Modine Manufacturing Co (MOD) 2005 Q1 法說會逐字稿

Please standby. Good morning and welcome ladies and gentlemen to the Modine Fiscal 2005 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 up 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 could affect Modine's results are on Page 31 of the Company's fiscal 2004 Annual Report to shareholders and recent public filings with U.S. Securities and Exchange Commission. Modine does not assume any obligation to update any of these forward-looking statements.

Today's conference is being recorded. I will now turn the call over to David Rayburn, Modine's President and Chief Executive Officer. Please go ahead Mr. Rayburn.

Well, thank you and good morning and welcome to the call. Yesterday Modine released our first quarter results and held our Annual Meeting in Racine. I would like to go over some of the highlights of our earnings release in my presentation to the shareholders, both of which are available on our website.

Certainly we've started the year on a strong note, as we had commented in the last call we were expecting this; it is a continuation of the momentum that we established in the second half of last fiscal year. We did report 20% year-over-year improvement in sales, 22% improvement in earnings is a record sales for the third consecutive quarter and the eight consecutive quarter with year-over-year sales increase. Our strong performance was driven by a number of issues, first of all new business. And we've launched this last year several major programs with customer both in North America and Europe for engines as the diesel primarily market has been responding to the new emission laws and heat transfer is a big part of that -- those solutions, and we are enjoying a number of new programs, as well as we'll get the full ramp-up of the new BMW X3 program, as well as a four quarters worth of the Dodge Durango program. Fortunately, we are also enjoying some stronger markets particularly in North America, the heavy truck market, that continuous ramp up, the production rates continue to go up and that’s contributing to our bottomline and we are also seeing the construction market up 15-20% and we continue to hear positive news out of that marketplace.

From an operation standpoint, we are in full launch of a number of programs that are going well. We will be launching similar programs over the next couple of quarters. We have announced the shutdown of our Electronics Cooling Division business in Mexico and that is a direct result to that marketplace moving very rapidly to China, the OEs where the equipment is actually filled. In response to that we have announced earlier the expansion of our Taiwan facility particularly making heat price for the electronics industry, and that expansion is going quite well.

Partially offsetting our volume increases are the impacts of the increased material costs about 75% of our business is OE and about 80% of our customers we have agreements to pass those material through to them, but there is a lag effect and I believe Brad's going to comment some more on that. Our balance sheet remains very strong, and finally during the quarter we had the grand opening that a number of us attended of our new tech center and wind tunnel in Bonladen in Germany and that was very well received by customers, and their attendance -- and actually had very good coverage from the press. So Brad would you like to give them some details on numbers

Sure, thank you very much Dave and good morning to everyone --before I get into more detail in the results I just want to draw your attention to a press release that we put out on Tuesday which announced Dave Prichard will be joining the Company as Head of Investor Relations; we are very excited to have him on Board. He brings over 20 plus years of experience in the Investor Relations area to Modine, and we certainly look forward to the long-term relationship that he is going to build with each of you, and also thanks John Ge, the former Head of Investor Relations for his contribution, and we are exited about the role that he is going to play as the Global Cash Manager for Modine.

Turning to the first quarter results as Dave mentioned our sales were at a record level, up 20% or 16% if you exclude net favorable currency exchange rates nearly all the divisions of Modine reported strong year-over-year increases. Again as Dave mentioned reflecting continued delivery of new programs as well as market recovers in particular in our North American truck, Ag and construction market. Pretax income increased by 36%, while after-tax earnings increased by 22%.

A few notable items I'd like to discuss with you; foreign currency added about $1 million to our pretax earning base in the quarter. We also incurred $2 million of costs related to the August closure of the Electronics Cooling plant in Guaymas, Mexico that we have announced. I draw your attention that of the 2 million in terms of how it's presented on the income statement, 1.5 million shows up as a separate line item under restructuring charge, and the balance which is accelerated depreciation on the assets in Mexico is included in cost of goods sold. I'd also note that the affect of tax rate increased from 34% to 41%, reflecting increased U.S. income which attracts the higher tax rate and additional taxes associated with the repatriation of cash from Europe, as we pool our cash in order to prepare for the acquisition in Korea.

We expect for the remainder of the year that the effective tax rate will average between 35 and 37%. I would note that the gross margin as a percent of sales declined from 25.1% in last year's quarter to 23% for the most recent quarter, despite the stronger sales performance. As Dave mentioned, contributing to the decline was the significant increase in raw material costs for copper, aluminum, and steel. Most of our contractual arrangements with our OEM customer base allow us to pass-through copper, aluminum, and surcharges on certain steel products subject to a quarter or more lag in the pass-through. We have price increases starting to kick-in in the first of July and more in the September price time frame, which positive contribute to the overall gross margin.

Our activities to tightly control SG&A expense are bearing fruit. We are encouraged, with SG&A as a percent of sales declining from nearly 20% last year to 17% this year. In terms of the segment performance, I would draw your attention to the footnote in the statements that were attached to our press release, we have restated our segment results for the movement of Emporia, Kansas. The Emporia, Kansas facility from the Original Equipment segment to the Distributed Product segment. In additional, we have restated the segment results to reflect the allocation of certain centralized services for the segment to more accurately present the profitability of the segments.

In the Original Equipment segment, we experienced very strong growth in sales of 29% driven by the strong truck and Ag and construction markets and new products. Our operating margins for this segment, the OE segment that is, now constant at about 15%. The Distributed Products sales were flat at $85 million as lower sale in the after-market were offset by stronger coil sales in our commercial HVAC&R division. The reported earnings -- the reported results improved by about $1 million to a loss of around $100,000 which includes the adverse impact of the $2 million Guaymas, Mexico closure cost. Absent this factor, this statement would have -- the segment would have been profitability.

European operating income declined by about 4% despite a 20% growth in sales reflecting higher SG&A related costs, which are being incurred to support the new programs that we are launching and developing.

We have provided a statement of cash flow in the press release and again I would draw your attention to the footnote regarding the presentation of our cash balances and accounts payable. The overall cash generation for the quarter was relatively weak with the cash balances declining by about $16 million resulting in a quarter-end balance of $47 million. The use of cash reflected higher working capital requirement in support of growth and support of the higher sales, plus a slight increase in our days sales outstanding from the prior year end. We also reduced our accounts payable balances using working capital in part reflecting the phasing of our capital program from accrual of that program to payment.

And finally the debt ratio, the overall financial position of the Company remained very strong as evidenced by the debt ratio which decline from 13% at our prior fiscal year end to 12.7% at the end of the quarter. And now I would like to turn it back to Dave to talk about our fiscal 2005 outlook.

Thanks, Brad and well said. For the fiscal year, we are certainly going to be very engaged in continuation of launching several pieces of new business, specifically in the engine segment. Market recovery continues to drive favorable volumes and we look forward to having a closure on our acquisition in Asia from WiniaMando. We are very excited about this strategic acquisition, we've talked about it in the past the last conference call, but we really feel that this acquisition allows us to be a truly global Company. Most likely we will close -- our target date is the end of this month with the China segment following probably in a 1, 2 months or 6 weeks after that. Integration of that business is a high priority of the Company. We've got full time integration manager named and 20 other individuals on the organization that have been focusing on the integration of that business into Modine.

From an earnings standpoint, we do expect the second quarter's earnings to be slightly higher than they were in the first quarter and that certainly are much improved earnings from the prior year. And we are on track to deliver or potentially exceed the fiscal '05 improvement in both sales and earnings that we've stated in prior releases. So operator we'd be glad to take some questions at this point.

Thank you sir the question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the "*" key followed by the digit "1" on your touchtone telephone. Also if you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Again that is "*" "1" to ask a question or make a comment. Additionally if you found that your question has been answered, you may remove yourself by pressing the "*" key. We will take our first question form David Dino (phonetic) with Sidoti & Company.

Good morning David

Good morning.

Good morning -- first question for Brad on the SG&A going forward, have you effectively taken a lot of variability out of that line or is it just kind of a one-time cutback in response to the higher raw material prices

I am sorry your question on raw material cost and SG&A, can you --

Well SG&A had a very strong performance this quarter. And I am wondering that was just a concerted effort this quarter to tighten that up in response to the higher raw material prices?

No. No, I understand, I think clarifying that, I would say that, David, we're not in a position obviously to give a line item projection of SG&A, but I would say that we went through a very rigorous planning process this year, and that planning process focused a lot on how we keep control and tightly control our SG&A expenditures. So I think as we go forward we're optimistic that we're continuing to be able to control this. I would note that there are a few unknowns out there, the whole world of Sarbanes-Oxley for example on exactly how much that’s going to cost us, that could put some upward pressure on our current projections that we have internally. But, I would say that we've -- this isn't a one time bliss, we've put a lot of emphasis in our planning and budgeting process to ensure that we can tightly control this as we go forward. Dave, I don’t know if you want to --

Brad, it's certainly very important for us to -- as we have this incremental volume that can develerage down our SG&A, and not go with the sales growth. And the whole organization understands that and -- so we're going to continue to make choices in SG&A versus allowing volume to rationalize the incremental cost in that area.

So it's safe to say going forward that 20% would be unacceptable and the number would be something lower than that?

I'll let you do the math, but that certainly is our goal.

Okay. And my second question -- I guess again for Brad, is there any way you can split up the growth this quarter by how much new business contributed and how much was just markets?

That's a very good question, if I would give you a number, it would certainly be not very accurate -- I mean I certainly think, in the truck business and the ag and construction, there has been both new programs as well as market recovery. But then that was a significant component of the market recovery in that particular segment, but David I don't have that exact list.

Okay. I don’t mean to nitpick, nice quarter.

Thanks, Dave.

Our next question will come from David Leiker with Robert W. Baird.

Good morning.

Good morning, David.

Good morning.

I am sorry. Mr. Leiker will you please requeue, "*" "1". Sorry about that, please go ahead.

Does the performance in the first quarter and your guidance for second quarter -- when we look at -- it basically gets to the 80 cents or a little bit above that for the first half of the year to get to the 140 kind of number, would imply earnings in the second half of your fiscal year to be down from last year and I just wanted to get a sense of your comfort with that analysis.

David, I -- you are obviously doing the math very well as usual, we don't expect that. What we try to say, I mean -- is that at the end of our fiscal year we signaled that we would be at least as good as the prior year in terms of sales growth and earnings growth, and sales in the prior year had grown at 10% and earnings had grown at 18%. And clearly what we have signaled in this most recent release is there certainly is the potential to exceed that guidance that we gave as we go forward. There is nothing out there on the horizon that is alarming us, if you will, in terms of the second half of the year that could potentially cause the overall performance to come off where we have been in the first half.

Okay. So it just sounds like those comments you made about '05 were probably on the conservative side?

Probably a fair comment there.

As we look at gross margins and as you put in the price increases through on the raw materials, do we see that as early as your second quarter or as only some of it is going to show through in the second quarter?

Yeah, I mean some it and that’s why I was careful and that we have certainly some agreements that are kicking in literally as we speak and then we have other agreements that will kick in the September timeframe and therefore won't benefit the whole quarter. So I think your statement is fair.

David the way these agreements work generally is that there is an annual update and those annual updates are at different points depending on when [inaudible] negotiated with customer, but most of them are on a quarterly review and there is a band and that band if that exceeds plus or minus then it kicks in and then we have a number of our customers where they have exceeded the band and that’s why have some hitting very soon in June, July or July, August gives me in the some or little later. So this and we see the good news going the other way. When materials go down we actually enjoy some material recovery before we pass it back to the customers

Okay. And then are you having any issues in the scalability of the five raw material?

Absolutely it has been a challenge in steel. We don’t use a lot of steel but it has been a issue and certainly when we go into modules and dealing with systems, one part can make a huge difference. So yes, we had to do a lot of expediting and --in some cases having to pay premium. In our primary commodities like aluminum it certainly has been tight but the key is good scheduling and good anticipation and having the right relationships and I'll knock on wood but we have not any severe issues in that regard. One issue that we are facing Dave and --we have a small plant [philosophy] in North America and in Europe but as we are ramping up and many of our plants are in small town U.S.A. we are having a tough time finding people and we know that and we believe very strongly that the hiring process is the most important process in having a good workforce. And so we have pretty high standards and in some of our locations -- a number of them we are having to go through a lot of candidates to find acceptable candidate. So it is driving some premium cost right now to deal with the incremental volume and overtime until we can get the right people on board and we trying to be creative in regards to summer hires, college kid per weekend work etc but I am more concerned on short term on labor availability then on materials.

Okay. Great thank you

Once again it is "*" "1" to ask a question or make a comment and David Leiker has a follow up question

Back again. The BMW plant in Wackersdorf, can you just give us a sense of how that ramp up is going relative what you expected? Where you are on the scale of ramping that up?

You know Dave, I'm really proud of that plant. [inaudible] management team has done a great job, and for those who don’t know this plant is what we call [inaudible] Because when we launched the first Series 3 business a number of years ago, we had a plant that provided modules, but with the growth of business that we've had with the X3, the Z4 and we'll be starting up the Series 1 here very shortly we had to build a new facility, and we're dealing with over a hundred different modules; we're sequencing the three facilities. It's doing quiet well Dave. We're currently shipping around 2500 modules a day. We will be about 2900 in a couple more months, and it will be peaking out of about 3500 units by the end of the year, and again knock on wood, that’s we're really proud of that facility. Inventory turns right now are right around 72, and our relationship with BMW is very, very strong.

And when you say by the end of the year, you mean calendar year or fiscal year?

Fiscal year.

Okay. And then just a last items here, is what -- when we talk about the suppliers truck market, we're hearing more and more that there are capacity constraints within that supply chain that is constraining the build rates there right now, and I guess I got two questions for you; one is, where are you in terms of how capacity constrained are you on that; and secondly, if you look out six months or so, you are using the build rates on your customers, you know, some people are talking about pushing to 60,000-70,000 range on the Class 8 this year. Is that something that you think you can handle?

Well Dave, we have heard that a number of them are struggling with supply based problems and impacting their build rates, that wouldn't be Modien. We are in very good shape with regards to dealing with a very strong market. You know we dealt with over 300,000 a few years ago and we are willing and able to deal with the up market. We had our Class 8 forecast this in our, you know that's in our fiscal year of a 210 average and our current forecast is 245. We have heard numbers like you just spoken to, for now at least our forecast internally is 245.

And it seems to me it will be hard for the industry in calendar '04 to get a 260 number that some people have thrown out there.

Yeah, but we'll, you know our first -- our last, our fourth quarter is actually the first quarter of the new calendar year so stay tuned on how this will ramp up and what the rest of the marketplace does. It has been encouraging, the engines how well have they been accepted and some of the paranoia that the people have in the new engine it seems to have gone away.

In those new engines, you are ending up with more cooling system?

Absolutely, the both from EGR standpoint, other customers don't use EGR but they Modine transferred specifically on the engine for, in the turbo system.

And did that translates into higher content in profits for you or --

Absolutely.

Could you give us some sense of scale, is it 10%, 20%, 2%?

That will be difficult, off the top of my head.

Okay, thank you.

Thanks Dave.

Sure. Jerry Hopernine (phonetic) with Lord Avest (phonetic) has the next question.

Good morning everybody and thank you very much for a very impressive results here. I apologize, getting on the call late and if you discuss some of these things, I beg your pardon. Tax rate you did make comment in the outlook section as to where you see the tax rate goes. Could you just comment us to what caused the higher tax rate this quarter and just so I understand that and incase some other things happen again going forward?

Yeah. Good morning Jerry it's Brad. The tax rate in the quarter we certainly saw a mix impact meaning much more of our income came in North America which when you add in the federal as well as the state tax rates, actual result in the higher tax rate then the rest of our operation in Europe and in Mexico. So that certainly contributed and as we go forward we see European business and the rest of world business making up more of our income than it did in the current quarter and therefore that will moderate the tax rate. We also had in the quarter what I would call a one time tax that was associated with the repatriation of cash from Europe to the United States as we pool our cash to get prepared for the acquisition that we are making in Korea and so there was the one time affect there. So that’s what kind of contributed to the higher rate in the quarter and again we try to give you our thoughts based upon the mix that we see going forward at to what that is the mix of income as we see going forward and we estimating between 35% and 37%.

Okay. If I could change gears here to Wackersdorf. Certainly a very pleased to hear your confidence and review of how well things are going there. In the fourth quarter we certainly had -- Rick (phonetic) spoke about cost that were doubled up because of the switchover shutting down the old plants starting up the new plants, were there any such cost in this current quarter?

No

Okay. And then you mentioned that eventually you hope to see Wackersdorf too get up to a 3500 unit per day ship level where is [inaudible]?

[Asset].

Okay

Again I don’t really want to [inaudible] about it but certainly if the customer came back and one of those deflects up we got the ability to break bottlenecks and etc that’s probably the optimum number. We are dealing with a lot of models and the bottom line with BMW is that for this volume output is the acceptance of the new refresh or actually it’s a new Series 3 and the old one was very, very popular and the volumes have trialed off on the old one. So our volumes assumption is assuming that the marketplace will like the new series 3. The really big wildcard is the new Series I and if you haven't seen it --it’s a really an interesting vehicle and there's a lot of speculation the marketplace will like it but it is their entry into the low end of the marketplace in Europe and so tuned whether the dog likes the dog food

Okay. Good. [Pegault] you had mentioned last quarter that you started up business with [Pegault] is that being serviced out of this Wackersdorf plant also?

No the Wackersdorf facility is a modular assembly plant; and works that were reshaping powertrain cooling systems, and it's only a BMW plant. It's supplied by four other Modine plants that make condensers, radiators, oil coolers, charge air coolers etc. In regards to the PSA business that I mentioned in the last quarter -- that’s a new business we secured, and it's actually not started yet; we're tooling that up right now, and that will be served out of our Berndorf, Austria facility; and that will be launching, I believe the launch is actually in next fiscal year off the top of my head. I think our qualification runs are the latter part of this year, but it doesn’t really kick-in until next year. I think that’s correct.

Okay. Alright, and I certainly missed any discussions that we had on the after-market business if you could just tell me how close are you to making any kind of overall decisions on that business or any you know major changes there?

I'm not going to speculate on what might happen. I will say that -- and we talked about it yesterday in the Annual Meeting is that our organization has been very focused on that business. At one time it was 33% of our total sales in 1999, and right now I believe it's 18 -- 91, excuse me, 91, it's was 33 and today it's only 18% of our sales. Our employment in that business is down almost 700 people; so we've made some tough decisions in that business by exiting Canada. We have walked away from some business where it wasn't profitable; at the same time, we are very focused tactically on reducing costs, both manufacturing costs as well as source costs, and dealing with distribution costs; and they've made nice progress. We are very pleased with that organizations progress both for the last fiscal year and actually our first quarter. But as we said multiple times, if there is a strategic alternative out there for us to deal with this business we are going to pursue and find, and work those alternative out. And if they make sense for the shareholders and our employees, we'll work through those and so we'll continue to work that volume -- we are ready to say something about it, publicly we will.

Okay, I have heard others in the associated thermal business, auto business that this summer has not been conducive to really strong sales in that business, are you seeing the same thing?

Correct, the volumes have been soft in the after-market business, certainly that tends to be weather related. And we like high humidity and high temperatures for multiple weeks and we'll get around the shelf when that happens.

Making a little hell on earth.

Yeah.

Very good --

Mostly in high population areas too that --.

You are fun to bring to the party. Okay thank you very much.

Thanks [Jerry].

David Leiker has a follow up question.

Operator it's David Leiker.

I am sorry about that.

That's okay, it wasn't my last time anyway, I haven't heard you talk about an update on your new business, you know pipeline, backlog at this start of the fiscal year, is there a way we can talk about what that number might be over the next 2 or 3 years?

Yeah David, we are in the process, quite frankly of going through our five-year planning process which allows us to obviously be able to kind of give a better update as to where we are on the $320 million worth of net new business that we announced last year, and we'll be doing that you know over the summer and into the fall timeframe and be prepared to give a better outlook on whether or not we have added to the backlog, if you will. I would say that again there is nothing out there that causes us of any concern that we are off-track on that number. And we are encouraged by the new programs that we currently either have secured and haven’t announced or that we are currently in the process of getting on. So we'll have a better estimate in the fall timeframe as to how we are doing on building that -- maintaining or building that $320 million number. We attend two great conferences, Investor Conferences. Dave I think gave you about one of them in the November timeframe, so we'll certainly bring those numbers forward at those two meetings.

Can you just -- thanks for that Brad. Could you give us you think as you roll '06 on and '04 rolls up at the 340 numbers or 320 number is likely to go up or down.

You know, stay tuned on that. Again I think there is nothing out there to say that it's sells on us, more encouraged by the, -- again the new program that we have always either landed and haven’t announced or that we're currently in the process of securing.

And if you know there is whole other series of engine changes that are going to be changing depending on where and what time you are at year end, but '07 and '10 will be two new breakpoints, and in a number of cases will be decisions laid by the OEs on who is going to serve those, so that will impact that number we are working hard to make sure that we get our fair share.

Okay. Let me just ask one more question then related to that. That 320 number is an '04 '05 '06. Now with '04 behind us, what portion of that 320 is still in '04 do you think?

Well what we had said -- Dave I am not going to answer your question specifically, but what we said was about two-thirds of that 320, which is a 5-year number -- two-thirds of that would mature in the first 3 years. So you can kind of do your own math in there

Yeah that’s pretty even do you think?

I'll stop.

Okay thank you

If I was doing the math I'd probably say yes

That’s all I need thank you

Thanks Dave

Jerry Hopernine (phonetic) has a follow up question

Hello guys. In the supplemental information in the press release where you have operating income numbers, have you placed the restructuring charge or the total of $2 million of plant closures in any of those numbers?

Yes certainly. And if you looked Jerry at the income statement that we've attached to the press release, you'll see of the 2 million, [inaudible] is Mexico closure cost, 1.5 million it shows up under the line item of restructuring charge, and the balance, which is roughly $0.5 million which is accelerated depreciation on the asset in Mexico shows that in cost of sales. But also note that the whole $2 million impact is in the operating income or the segment under distributed products, and that certainly is what contributed to the $138,000 loss that you saw in that segment in the quarter, absent that the segment would have been profitable.

Well that’s an encouraging item there. Then, as far as the original equipment segment goes, sequentially if I'm doing my math right here, perhaps I'd need David to my math, I have a 18.8 margin showing up in the first quarter, the March '04 quarter, going to 15.1 now. What's happening there in that 300 plus basis point change there?

Yeah, I would encourage you -- I think you may be working with an old data, if you will, because we've noted in the footnotes that we have restated this segment to reflect two things -- one is the movement of one of our facilities, the Emporia, Kansas facility from the OE to the distributed products to better align that plant with the businesses with -- the business with its peers. In addition, we had moved certain corporate costs that were held up again at the corporate level down to reflect the overall profitability of this segment.

Okay --

So, if you look at on a restated basis, the margin was constant at 15% last year's quarter that is fiscal '04 versus the current quarter.

The June '04 versus June '03?

Correct, yeah.

Okay, that I see as constant, I was look at March 31 '04.

And March 31 '04, again --

Was the restated also?

Not yet.

Okay, I'll have to talk to you guys later to get a restated number for March 31 '04 and then I'll have -- and we'll see what the questions come after.

Okay.

Thank you.

As a reminder, it's "*" "1" to ask a question. At this time it appears that there are no further questions. Mr. Rayburn, please go ahead.

Well thank you and I appreciate everyone's participation in the conference call and we look forward to talking to you at the end of the our second quarter, and hopefully we can bring those numbers on that we talked about. So have a great day.

Thank you

That concludes our conference. Thank you for your participation. You may now disconnect you lines.