Modine Manufacturing Co (MOD) 2002 Q4 法說會逐字稿

Good afternoon and welcome to Modine Manufacturing fourth quarter conference call. At this time I would like to inform you that all participants are in a listen only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I would now turn the conference over to Mr. Mick Lucareli, Modine's Investor Relations Manager. Please go ahead sir.

Good afternoon everybody and welcome to Modine's conference call to discuss both fourth quarter and full year financial result. On the call today from Modine are Donald Johnson, Chairman and Chief Executive Officer, David Rayburn, President and Chief Operating Officer, Ernest Thomas, Senior Vice President and Chief Financial Officer, and Anthony DeVuono, Vice President and Chief Technology Officer.

Before we get started, I would like to read Modine's Safe Harbor statement. This conference call may contain forward-looking statement that involves assumptions, risks, and uncertainties, and Modine's actual results, performance, or achievements may differ materially from those expressed or implied in these statements. A detailed discussion of factors that could affect Modine's results are on page 19 of the company's fiscal 2001 Annual Report to Shareholders and in other public filings with the U.S. Securities and Exchange Commission. Modine does not assume any obligation to update any of these forward-looking statements.

Now with that behind us, I would like to turn the call over to Donald Johnson, Modine's Chairman and CEO.

Don.

Good afternoon, and thanks again for participating in Modine's fourth quarter conference call. Modine experienced significant challenges during both the fourth quarter and the full fiscal year. Cyclical and structural changes created weakness across most of our markets. North American and European light vehicle industry production was down from the previous year.

The heavy truck market showed little improvement and remains nearly 50 percent off of its previous peak. Conditions were no better in the off-highway areas with both construction and agriculture markets flat-to-down from the year ago. The weak economy and an extremely mild winter contributed to a HVAC industry that was down sharply. As you know, the markets for telecommunication equipment and computers remained depressed driven by dramatic reduction in spending. We remain optimistic about our Thermacore acquisition although it was not accretive in the first year as planned. Despite the unprecedented downturn, we will remain enthusiastic about the long-term growth prospects in electronics cooling.

Modine continues to see a structural change in the after market as large competitors have entered the market creating excess supply of product and severe pricing pressure. In addition, Modine's after market group and advanced auto parts mutually agreed to let their supply agreement expire at the end of May. Market conditions contributed to sales and production volumes that were below internal expectations. Prolonged weakness and competitive changes in certain markets have created excess capacity, which has put additional pressure on our profitability. We believe we have responded to these challenges.

In October we announced that we would take a restructuring charge and close six facilities. We have taken steps to reduce Modine's SG&A expense and have limited our capital spending. Lastly, our management team has aggressively attacked the balance sheet. Modine's Board of Directors responded during the year by making a difficult decision to reduce the quarterly dividend rate by 50 percent given the uncertain outlook and weakness in Modine's core markets. This has provided Modine with more financial flexibility to reduce debt, increase free cash flow, and pursue other measures to increase shareholder value.

And now I will turn to Ernest Thomas, Modine's CFO to discuss our financial results in more detail.

Erny.

Thank you Don. Good afternoon everybody. As discussed in our press release both the fourth quarter and full year results contain several one time items relating to the company's restructuring, other closure-related costs, changes in workers' compensation reserves, Thermacore acquisition, and the sale of company aircraft. These items taken together account for roughly 18 cents per share. In addition, Modine's prior fiscal year included a pre-tax gain from patents elements that totaled 17 million dollars on a pre-tax basis, roughly 39 cents per share after tax.

Discussion that follows on financial results will exclude the one-time items in both fiscal year 2001 and fiscal year 2002. And any references to earnings per share will be fully diluted basis.

In the fourth quarter, Modine earned 3.6 million or 11 cents per share on 254.6 million in revenue. This equates to roughly a 31.3 percent decline in earnings per share and a 6.2 percent decline in revenue over the prior year. On a full year basis, sales declined by roughly 4.2 percent to 1.075 billion from 1.121 billion in the prior year. Excluding all of the one-time items mentioned above, 12-month results would have declined by roughly 26 percent to 88 cents per share from a dollar 19 per share in the prior period. These results exceeded the company's previous guidance of 75 cents to 85 cents per share for fiscal 2002.

As Don mentioned, during the fiscal year, Modine was able to strengthen its balance sheet and generate record cash flow.

Reduced plant, property, and equipment by roughly 26 million or roughly 7.2 percent over the last 12 months. Also excluding cash and short-term debt, the company reduced its working capital by another 52 million or 23.5 percent.

In addition, we also reduced total debt by 32.5 million or 17.8 percent for the period. The balance sheet improvements helped to generate a record operating cash flow of 131.4 million and operating cash flow just under 4 dollars per share for 4.5 percent increase from a year ago.

For the year, Modine's capital expenditures were 35.8 million, down just under 51 percent from the prior period. Operating margins were lower in the current period due to in large part to increased depreciation from past capital spending. Depreciation was up by 9.2 million or roughly 21percent over the prior year. In addition to strict controls on capital spending, the company continues to work on improving short-term profits by focusing on reduced operating expenses and increased asset utilization. During the year, SG&A expenses were reduced by 7.7million or roughly 3.4 percent from a year ago.

Regarding our restructuring and closure activities, Personnel reductions and a phase out of four of the facilities that were mentioned have already been started and should be moving forward about the next nine months.

Now I will turn things back over to Don to wrap up the conference call.

Thanks Don.

Thanks Erny.

Despite the challenges, we are taking steps to improve our profitability while continuing to pursue long-term growth opportunities. We continue to win new business in our core markets such as the new programs with BMW and DaimlerChrysler. In addition, we introduced several new electronics cooling products and continue to solidify our position in the fuel cell market. The management team is also enthusiastic about the opportunities in its EGR coolers and CO2 technologies. Most importantly, we are committed to maximizing shareholder value.

That concludes the prepared remarks. We would be happy to entertain any questions that you might have.

The question and answer session will begin now. If you are using speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press the one followed by four on your push button telephone. If you would like to withdraw your question please press one followed by three. Your question will be taken in the order they are received. Please stand by for your first question.

The first question come from please take your affiliation followed by your questions.

Good afternoon guys, .

Hai, David.

Few questions. The balance sheet and the cash flow were terrific. The question is going forward given your lower CAPEX requirements from the previous couple of years, what do you do next? Do you buyback stock or do you make an acquisition? Can you give us some idea of direction how you plan to use the strong balance sheet and strong cash flow to your advantage?

This is Don, David. Our priority would be in acquisition. We continue to look for complementary acquisitions both for our core markets, core business, as well as the electronics cooling market. So acquisition is the top of our priority list.

Okay, I guess staying in the portfolio, you know, given the state of to market business, more competitors coming in, you have indicated for some time that it has been a difficult business. Is that a business you want to stay in for a long term?

I think at least for the near term that the resources we apply probably won't be in the direction of the after market. We think that our resources can be better utilized in some of our core markets as well as the electronics cooling business. Long term that is there is no growth market. It's extremely competitive. We continue to look at the business and continue to evaluate it.

Okay and on the new business front, especially on the light vehicle OEMs particular, you have done very well with BMW and Daimler. Are you pursuing other OEM customers on the light vehicle side in the US or Europe?

In both places, David, we have very active programs both here in States as well as in Europe other than BMW or DaimlerChrysler.

Will you be announcing some new contracts this year?

We are going to have to. We have got quite a bit of business that we have booked for the next couple of years and announcing that as you know is dependent upon when our customers will allow us to announce it. We keep pressing that. We think we have got some good news and we are anxious to announce it.

And the last one. In terms of 03 guidance, you usually give it in July. I mean If not numbers, can you just give us a couple of on your major markets where you see them going, you know that the heavy truck off-highway, etc.?

I can talk . We are seeing increases in the heavy truck market, primarily in our first two fiscal quarters as a result of pre-buys after October admissions change. In our forecast, we plan for heavy truck market of 135,000 vehicles. We think it will be a little higher for the first six months and then fall off the last six months to somewhere around 120,000. Offsetting that is a new customer and new heavy truck customer coming on board in late August and September that will offset some of that downturn. We continue to see increased activity in our electronics cooling business, which is generally a precursor to improved conditions. As you know, we continue to pray for very hot summers and very cold winters for weather-related businesses. We looked for a fairly steady automotive market throughout the year. Nothing significant in our off-road.

Okay so. Would it be safe to say that the worst is behind us and fiscal 03 versus 02 should look a little better?

I hate to be a predictor but I think we have done our homework well and I think we have positioned our company well with the actions that we have taken to date. If the economy starts to pick up a little and volume starts to increase, I would look very definitely for some improvement.

Okay thanks.

Thank you. Once again ladies and gentlemen as a reminder, if you should have any questions at this time please press one followed by four on your push button telephone.

Next question comes from . Please take your affiliation followed by your question.

Good afternoon gentlemen. 500 advisors. Can you give us a little more color on what happened with the advanced auto parts, I guess, agreement and what that means in terms of reduced sales and maybe it means no impact on profits? I don't know. I assume that is part of the issue but?

I think your last commend is probably appropriate. We don't comment on individual customer volume. As you know when other companies make their acquisitions, their practice is to rebid all of their business. We looked at the continuing relationship, decided that we would be better off as a company applying those resources in areas where we felt we would have more opportunity.

Okay. Can you talk a little bit about gross margins? And they have been trending I guess down for most of this year which you would expect in a lower volume environment, but with the restructuring charges that you have taken and the closing of various plants, when do we see the bottom in gross margins and when do we see them start turning back up?

As I mentioned that it could vary with earlier, David. I think we are positioned well with the cost reductions that we have made to date. I expect as the volume starts to pick up certainly in first and second quarters if the heavy truck business does start to pick, we will see the margins improve. I believe we have hit the bottom.

Very good. You mentioned reduction in SG&A and certainly it appears the restructuring actions, you said you took out 7 million dollars year over year, but if I look at it sequentially between Q3 and Q4, SG&A increased 2.5 million or so. Were there some unusual SG&A items in the fourth quarter or is the 56.2 million, is that the run rate we might expect going forward?

Well we can. This is Ernest Thomas here. We continue to focus on this area. Unfortunately, we have not been able to move it down in line with revenue, because a lot of those costs are fixed. Regarding your question on Q3 and Q4, I don't have any answers specifically as to what that is. I can tell you that we are focusing on keeping the trend going in direction we established that is moving those costs to lower. There may be some one-time accounting issues between those two quarters.

We can get you an answer. I can look it up for you and get back to you on.

Well you can see it in first quarter was 56.5, then 1.55, then 53.8, which is all trending down as you suggest and normally in fourth quarter there are things like the bad debt reserves for examples.

I think what we need to look at is long-term trend more than quarter. I can dig and find what that is as probably some timing or expenses.

I would appreciate that and try to as we try to model or try to understand where probability might go.

You non-recurring or recurring. We can get you something on that.

That will be terrific. Thank you.

Thank you.

The next question comes from . Please take your affiliation followed by your question.

Charity Capital Management. My questions have been already answered with respect to the advanced auto parts but you can give us any sense really as far as with the revenue associated with that is?

From my perspective I would indicate to you that it is not material.

It is not material. Okay. Great. And then also could you just comment I guess on the fuel cell situation? Status of something is that or a kind of progress has been made.

Well, the programs continue to be very active. We are working, as you may know with both Ballard Power Systems and Plug Power, as well as some other customers. We believe and I think the industry believes that we are the leader in fuel cell thermal management. From a revenue standpoint, we believe this stationary power will come first, that's probably a couple of years away. Followed by the power units, transit buses and automotive last some where in 2010 and 12. So we remain very active. I think we have a good reputation in this field and we look forward this market as it develops.

Great. Thank you very much.

Thank you. The next question comes again from David . Please take your question.

Just two follow-ups. Don, any comment on the European labor situation? Does that pose any long-term business? Are your production schedules being disrupted or are any of employers involved? Can you just comment on that?

David as you may know they targeted a couple of regions in Germany, our facilities are located. We had a sympathy strike yesterday. The production was out prior to the sympathy strike, which has been typical with our facilities and our people there. The more important aspect would be the impact they have on some of the supply as well as some of the OEs. I don't have a feel, David, for the length or depth of the negotiations or the strikes. At least in the past they have not been disruptive for us. I don't believe in the past. I recall being targeted as a region and is leased to date and the 9 years we have been over there we have had a low interruption.

Okay. And just a one quick followup on the acquisition question. Would you say, I mean, I would say Thermacore put into a whole new market. Are you saying that any future acquisitions would be in your existing markets that would be biased towards any of your existing product lines or are you looking at businesses that you are not in now? Can you just comment on that?

Some of all of the above. We think there are some things that we can do for our core businesses. We believe that the long-term growth opportunity in electronics cooling is substantial. So we would certainly be looking for in that area, as well as venturing into some related areas still involving the thermal management side of the business. So I think, in these three areas we are going to be looking to make further acquisitions.

Okay. Thank you.

Thank you. The next question comes from Andrew . Please take you affiliation followed by your question.

Bear Stearns Investment Management . Good afternoon. Could you comment on what your expectations are with respect to the heavy truck pre-buy that seems to be going on now in terms of your own production levels and now are you anticipating some pretty good volumes in terms of products that are exposed to the Class market to say for the next six months?

It's still a fairly fluid situation. There are, some of our customers have announced increased line rates. Some of them are still wondering how much to increase. As I indicated earlier, we looked at 135,000 class A trucks. We think it will be higher than that in these first six months. I think it's a little early, Andrew, for us to make a call on exactly what the impact would be on the first two fiscal quarters, but we definitely do see some interest in increasing line rates.

And then one unrelated follow-up question. Did you say what your capital spending plans for this upcoming year?

I would imagine that we are going to be under our depreciation. Our depreciation is around $57m. I would think we would probably come in the mid 40s.

Thank you.

Thank you. Once again ladies and gentlemen as another reminder, if you should have any questions at this time please press one followed by four on your push button telephone.

If there are no further questions at this time, I will now turn the conference back to Mr. Lucareli for final remarks.

Okay. Thank you everybody for participating. And we look forward to talk in the next quarter.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.