at this time to recognize a tax shield or benefit on the losses that are being incurred in the United States.

We also recognized a $6.7 million charge against Modine’s net deferred tax asset in Korea, again related to the reduced outlook for that business as we go forward. I’m turning to the next slide titled “Fourth quarter fiscal 2008 unusual items.” Our objective on this slide is to show you what happened on an underlying basis to Modine’s gross profit, pretax results and EBITDA for the fourth quarter.

By adjusting for the factors discussed on the previous slide, you can see that our gross profit was $64 million, representing 13.4% of sales with pretax results at $1.8 million and EBITDA of $28.3 million. I would draw your attention to the fact that our adjusted pretax results exceeded the guidance that we provided in February of a $3 million loss and also exceeded the reported loss of $4.8 million in our equivalent period fiscal 2007 results.

Further, the EBITDA showed significant strength, increasing approximately $12 million versus the prior year to an absolute $28 million reflecting the underlying strength in performance out of Europe, South America and our commercial products group.

Transitioning to the full year results show on the next slide, it’s prepared in a like format to the fourth quarter slide showing reported and then adjusted financial results for the full year. On a full year basis, Modine’s gross profit as a percent of sales was 14.6% with a pretax loss of $21.1 million and EBITDA of $72.8 million.

Adjusting for impairments in the various segments, coupled with repositioning and other onetime costs, the gross profit percent was 14.9% and generating $39.8 million of pretax earnings and $133.7 million of EBITDA. Our pretax results were below the prior year reflecting the volume reduction of the higher margin North American truck business as well as ongoing operational inefficiencies in North America resulting from plant consolidation and product launches.

However, the pretax results did have higher depreciation and interest costs which when added back in the calculation of EBITDA led to the overall improvement in EBITDA to $133.7 million in the current year versus $125.1 million in the previous year.

The next slide shows the various factors contributing to the swing in pretax profitability from $45.2 million in fiscal 2007 to the reported loss of $21.1 million in the year just completed. What is most telling is the impact of the North American truck market on the profitability of the company and certainly provides some insight into the earnings leverage when the truck market recovers.

And further you can see earnings leverage when we get the North American business, restructuring and performing to expectations. As shown on the fourth bar [N], the impact of the operating inefficiencies in our North American business resulted in a $14 million impact on profitability reflecting inefficiencies from the closure and consolidation of facilities and less than optimal launch performance including certain EGR programs at our Joplin, Missouri plant.

Looking at our results on a segment basis, the next slide shows both sales and operating income. The change in sales for Modine by segment are shown on an absolute basis and without foreign exchange benefits. Most notable is an absolute plummet in our sales out of North America, down 22% reflecting the cyclical decline in the North American truck market.

The decline in North America was offset by significant strength in Europe, up 14%, South America up 41% and commercial products up 9%. From an earnings standpoint, I would draw your attention to the far right column which shows the change in profitability excluding the numerous unusual items recognized in the two periods.

It is clear that the strength in sales for the European commercial products and South American business flow through to a favorable change in operating income. A material decline in sales in North America resulted in a significant decline in operating income which was further compounded by the operating inefficiencies within this segment.

The OE Asia segment which is largely comprised of the results from Modine Korea were disappointing as strong volume was given back in the form of pricing and rising per unit manufacturing costs. On the next slide shows our cash flow and debt levels for the corporation.

For fiscal 2008, you can see we ran a net cash deficiency of $30 million. This coupled with the cash build up primarily in Europe resulted in an increase in borrowings of $47 million bringing the debt to approximately $227 million and the debt to capital ratio up to 32.6%.

As shown in the lower right box, we were in full compliance with our covenants under the various debt instruments of the company. You will note that in a separate release today the Board did approve a reduction in the dividend from the current annualized rate of $0.70 per share to $0.40 per share.

We believe that this is the prudent decision at this point to ensure that we have the financial flexibility to handle economic and commodity uncertainty while supporting the reinvestment for growth and restructuring the company over the next 18-24 months. Our current forecast of cash flow for fiscal 2009 subject to the assumptions that I’ll discuss in a few minutes projects a free cash flow surplus and therefore a modest deleveraging of the company in fiscal 2009.

On the next slide and Tom spoke to our action plans to address the business performance and what I’d like to do is just give you an update on where we stand on that. The company as you know announced in February our plans to commence further restructuring of the business with closure of four facilities, three here in North America and one facility in Germany.

The total cost of this restructuring is estimated at $38-$44 million is consistent with our previous release and we expect in 18-24 months when these closures are completed that we will save approximately $20-$25 million annually. Included in the costs are expenditures for severance, equipment transfer cost, project consulting as well as productivity and scrap related costs which occur when products are transferred.

The benefits we expect to achieve factor in labor and overhead savings, but also scale benefits from operating our facilities at significantly higher levels of utilization. Our average revenues per plant in our North American OE segment will double over the 18-24 month timeframe.

Other elements of our action plan to address the financial condition of the company include the capital allocation and portfolio rationalization activities that Tom spoke to. In addition, we also continued to be focused on the target of driving the SG&A levels of the company down to 11.5% and we’ll have more specifics around the roadmap to meet this objective in our second quarter release.

So what’s the impact on our overall objective of achieving 11-12% return on capital deployed? This is the top quartile performance that the company is aligned around. On the top left chart you will see that our fiscal 2008 gross margin was 14.6%. The fiscal 2008 results were burdened with the repositioning costs of 30 basis points and significant operating inefficiencies of 70 basis points driven by the previously announced closures.

North America was impacted by a material decline in the truck market resulting in 140 basis points of under absorption assuming a normalized truck market of 280,000 units. The sum of these factors adds up to a 17% gross margin and the additional restructuring benefits announced in February, that is the reduction of $20-$25 million of cash costs will add another 1.5% to our margins.

There will be negative factors such as product mix impacting the company and therefore it is critical that we focus on other factors within our control, including culling the product portfolio and driving a significant improvement in the Korea business which is a drag on all of our metrics.

The improvement in gross margin coupled with steps that are being formulated to drive the SG&A down to 11.5% and capital turns to 3, yield the fiscal 2011 target of 11-12% return on capital deployed. Let’s turn to our guidance for 2009 and let me say at the onset that this is going to be a very dynamic year with significant external headwinds that will impact the overall performance if the company.

These headwinds include the rapid escalation in commodity costs that we have seen lately, the overall weakness of the North American truck market and the moderation of the European economy. Also impacting the results are the significant restructuring activity that is underway to affect the turnaround of the North American OE business.

Bottom line, 2009 as Tom mentioned is a year of transition with significant blocking and tackling required to achieve the guidance set forth before you. The guidance assumes continued strength in South America and commercial products, softness remaining in the North American truck market, moderation in European profitability and an unacceptable deterioration in the contribution out of Modine Korea.

We have shown our guidance on both an unadjusted and adjusted basis to arrive at the adjusted guidance range we have added back to pretax and EBITDA approximately $8-$12 million in directly identifiable restructuring costs such as equipment transfer costs and the cost of the third party we have retained to facilitate the closure activity.

I would note that guidance does include approximately $7 million of operating inefficiencies associated with the ongoing closure and product line rationalization activities here in North America. This guidance does not include potential costs associated with the restructuring of the Korea business which is currently under evaluation.

Versus fiscal 2008, we are expecting an improvement in earnings and EBITDA reflecting the absence of the impairment charges. Capital spending net of divestitures is expected to remain in line with our fiscal 2008 spending. With that, I will turn it back to Tom for a wrap up.

Tom Burke

Thanks Brad. So in conclusion in 2008, we saw continued strong performance in Europe, South America and in our commercial products group. While the North American OE segment and our Korean business clearly underperformed. As we enter 2009, we foresee continued strong growth in South American and commercial products.

Europe, while continuing to perform very well will experience some moderation of its strong growth. In Korea, our near term expectations are as Brad mentioned for a deterioration in performance. We are actively addressing the performance issues in both North America and Korea.

With that said, we are very pleased with the quality of our order book and foresee significant technology driven growth and solid fundamental growth drivers around both emissions compliance and increasingly fuel efficiency. We are continuing to execute on our four point plant, including manufacturing realignment, portfolio rationalization, capital allocation discipline and SG&A cost reduction.

2009 is very much a transitional year for Modine, a period of the needed blocking and tackling to restore our profitability and attain our stated gross margin and return on capital employed targets between 18-20% and 11-12% respectively.

Finally, and to conclude, we have a great team spirit in our company and our technical capability is unmatched. We are establishing a clear leadership model based on specific behaviors to drive both accountability and on continuous improvement in our bottom line performance as we teach and drive these behaviors across the company, we will see accelerated improvement in our results.

With that, Brand and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Andrew Deangelis – Keybanc Capital Markets.

Andrew Deangelis – Keybanc Capital Markets

On FY09 guidance. First of all, looking at the various segments incorporated within that guidance, I was wondering if you could flesh out what you expect North America and Asia to do specifically, incorporated within that guidance range.

Brad Richardson

I can speak qualitatively, I’m not going to provide specific segment guidance. What we’re expecting clearly with North America. If you kind of sort through all of the underlying restructuring, repositioning, inefficiencies, we are expecting the North America business to improve. You would expect that given the moderate improvement that we’re seeing in the build rates in the North American truck business.

Having said that, clearly the North American business is facing some headwinds around the commodity prices, in particular on the steel cost. But again underlying North America, we’re seeing the turn in that business with improvement. It is as Tom mentioned and as I mentioned in my prepared remarks that the OE business specifically in Asia, specifically related to Korea is projected to actually decline.

And this is because of, we’re currently working with a customer, trying to resolve some commercial issues, the primary customer for that business and we clearly have a lot of work to do on the manufacturing costs in order to arrest what is a deterioration in the Modine Korea performance.

Andrew Deangelis – Keybanc Capital Markets

Also you had mentioned a moderation in the European profitability during FY09, I’m just wondering what is your expectation around that?

Brad Richardson

I think Europe as you know has done very, very well, you can see it from the segment performance and we’ve been very, very pleased but what we’re assuming again is a moderation to flattening if you will of the performance out of Europe in our fiscal 09.

Andrew Deangelis – Keybanc Capital Markets

What do you guys expect the commodities impact to be during FY09 incorporated within the guidance.

Brad Richardson

It is included. I mean the impact of the commodities is included in the guidance. We’re assuming $3.80 copper, $1.35 aluminum and $12.50 for nickel. Certainly if you look at year over year, the change in the performance of the company, copper was high last year, we’re expecting it to remain high again this year.

So it’s not a huge factor in the year over year, it is the aluminum that is up $0.10 to $0.15 a pound and so we do have and we’re very pleased with the hedging activity that we have in place. There probably is a negative impact on the year over year guidance of about $5 million.

Andrew Deangelis – Keybanc Capital Markets

That’s all in or is that just aluminum?

Brad Richardson

That’s aluminum.

Andrew Deangelis – Keybanc Capital Markets

Okay, and so all in, what would you expect the commodities cost increase to be year over year?

Brad Richardson

I think clearly copper being flat and nickel down moderately and then you factor in the steel inflation that we’re seeing, I would estimate we’re probably in the $10 million range on a consolidated company basis.

Because you know that the steel, we’ve taken active measures obviously with our contracts but also with the futures market to try to mitigate the impact of aluminum and copper and there’s just not a good market for purposes of hedging on our steel exposure. So clearly and Tom may want to speak to this, that we are clearly working with the customers on the impact of steel.

Tom Burke

We’re working with all of our customers very aggressively and appropriately to make sure that there is a sharing of this burden that can be passed through Modine, we can’t absorb that. So the sales teams around the globe are all focused on a common process approach to make sure that we address it appropriately.

Andrew Deangelis – Keybanc Capital Markets

How do your steel buys normally work, are they mainly on a spot basis or do you have contracts in place?

Brad Richardson

We do have contracts in place with semiannual price predetermination. Typically we’re trying to, we’re typically locked for about six months. So we will be seeing obviously in July of this year we will be seeing some increases.

Andrew Deangelis – Keybanc Capital Markets

So that $10 million that you spoke about kind of anticipates what may happen in July?

Brad Richardson

Correct.

Andrew Deangelis – Keybanc Capital Markets

You talk about a strategic review of the Korean business, expected restructuring in that business, I was just wondering if you could maybe provide a general overview of your strategic perspective on that business and flesh out any expectations on the restructuring.

Tom Burke

We start fundamentally just looking at the business elements and the changes that have happened. Brad said we’ve got a tough situation commercially with our customer, we’re probably not as, we’re penalized a bit more with the pricing pressures in that market and we’re working aggressively on that end.

Operationally we’ve been working very hard for the last couple of years, a team in Korea has been focused on that but we just have run into some tough situations on getting those operation efficiencies in place. We’re going to take the next step up to evaluate what those changes can be and from there you look at all options quite frankly Andrew. But right now its fix the business, whatever we have to do and that’s our focus.

Andrew Deangelis – Keybanc Capital Markets

And when will a definitive determination on the restructuring actions be, any timeframe on that?

Tom Burke

I think this is something that, again, there’s quite a bit of activity going on right now and I think this would be kind of in the second quarter, our second quarter when we’d be able to update you as to how successful we think we’re going to be to affect both the commercial side of the business which is critical but also the manufacturing cost reductions.

And just to ensure clarity, again in my prepared remarks, in the guidance that we have provided here, we have not assumed any cost associated with restructuring, we clearly would update that, that is restructuring of Korea, we clearly would update that again along with progress on our activities in the second quarter.

Operator

Your next question comes from David Leiker – Robert W. Baird.

Analyst for David Leiker – Robert W. Baird

This is Keith on the line for David. I just wanted to dig into some of the special items that we pulled out this quarter. Is there by any chance an after tax number that you could provide us with? You know the long list of asset impairment charges if we kind of wanted to get down to an adjusted EPS number on the bottom line, I guess that’s really what I’m hitting at. We can get to an adjusted pretax number but don’t know what the.

Brad Richardson

We provided the guidance for pretax. I guess what I would do is leave it to you to, if you want to try to apply some normalized tax rate, as we put in our forward thinking is we are expecting the company to get back to a normalized tax rate in the 2010 timeframe, that is our fiscal 2010 when the US business returns to profitability and therefore we’re able to start to release if you will some of the valuations that we’re having to put on the losses that we’re taking in North America.

So my best guidance at this point is if you want to just assume our normal 30% tax rate which we had been running at for many years and then we ran into the situation that we’ve run into with the US losses. That’s the only thinking I can provide to you at this point.

Analyst for David Leiker – Robert W. Baird

With Korea we expect that to deteriorate in fiscal 09, is that at the top line operating profit line or both?

Brad Richardson

The top line has been, quite frankly, positive. We’ve had very, very strong revenue growth out of Korea and we’re not expecting a deterioration in the top line. It is the pricing issues from the key customer and the inability at this point to take a corresponding amount out of the manufacturing cost to protect the margins of the business. And that’s the equation that Tom spoke to and that we’re focused on is to figure out how we can stem the margin decline in that business. It’s not a top line issue.

Analyst for David Leiker – Robert W. Baird

Could you offer a little more detail on the strength in Europe, that business has really been doing quite well recently, is that on the truck side, the auto side, both?

Tom Burke

It’s both.

Brad Richardson

The automotive has been strong, the truck has been strong, especially with the exports going into the East and into Russia. Our engine products business in Europe has been very strong. So it’s been a combination of both markets as well as a very, very, we’ve been launching new programs in particular in the engine products area and condenser programs.

Tom Burke

I’d add that the manufacturing utilization is very high in Europe, okay, so the pattern that we’re following in North America to build up that capacity utilization, get that scale, the Europe team has done a great job of really getting the maximum amount of their assets, so that’s been another key factor for that team.

Analyst for David Leiker – Robert W. Baird

It sounds like you guys are taking market share over there, next year we expect that business to moderate a little bit, is that just general economic activity over there is slowing down or is there anything Modine specific where that business isn’t going to grow quite as fast as it did this year?

Tom Burke

I think probably the growth is down a little bit but the market is churning, there’s going to be a lot of resourcing on the truck market with the sourcing of 2011, 2012 with Euro 6. So I think the growth rate is just going to slow down some but it will still remain very healthy.

Brad Richardson

Just to build on that, the market share gains that we’re expecting again is with the Euro 6 vehicle changeovers which will be in the 2011 timeframe.

Tom Burke

We have won some great product sourcing over there with premium brands, both in automotive and in commercial truck.

Operator

Your last question comes from Andrew Deangelis – Keybanc Capital Markets.

Andrew Deangelis – Keybanc Capital Markets

I was wondering if we could get a snapshot in time here as you update people on the various footprint actions that you’re taking. I mean I know you’ve opened a few plants in Asia, one in Hungary and then the closure of the first set of plants in North America, just wondering if we could get a snapshot in time here.

Tom Burke

On the new plants, we are actually filling a plant in [Shinai], it’s launching its initial products and over the course of this year there will be another eight product launches this calendar year. By the end of this calendar year that plant will be reaching a lot of its capacity, in Changzhou, yes, I said [Shinai], I meant China, excuse me.

In India we are just finishing off the plant that’s going to be launching later this year with its first product in the September timeframe. It’s going to be controlled atmosphere braising aluminum products, charge air coolers and also aluminum layered oil coolers will be coming online later in the year. So it’s a little bit behind Changzhou in China.

In Hungary the plant is going to be a highly leveraged plant for the Euro 6 sourcing that Brad mentioned, so that’s a real key part of the footprint. We’re going to be looking at again, aluminum cad braising with modules in that plant to satisfy the truck commercial opportunities on power train cooling modules.

In Mexico the plant is launching in North America with targeted automotive applications in this region and we have half that plant will be available by the end of this year, still for further growth, so we’re looking at that growth very carefully as to what market we want to target that growth so we view that as a very key opportunity.

On the closure side, we’re going to spending this year, pretty much all of this calendar year focused on preparing for the transfers and so you’re not going to see a whole lot of activity in this calendar year to be specific. But there’ll be the inventory buildup, preparation along those lines will be starting in early next year.

On our 2006 restructuring announcements though we have closed the plant in Richland, South Carolina and Toledo and Jackson in Mississippi is now closed and we’re targeting the Clinton plant for closure this fall with the balance of the product line with the customer there. So we’ll be finishing out this year, the previous restructuring announcements and preparing this year for major activity on closure in the following fiscal year.

Andrew Deangelis – Keybanc Capital Markets

What is driving the $34 million increase in cash restructuring costs versus the range that you initially laid out last quarter?

Brad Richardson

What’s driving that, again the total costs are the same but one of the things, the third party consulting costs are up slightly because we have expanded the scope of the project with this consulting firm to assist us not only on the original scope which is the manufacturing closure but also on the product line rationalization activity that we have going on in the North American business where we’re going plant by plant, product by product, customer by customer and making decisions on either commercial decisions or exit decisions.

So that’s the incremental cost, but again the all in cost on a cash and non cash are the same.

Andrew Deangelis – Keybanc Capital Markets

So it’s really just more of a scope issue than any issue related to timing?

Brad Richardson

Absolutely right, it’s a scope expansion and the economics of that we think are very attractive.

Andrew Deangelis – Keybanc Capital Markets

I know you touched briefly on the charge you took in the commercial products group for the product line closure, just wondering if you could expand on your comments there and as to why that decision was made.

Tom Burke

This is a product that’s been under development since 2001, a very innovative product that quite frankly was received very well to the market. The problem was that this is a PF coil product so going away from traditional round tube plate finned it offered our customers in this segment an opportunity for efficiencies to be gained in that to get out of copper and to reduce their refrigerant charges in their systems and so on.

The problem was we really faced manufacturing launch issues. So the development process was not as robust in the process end as it should have been, so the simultaneous engineering that needed to happen to make sure that we had a capable process to ensure delivery to our customers and to ensure profitability to the company, we could not, we did not have confidence in that and decided to drop that product line and focus on a different direction for that market.

So it was a responsible decision, a lot of lessons learned have gone in with that, we’ve looked at that very carefully and quite frankly the organization structure is focused to make sure we address that issue in the future, that we have that simultaneous engineering effort up front to make sure that we launch appropriately.

Susan Fisher

Okay, thank you very much for joining us today for our discussion of our Q4 results, we look forward to apprising you of our progress next quarter. Thanks again.

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Source: Modine Manufacturing Co. F4Q08 (Qtr End 03/31/08) Earnings Call Transcript
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