Modine Manufacturing Co (MOD) 2004 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Modine first-quarter financial results conference call. On the call today are David Rayburn, President and Chief Executive Officer, and Brad Richardson, Vice President Finance and Chief Financial Officer. 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 for questions and answers after the presentation. Before we get started, I would like to read Modine's Safe Harbor statement. This conference call may contain forward-looking statements that involve 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 may affect Modine's results are on page 25 of the company's fiscal 2003 annual report to shareholders and in recent public filings with the U.S. Securities and Exchange Commission. Modine does not assume any obligation to update any of these forward-looking statements. I will now turn the conference over to Dave Rayburn, Modine's President and CEO.

Good morning. This is Dave Rayburn. I have a cold so hopefully we can get through this without having a sneeze or a cough, but it is my pleasure to participate in the call this morning. Modine yesterday reported our first-quarter results and we also held our annual meeting of our shareholders. I would like to take the opportunity to go over some of the highlights of the earnings release and my presentation at the shareholders meeting. Both of those, by the way, are on our website under the Investor Relations section.

From a business climate standpoint and certainly a number of these are business climate issues that our customers and our competitors are having to deal with as Modine is, and that is the continuing challenge from the global economic situation and certainly in our markets, we continue to see very flat volumes and not the recovery that everybody continues to talk about. Competition is very keen. Certainly the pressures on the OEs is spilling back into the supply base, and we are responding and taking costs out through the engineering approach versus just taking it out of our shareholders' pockets.

The issues in regards to insurance and auto fees, etc., are very real for all of us because of the Enron event and WorldCom and 9/11 and etc., that is having a financial impact on all companies, and certainly we talked about that yesterday and it is a reality. And the other last issue we talked about in shareholders meeting is the ongoing cost pressures in regards to healthcare, and we like many other companies, are initiating a number of activities in order to be able to mitigate those increases via purchasing power, being part of national networks, employee education, etc.

The other two issues in regards to business climate which is really creating opportunity for Modine is the area of environmental regulations. Because of the emissions changes, specifically in heavy truck and automobiles, automobiles being in Europe and heavy truck in both markets, Europe and North America, that is creating real opportunity for Modine and will be part of our growth in the coming years, both in the new power train cooling systems dealing with larger heat loads in order to be able to support the new required engines, the new performing engines, as well as a new product called exhaust gas recirculation coolers which we've enjoyed incremental business already in Europe and will be having incremental business in North America, oil coolers, fuel coolers.

And then the longer-term opportunity for us, which is really outside this year's business plan, but certainly we think in the long-term maybe three or four years, it will have significant volume, is the area because of the greenhouse gas reductions in R134 refrigerants, the emergence of Co2 air conditioning, we have a lot of activity on that. The other area that is a part of the business climate and we feel that we have a competitive advantage is the continuing approach by many customers partnering with their customers. And because of Modine's product breadth, skill sets, and locations of where we now have our technical centers, we think that our customers can continue, especially the select customers that we have certainly will value Modine for more than just as price standpoint, but from a product performance validation and we think that is a long-term opportunity for Modine and has in the past and will continue.

From a first-quarter highlight standpoint, first-quarter showed continued improvement. Our sales were up in earnings. Our balance sheet continues to be very strong. Our strong performance was really driven by global automotive and heavy-duty businesses. In the automotive side, we previously announced (technical difficulty) the launch of the Z4 with BMW and there is year-over-year volumes in the first quarter for Modine, as well as the Blue Diamond JV, the JV -- the truck JV between Ford and International, and that has brought incremental volume.

We have also enjoyed stronger sales in certain platforms in the first-quarter than the prior year. An example of that was (indiscernible) truck. In regards to the heavy-duty segment, as we have talked in the past, we have done some restructuring in the past in both our heavy-duty business here in North America and in Europe, and that restructuring has yielded nice cost reduction and better performing portions of our business. We did discuss the continuing challenge of our aftermarket. Our aftermarket has been a strong piece of our business for many years. It is about 20 percent of our total business, but as we have talked in the past, there is increased competition and challenging market conditions in this business segment.

There's new players out there. There is changing in the distribution channel. Purchasing power at the distribution channel has increased, and so we continue to respond in reducing our costs and focusing on the more profitable segments of that business. We have done some reorganization in regards to take some costs out and get better accountability in the business. We have downsized it in some places. For example, we last year sold the Canadian business which was part of our restructuring and we continue to focus on both outsourcing and insourcing as appropriate and utilizing our JV in Brazil in regards to providing high-quality low-cost product.

So we continue to work the aftermarket side. It is an important piece of our business, has been in the past and management is continuing to spend a lot of time on that piece of business in order to be able to mitigate some of the competitive challenges that we have. The other one that we spent some time on and it is appropriate is that we made the acquisition of Thermacore in April of '02.

The telecommunication market and server market are down nearly 60 percent from where they were a number of years ago. The fundamentals are changing in that business as well, especially a large portion of the marketplace is moving to the Asian market for manufacturing. We have been aggressive in reducing our breakeven costs in that business. We closed the facility in Korea, but at the same time we have opened a brand-new facility in Taiwan in order to be able to leverage that incremental volume opportunity we have in Asia.

And we are also focusing on fewer customers and taking that partnering approach that I mentioned before in our OE businesses where we have been successful. An area that we've been putting more energy on in regards to Thermacore is what we call the consumer market and in the consumer market, which traditionally had been served via the extrusions, more of a commodity type product, we're having success in introducing our technology into that marketplace and we do have some incremental business that should be starting up in the second half, which will help mitigate the reductions that we have seen in the telecommunication and the server market.

So we think the fundamentals of this acquisition are still sound. The whole electronic industry has continued to push more speed, more power, and with all of that you get more heat, and they need more sophisticated solutions. Long-term we think this is still a very good acquisition. We continue to focus, and as our annual report talked about with regards to progress for our four corporate priorities.

We're continuing to put action plans together to deal with improving profitability, continue to maintain and have the flexibility that you get from a strong balance sheet having good financial stability, continue to increase our resources and our focus on new products and technology, which I've already mentioned a couple of those, and strategic planning in the business development side. We are enjoying the benefits of our restructuring that I mentioned and we continue to rationalize certain products or even customers where it just doesn't make sense to be pursuing. I would now like to introduce Brad Richardson, our new Chief Financial Officer, who joined us in May.

Thank you very much, David, and good morning to everyone. Let me just say at the onset how pleased I am to join Modine and also how excited I am to be a part of a management group that is committed to driving progress on the four corporate priorities. In terms of my prepared remarks, for the first-quarter, sales increased six percent to 288.9 million from 272.3 million reported a year ago. Earnings before the cumulative effect of accounting change increased nearly 9 percent to 11.3 million or 33 cents per diluted share compared with 10.4 million or 31 cents per fully diluted share from the same quarter a year ago.

We recorded a $21.7 million goodwill impairment charge in the aftermarket segment in the first-quarter of last year, resulting in a loss of 11.3 million or 33 cents per fully diluted share. The gross margin in the first-quarter improved on a year-over-year basis, increasing from 25.2 percent to 25.7 percent. Two material items impacting our first-quarter results are net favorable currency exchange rates, primarily the euro, which added about 21.4 million to first-quarter sales, and 2.6 million to pretax earnings, partly offset by the acceleration of retirement benefit related expenses, up $1.9 million again on a pretax basis.

Modine's overall financial performance showed improvement after taking into consideration these items. I would now like to give you the segment results for the first-quarter. Sales in the original equipment segment decreased about 2 percent to 115.7 million from 118.6 million a year ago. As Dave mentioned, this segment sales benefited from new business in the North American medium-duty and heavy-duty truck business, but were negatively impacted by lower sales in the off-highway and industrial markets, reflecting the impact of a customer focused strategy.

Operating income from this segment increased modestly to 20.2 million from 20.1 million in the previous year's quarter. Our rationalized customer based in the off-highway and industrial markets contributed to the improved profitability, while new program launch expenses had a negative impact. For the distributed product segment, sales decreased approximately 7 percent to 84.1 million from 90.3 million. Operating income declined from 4.9 million in the previous year to a disappointing loss of 0.4 million.

As Dave discussed, we have continued to face challenging market conditions in our aftermarket and electronic businesses. Sales and operating income from both the automotive and heavy-duty markets in Europe increased for the first-quarter. As a result, sales for the European Operation segment rose nearly 33 percent to 102.3 million from 77.1 million a year ago. Operating income increased 89 percent to 13.7 million from 7.2 million in the previous year.

Contributing factors to the improved profitability included strong automotive growth, benefit from the restructuring and plant closures in the heavy-duty business, and the positive impact of the currency exchange rates. Turning to our balance sheet, which remains solid with excellent liquidity, the cash balance was 70.2 million at the end of the first-quarter, compared with 77.2 million at the prior year-end. The decrease was due to stepped up capital spending, the dividend payment, and a build in working capital.

We generated 13.7 million in operating cash flow and reduced our total debt-to-capital ratio to 16.9 percent from 17.3 percent at the end of the last fiscal year. We did see higher capital expenditures for the quarter, which increased from 8.3 million last year to 14.3 million. This increase reflects the ongoing construction of a new facility in Germany in support of additional programs and the new European technical center, which we believe will be key to our future growth.

We are confident that for the remainder of the year that the strength in our cash earnings and strong working capital management will provide adequate financial liquidity and flexibility. On that note, I will turn it back to Dave.

Thanks, Brad. Now I would like to talk some about the remaining of our fiscal 2004 outlook. We do expect additional growth both in sales and earnings, specifically in the third and fourth quarter. This is not being driven by any assumption in regards to market recovery, and certainly if there is market recovery, that would be good news, but it is being really driven by new business, new business that we have announced, like BMW X3 and it launches this fall in Europe, our Chrysler program that will be launching this fall, as well as year-over-year incremental volume on the Blue Diamond program I mentioned earlier.

It is also being driven by business that we have not announced because of the customer's control, but those programs are various engine programs as well as the electronic business that I mentioned earlier. We continue to drive cost reduction and operational improvements. So we are encouraged by our expectations for the second half.

I'm taking a longer perspective beyond this year. We did talk yesterday and it is included in our press release, is that we are going to enjoy incremental business of a magnitude of about $320 million that will be maturing over the next five years. Now, let me define how we arrive at that $320 million. It is ROE businesses, so that is about 70 percent of our overall volume and these are incremental. They are not replacement programs, but programs that are incremental to the base, but they are net of any businesses that we are losing.

About $90 million worth of business in North America, automotive, and about $80 million in North American truck, $20 million in our fuel cell operations and 130 in the European automotive and heavy-duty businesses. And it's fairly front-end loaded. Most of this matures out in year three and year four, some in year two and certainly some in year one. So we are encouraged because this will allow us to continue to get good costs, fixed cost absorption as we have better utilization of our facilities and grow our overall business.

We also are encouraged by the progress we're making in regards to focusing on lean manufacturing. As Brad mentioned, we've made a number of investments in state-of-the-art facilities, particularly our tech centers which our customers certainly value. We continue to work on diversification of our customers and our markets so we can deal with cycles within markets, such as the Thermacore cycle, and having offsetting cycles in other businesses. Pursuing globalization is certainly a priority in the long-term and leveraging our core strengths. So we are encouraged by our long-term outlook. That concludes our prepared comments, and I will now open it up to questions.

Thank you. The question-and-answer session will begin at this time. (CALLER INSTRUCTIONS). David Seno (ph) with Gabelli & Co.

Few questions. Starting with the tech center, could you just go through how much it costs and what is the benefit of having an additional tech center in Europe?

In regards to the cost side, we have talked in the past that the North American investment, which was really completed about year and a half ago, two years ago, is in the neighborhood of $30 million. And in Europe, our total investment, which has been spread over a number of years, first the new headquarters, then the new tech center that was completed last year, and the wind tunnel that we will be finishing up this year, that investment was around $50 million.

The real value of all of this investment we have made in the technical centers is twofold. It is to protect our shareholders. As the business climate has changed, our customers expect us to meet the application, not just pass the test. In order to be able to meet the application you have to be able to simulate all the potential variations that a component or a system will see in its application. So we gather data and bring that in and then do these various tests and simulations.

So we have gained confidence that we understand the application and we're not putting our shareholders at risk, and that is certainly a defensive issue. The opportunity for us, though, is the long-term and that is the long-term of sales growth where the customers can look at Modine and see that we are investing in the future. We're not just leading with the price card, but we're making sure that we are not putting their shareholders at risk by not giving them qualified, durable products.

And certainly some of the businesses that we have announced in the past, Paccar's confidence in us in new business that we have secured and talked about in the past, and certainly the growth that we have enjoyed in BMW. As you know, we have the new series 3. We have the current series 3. We've got the carry-on there and we've also got the new series 1.

So certainly if we had not made the commitment in Europe in our new tech center, I'm sure BMW's decision, positive decision of selecting Modine would've been a tougher decision if we haven't made those investments. We certainly absolutely have to grow the business in order to be able to pay for these investments, but I think they were prudent, well thought out, and they will lead to long-term benefit.

Staying in Europe, it looks like if you strip out the effect of currency, you had a tremendous contribution margin approaching 100 percent. Could you go through what was behind that? What is mix, the new business being more preferable than the old business, or was it just cost-cutting?

Dave, good morning. I look forward to beginning a relationship. I think -- I won't go through all the components, but they did mention (technical difficulty) the Z4 program, the strong automotive growth and that was -- and the gross margin there was driven by both topline as well as cost. I think in the heavy-duty business if you strip out the effects of currency, that was driven primarily by the restructuring, the closure of plants, and so that was driven more from a comp standpoint.

Great, and Brad, the tax rate is down from last year. Should we use 34 percent for this year?

I think that range, that kind of range, of where we had been last year versus this year, I think being middle of that range would be appropriate. We don't see anything at this point on the horizon.

John Helmer (ph) of Coldwell Securities.

Dave's remarks on the outlook mentioned the third and fourth-quarter. Any reason why the second wasn't mentioned? I know (indiscernible) I was also struck by the similarly worded press release.

Yes, John, let me comment on that. I think at this point as we look forward we're not projecting a significant improvement in the 2Q this year versus 2Q last year, and that is driven partly by some issues that we've had with a supplier strike at BMW that will impact our 2Q European results, and so at this point is too close to call, and again, we're not projecting a significant improvement in 2Q. We were clear in our press release and in Dave's comments that the improvement, the significant improvement that we are expecting is in the second half.

Let me just add another comment on that in the second quarter, certainly that is the prime season for our aftermarket, and it is very weather dependent (indiscernible ). So depending on what happens in the second quarter in regards to heat in the Southeast and in the West and in the Northeast, that could have a play either positive or negative in the second half results -- or second quarter results.

Thank you. I notice the new improved dividend was repeated. Any additional comment to that?

Our board is going to continue to evaluate dividend policy. We have a strong cash position and low debt which gives us a lot of flexibility in regards to responding to any unfortunate economic or political issues that may occur. More importantly, though, the board looks at balancing our cash strategy in regards to the dividend policy and what the yield is versus our stock price, and also other uses of cash, such as acquisitions and investments. We do have and we've talked in the past this year, we will have a little higher CAPEX than we had last year because of the investments, finishing up the wind tunnel in Europe and a new plant for BMW, and then we will come back to more traditional levels beyond that.

So we have a very strong position in cash and the Board will evaluate that dividend policy on a go forward basis. I think we have made a very responsible decision in the past when the cut, not knowing what was going to happen to the economy and some of the requirements we had for cash. But they had confidence when we made the decision to increase it in May in regards to the job that our organization has done on working capital and also some of this future growth, and that's why we made the change. We will continue to evaluate that on a quarter by quarter basis.

Adam Hurwitz (ph) with Sidoti & Co.

As far as Thermacore and the markets they serve, you mentioned something earlier about business moving to Asia. Could you elaborate a little more on that, please?

Certainly because of what that whole electronics market has gone through, cost is extremely important. And Asia has been part of our manufacturing strategy, but we see that accelerating and so it is important for us to be where our customers are, and that's why you have -- we shut down a smaller plant and moved our operations in Taiwan to a larger facility, and we have added capacity, and that is directly supporting the computer industry.

Also when you spoke earlier about the aftermarket, I believe you mentioned, you had a comment saying that you were concentrating more on the better parts of that market and not so much in the other parts. Can you distinguish which part is which that you are focusing on and what you're focusing less on?

Well, we have had real success in a number of venues and channels as we have increased our focus on the installer market direct. We have had some success in some specific national accounts, but there's other places that we have moved away from, and the previous example I gave was where we sold the Canadian operations. And we had a national account last year that we mutually agreed that it wasn't in our best interest to continue that. And that is what we're going to continue to do, to make sure we understand the numbers and make sure that we're not doing anything for practice.

Okay, just last question here. Aside from the $320 million that you talked about earlier incremental business, are there any other big contract that you are currently bidding for?

That is an ongoing process and the number that I gave is the businesses where we are the development partner, where that typically always turns into a purchase order and a program launch. Now sometimes but infrequently fortunately, is a program may be delayed or having different volumes, although we try to take a very conservative position on our assumptions that are behind the 320.

We continue to pursue other businesses in all of our segments. We have had very good success in Europe in automotive. As we've talked in the past, we have a very strong position in North America in truck, heavy-truck, and we want to leverage that reputation in Europe. So we continue to pursue a truck opportunity in Europe. So it is an ongoing (technical difficulty) but we want to make sure we are partnering with the right customers.

Thank you.

Dennis Canal (ph) of Rutabaga (ph) Capital.

A couple quick things. One, if you could just talk about the forward-looking opportunity on the heavy-duty truck side. You talk a lot about your position on the EGR engines, and when you look at the content that Modine has on the old-style engines versus EGR how much increased content do you have? Is that a 10 percent increase, a 40 percent increase, can you kind of ballpark that?

Sitting here, I am not sure I could do that off the top of my head, but there have been two things have happened. As the heat loads have increased, we have had a number of customers that have moved from buying components to buying the full system, because when you have a 35 to 40 percent increase in the heat loads to the powertrain cooling system, which is for radiators and the charged air coolers, etc., our customers would really rather buy from a supplier that can provide the full systems analysis and the full systems results. And that has created some incremental content in our vehicles where we've moved from components to (technical difficulty) systems.

The EGR is a new component, and we are enjoying business in EGRs in Europe. They are basically a product that is used on diesels and with 35, 40 percent of the cars in Europe being diesels, we are enjoying some nice business in the automotive sector in EGRs. And certainly then in North America, it's a big piece of the whole heavy truck business. We do continue to monitor the technology as it evolves in regards to the application of EGRs.

There are some competing technologies. There's a lot of things being done on fuels. Caterpillar has a different approach, although we have participation with them. They've always been a great customer of ours. So we need to be very aware of where all of those technologies are, and now that we're just finishing up our '02 emissions answers and working with a number of customers on some incremental EGR work that will be launching, as I mentioned, in the not too distant future. We have already started working on the '07 emissions requirements and at this point, we think EGRs will be part of that solution, along with other technologies. But we have to be very aware of potential swings in what this market perceives as the solutions.

Absolutely. So naively then, when Cummins says, okay, we've got an EGR solution and Cat says they've got their ACERT (ph) solution, for EGR to work, it is not just some bigger, more robust radiator charged air coolers that you're putting on. There's an actual -- this is incredibly naive, but there's an actual part you're putting on to make the Cummins' engine work?

The EGR is a product. It's a cooler. It's an exhaust gas recirculation cooler and it has some huge technical challenges because you're taking very, very hot exhaust gas that's extremely corrosive, so you have to have your act straight on being able to handle the thermal cycle event that takes place and also the very corrosive environment, and we have some very good solutions for our customers.

That is helpful. And on the Cat engine, I know that part of -- and believe me, I'm not an engineer by any stretch of the imagination, but I have heard them talk about it and they say well the issue is they've got two turbochargers on there, but do they have the same kind of heat issues that the other engine manufacturers are dealing with, or is -- you said there are our some opportunities for Modine?

I think you are better to talk to Caterpillar in regards to the engine specifications, although candidly, there is more heat on all of these new engines. Whether they are using each EGRs or other solutions, they are all generating more heat, and that is no different from the Caterpillar. There also are other components within the ACERT product that are different but I can't really get specific on that, but we have had a long relationship with Caterpillar. They are a great company and we have some participation in their activities.

Great, and then just to close out on the heavy-duty truckside. In terms of who the customer actually it is, are you selling to Caterpillar and Cummins and so on, and Detroit Diesel or is it more you're selling to Paccar and the truck manufacturer -- the truck assembler or the engine manufacturer?

It is becoming more and more a partnership. We sell the powertrain cooling system, the thing that is up in front of a truck, the radiator and charged air cooler and that module, we sell that to the OE manufacturer because he assembles it to the truck. But we sell the EGR and the oil coolers and the fuel coolers to the engine manufacturer.

But candidly, that is a system, and what is happening more and more is we will have a meeting with our OE customer and his engine suppliers and typically those are multiple and we will coordinate the optimum design for all three of those. So we don't talk isolated to one and not the other and sometimes we are in the middle.

A couple other more quick things. Looking at the performance of Europe, which has just been terrific, it really does look like the margins took a step function increase back, it looks like three quarters ago really going from a September '02 quarter into the December '02 quarter. Going from single digit operating margins to this kind of 13 percent operating margins that you have done over these past three quarters. Is that a good -- recognizing there is seasonality to the business and Europe goes on vacation this summer, but is that a pretty good number to use going forward, because that seems a lot higher than what you have done.

I will let Brad address the number side, but I'll just say that we are enjoying some growth over there and you get fixed cost absorption and that is a big deal.

And it's not just currencies. Currencies have got to be helping.

Our press release talks about currency, and the euro is a big piece of that as Brad mentioned. So currency certainly has helped us, but fixed cost absorption because of incremental volume has been very beneficial. And the restructuring, we have mentioned that we have done restructuring and we have taken fixed cost out and we're seeing the benefits of that in our heavy-duty segment in Europe. Brad, I don't know if you have anything else to add to that.

Well, probably just to embellish. Clearly as you just pointed out, the favorable euro has contributed to the kind of quarter over quarter comparison. That will clearly diminish as time goes on, depending upon the stability, if you will, of the euro. The automotive business, as we've said, has been strong both topline and the cost side, and in the heavy-duty, we have closed two facilities and we have also significantly focused the customer base, and that has really driven very strong performance out of the heavy-duty business.

Let me just make, because I did it yesterday at the annual meeting, is (technical difficulty) through our rationalization of our customers and our products. I used an example yesterday of a business that an older process, it was salt braising in a plant in Knoxville, Tennessee, which was part of our restructuring and we moved that business to a new technology in a different facility. But before we moved it we looked at that business very strong and said what are we doing, what is the best interest for the company long-term?

And we worked with our customers and our product design people and we were able to rationalize 50 percent of the part numbers out and it only reduced the volume seven percent. And that is the kind of an issue though that we have done very aggressively in our off-highway markets, both -- and that was North America. But we're going through the same journey in Europe and you've got to do that when you're working with the customer.

We don't want to say by the way we're not going to ship next week because we're going to get out of this product or you've got to work with this design or else. We're trying to do this in a friendly, nonconfrontational. In Canada it is a win-win for the customer because oftentimes we can move into, them to a more cost-effective product.

Right, terrific. Just another quick couple of things. Kind of an oddball question on Thermacore. I heard from another company recently that they've been trying to do stuff in thermal management side on the electronic side with "new material solutions" and particularly they were talking about graphitic solutions as being cheap, flexible, very light, better properties than aluminum, blah blah blah.

I'm just curious about whether or not you're seeing some folks, particularly I guess at the higher end, I'm not exactly sure where Thermacore would say their core business is. It sounds like you're looking more, also looking at more on the consumer electronics side. But are you seeing alternative materials come in? I know heated -- thermal management is a huge issue on the electronics side, but is there some vulnerability there? Do you have some of those sorts of solutions as well?

The addressable market for the thermal solutions is huge in the electronics market. I don't have the number off the top of my head, but the number is huge. But traditionally, it has been served by heat sinks and fans. And Thermacore was very focused at what I would call the high end which was telecommunication and high-end servers at the time of the acquisition.

They play in a lot of different markets like power and the consumer side and typically technology has been driven in the high-end telecommunications and high-end servers. But what is happening is that the heat loads and the power and the speed of all of these electronic devices are increasing so rapidly that the traditional solutions aren't viable and there's a lot of research being done in materials that you've mentioned and certainly this electronics market is certainly new to me.

My background has been more of a traditional Modine markets. So yes, there are going to be other solutions out there. There are going to be material changes, ways to get, to reduce the absolute heat generation, and there will be breakthroughs. But I think the overall addressable market is so large that I think we can be a player and an important player, and I think we're going to see some nice growth.

But we're going to have to stay aware of those what I call competing technologies and a number of them are going to be successful, but I think the opportunity or the problem the industry has is so large that we see (technical difficulty). It is going to move to our current solutions like heat pipes and next generation heat pipes. I don't think it is in too far distant future where you're going to see some liquid cooling, and we're certainly spending a lot of our R&D costs in evaluating with the cooling solutions.

What we're trying to do though is to partner with the customers so we can be on their product roadmap and that is how to make sure you have sustainability in this marketplace. The $320 million we talked about, I didn't include anything from electronics even though we have some incremental business on the consumer side in our second half. Those product lifecycles are so short that it is, what did you do for them tomorrow, and your point about staying aware of competing technologies is very important, but I think we've got the right group of people working on our thermal solutions.

And then just naively, when you talk about the 320 million, is -- you look at your March '03, you generated -- call it 1.1 billion in total revenue. Five years out, modest change in volume you would be at 1.4 for billion; is that --

Let me give you the old Safe Harbor. Certainly what will we be in five years from now, I'll tell you the economy and market volumes have a big impact. This is a class A market. Will it be 300,000 like we saw a few years ago or will it be 125,000 five years from now. The other piece of it candidly is the businesses that are about 30 percent of our business that have much shorter horizons on the order boards, and that is our aftermarket and our heating business and thermal core. So as you would build a business model, you can't lose sight of the other 30 percent of our business that I'm not addressing with the 320.

Okay, but that is a cumulative number that would "cume" at the end of that five-year period.

Yes. That's the mature volume, so let's say you launch a program next year and it may not fully completely ramp up. And the final ramp-up number is the number I'm talking about.

Okay, and finally on cash flow, capital spending up a little bit this year. You talked about that. As you go forward, excluding acquisitions, will we see CAPEX come down or will it say kind of around the depreciation number?

We've spent the money, now we've got to grow. A large part of our CAPEX was to support our technology. We have done some growth, new plants both here in North America. And we feel confident that the facilities we have, other than the incremental business in the plant that we're building in Wackersdorf, Germany for BMW, in that horizon we don't see any additional facilities, unless we have incremental business on top of what we've already talked about.

David Fondry (ph) of Heartland Funds.

Just a little housekeeping, could you give us a breakdown of other income, please?

We certainly -- here's what I would prefer to do in response to that, is to let you know what is actually in that. The big items in other income clearly are royalty income that we get on patents that we hold. That is a large component of the other income. There is also in there the earnings that we earn on our cash balance, both the cash balances that we hold both in North America as well as in Europe, and then there is also potentially monies in there related to, for example, tool sales that we might have, things like that. So those are the large items that make up the other income.

Will you, as you have in the past, will you break that down in the Q?

At the same level we have in the past, absolutely.

And you didn't say anything about equity and non-consolidated subsidiaries. I assume that's still in there.

Yes.

David Seno with Gabelli & Co.

Dave, could you give us any further breakdown within Distributed Products what the aftermarket looked like and what Thermacore looks like and whatever else is in there?

As far as the elements of Distributed Products, we would prefer not to go to that detail.

Were all three businesses unprofitable?

I think I should just comment that you have to look at the segment reporting, and I'd rather not get specific about the individual businesses.

Okay, and just a broad question, two years from now -- you have a great franchise at BMW. You have a great franchise at Daimler Chrysler. Looking out two or three years, will you have any GM or Ford business?

I am finding both GM and Ford to relate both really more looking more open to their alternatives other than their traditional Visteon and Delphi, and also Visteon is becoming a customer. They're a competitor, but they're also becoming a customer as we can fill some product gaps that they have. So if you are going to be successful in this marketplace, doors that maybe weren't available to you before, you've got to keep knocking on them and making sure that you understand the environment and the decision process of that particular customer. I really need to comment, though, on I think the importance for us to stay focused on non big three, that unfortunately they continue to lose share, and we have enjoyed business with all three in the past and we have got a number of success stories with them, but we're going to also be looking at the transplants, not just the Germans, but the Asians. And that takes a long-term work in regards to building those relationships. But you were saying project out who are you going to be pursuing. I think we have to be successful in all of the transplants as well. And customer diversification is a priority with us.

And Toyota traditionally used Denso?

Nissan uses Calsonic and Toyota uses Denso. And those relationships are strong historically, but there are other products on, specifically Nissan products, than just Calsonic. We're going to spend some time with those folks.

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