Modine Manufacturing Co (MOD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Good morning and welcome to the Modine second-quarter fiscal year 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct the Q&A session, and instructions will be given at that time. As a reminder, this conference is being recorded. A replay will be made available via Web broadcast at www.Modine.com or by calling 719-457-0820 or toll-free 888-203-1112, using confirmation code 808-4135. The replay will be available through November 2, 2006.

If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without the written consent of the Company. (OPERATOR INSTRUCTIONS).

I will now turn the call over to Wendy Wilson, Modine's Head of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you, Matt. Good morning, everyone, and welcome to today's conference call. Dave Rayburn, Modine's CEO and President, is with us today to give us some comments on the year so far and some of our current initiatives. And he will address any questions or concerns you might have. We are also joined by Brad Richardson, our Executive Vice President of Finance and Chief Financial Officer.

Before we begin, I would like to provide our usual caution that this morning's call may contain forward-looking statements such as forecast of business performance and Company results and expectations about the Company's plans and future initiatives. Actual results may differ materially from those projected. For an in-depth discussion of risk factors that could cause actual results to differ from those mentioned on today's call, please see today's press release and our Form 10-Q for this quarter, which should be filed by November 6th.

Also, you may reference the Company's annual report on Form 10-K for the period ended March 31, 2006. If you have not received today's release, it is available on our website, www.Modine.com.

Now I would I like to turn the call over to Dave.

Thanks, Wendy, and good morning. And I'd like to thank all of you for joining our second-quarter conference call. As we have said, this fiscal year is a year of transition. Sales are at a record level, driven by new business, new products, primarily for our engine business, strong segments, especially our North America truck business, and recent acquisitions.

We are making significant progress on our repositioning activities that I will review later. And these are intended to deal with the challenges that we have in regards to earnings.

I am very excited also about the new organization structure we have announced for our vehicular and commercial products businesses, which will further improve our focus on global product development and the key is differentiation in the marketplace and improve operating efficiencies. And Brad, would you now review the financials for the quarter?

Thank you, very much, Dave. And it is great to have everyone on the call this morning.

As you saw from our announcement today, earnings per fully diluted share from continuing operations came in at $0.35 per share versus $0.41 per share in the second quarter of last year. Two significant non operational items affected our current results, however. First, we booked an $8 million, or $0.24 per share tax benefit related to the closure of our facility in Taiwan. This is a benefit resulting from the IRS regulations around worthless stock investments that allows us to recover a portion of our investment as an ordinary deduction upon the closure of this facility.

Secondly, we recorded a post tax charge of $3.3 million, or $0.10 per share for our previously reported repositioning activities, including charges related to the consolidation of our Harrodsburg testing facility into Racine, the announced closures of our Richland and Clinton North American automotive supply plants, and our North American early retirement program.

Excluding the impact of these items, net earnings were $0.21 per fully diluted share, which represents a challenging year-over-year comparison. Given a significant number of drivers in the earnings comparison, we have included in our press release a profit factor analysis which is designed to help you understand on an after-tax basis, the key changes in the income statement.

Consolidated results from continuing operations for the quarter included record revenues of $438 million, up 8.3% over last year. It is important to note that excluding the impact of our acquisition of Radiadores Visconde in Brazil and foreign currency rate changes, underlying sales grew by about $2.2 million, with organic growth driven by strong demand for our North American truck and global heavy-duty businesses, offset by softer demand in our automotive business and heating products.

We also benefited from numerous smaller product launches, primarily in our heavy-duty business in Europe that have come on stream since last year.

Net earnings from continuing operations were $11.4 million, declining from $14.3 million last year. This was primarily due to the deterioration in our gross margin related to copper, aluminum and nickel commodity prices and price pressures from vehicular customers, as well as a labor disruption in Korea and an approximate $3.3 million after tax global repositioning charge in the quarter.

Addressing the Korean labor situation, you will notice that we reported a $4 million loss in our Asian segment. The majority of the loss was due to strikes at both Hyundai and at our facility in South Korea. The strikes have been resolved, and results in the segment have rebounded as Hyundai has stepped up production to make up lost volume.

Regarding commodity pricing, in total, higher commodity prices had an $18 million pretax impact on our results. Of that, we were able to pass through $9 million of that to our customers, leaving us with a $9 million pretax net effect. It is interesting to note that on a year-over-year basis, the price of copper is up 100% and aluminum is up 32%. While natural gas prices seem to have softened, we have only seen a slight price relief for copper and aluminum. We continue to be aggressive in getting our prices passed through to our customers per our contracts with them and plan to recover more as trigger points are reached in accordance with our contractual arrangements.

Excluding repositioning related costs, the gross margin fell slightly below 16% from 19.7% last year, reflecting, again, the impact of higher commodity prices and the customer pricing pressures that we mentioned previously.

We can't control commodity prices, but there are things we are doing to mitigate the effect of rising costs have on our results, which is at the core of our five-point plan that Dave will review, which is intended to get us to our growth in return on capital employed goals.

Second-quarter 2007 selling, general and administrative expenses, called SG&A, increased $4.9 million from fiscal 2006, primarily driven by approximately $2 million of repositioning costs which are included in SG&A and SG&A associated with the acquisition of Radiadores Visconde. Absent these factors, SG&A was consistent with the comparable quarter in 2006. As a percentage of sales, SG&A expenses actually decreased from 14% to 13.6% after excluding repositioning-related costs. Clearly, based on these results, we are already seeing some traction in our cost reduction programs. You should see significant progress from this initiative in the next fiscal year as a majority of the actions to affect the reduction in SG&A will be completed by the end of our fiscal year, which is March 31. The ultimate goal is to bring SG&A down $20 million, or approximately 10% on an annualized basis.

Operating cash flow for the first six months was not as strong as last year, coming in at $35.7 million due to the underlying weakened financial performance of the Company and increased inventory levels.

During the quarter, inventory levels increased in our North American automotive business and we banked inventory in Korea to mitigate the impact of the strike.

We made progress with receivables this quarter with our DSO, that is days sales outstanding, coming down one day to 54 days. We'll continue to work aggressively to bring this down further throughout the year.

We utilized the year to date operating cash flow plus incremental borrowings to acquire the remaining 50% of Radiadores Visconde in Brazil and funded $39 million in capital expenditures for growth in support of new business, in particular reflecting sizable investments required for the heavy launch scheduled for 2007 truck programs here in North America.

In return to our shareholders, we purchased 454,000 shares for $12.1 million, and we paid dividends to our shareholders of $11.4 million in aggregate. Our conservatively managed balance sheet remains strong with a total debt to capital ratio of 26.5%, up from 23.8% at the end of the fiscal 2006.

With regard to the outlook for the remainder of this fiscal year, we have been consistent and Dave reinforced with his opening comments, that this is a year of transition. For the remainder of this fiscal year, we will benefit from the accretive acquisitions of Radiadores Visconde in Brazil and the closing of the Company's Taiwan operation that has historically operated in a material loss position. We've also secured new business from Freightliner that will significantly increase our net share of the U.S. truck market, as well as our content per vehicle. As you know, truck volumes are anticipated to decline from current historical levels after the January 1, 2007 emission law changes -- when they go in effect. However, what we have gained in share and in content should partially offset what we will lose in volume due to lower industry build rates.

What remains a challenge for us is the ongoing lag impact of passing through higher commodity costs to our customers and continued competitive pressures from our vehicular customers for price-downs.

We have made a lot of progress with our five-point plan this quarter, which is designed to stimulate new business by being cost competitive, accelerating technology development, and repositioning our manufacturing footprint. These actions are all designed to get the Company back up to our stated target of an 11% to 12% return on capital.

I will now turn the call back to Dave.

Thanks, Brad. In regards to the material cost recovery and continued price-down pressure, there is obviously considerable tension across the markets in which Modine participates between the supply base and the equipment manufacturers. And that has been seen in a number of reports that I've -- actually read some this morning.

We certainly understand the competitive situation our customers face, and we work very hard in driving costs out via design changes, sourcing, manufacturing efficiency, etc. But there are costs that we can't control, such as aluminum, that we must recover. By diversifying sales base, both in markets and customers, plus having products that provide a technical advantage does support our recovery of these costs and manage our customers' expectations. This is a significant challenge, but a priority and does take some time, but we will be successful.

We will continue to drive further sales diversification in our overall business model and continue to drive new technologies, which has been our core, but it is an increasing priority within our Company. I will further discuss that later.

The new global organization structure we announced this month for our vehicular and commercial products business is a very important step as we continue to respond to the global challenges of our markets. We will manage our product roadmaps and applications via a global structure versus regionally as we do today. This will drive global standardization, global solutions for our customers, which candidly, will differentiate us from our competitors; eliminate duplicate efforts; leverage our global design skills; reduce costs, very importantly, reduce costs; and increase speed; and most importantly, better serve our customers. Manufacturing will be managed by region versus currently by division. This will allow us to better optimize our asset utilization and drive best practices across all of our plants and better support our global purchasing initiative.

To support these changes, we have made a number of organizational changes to lead this global structure. I am very confident in Tom Burke, our recently promoted Chief Operating Officer, and his team that will deliver the improved customer support, sales growth and improved earnings that this organizational change will drive.

In regards to the five points of repositioning that Brad mentioned and that we had in our release, we're making excellent progress. There isn't any instant potatoes on this, but I am very confident that we will deliver the goods. As Brad said, we are going to reduce SG&A costs by $20 million. And I am confident we will exceed that goal via the new organization structure I just described and the support staff changes that will align with this new structure.

In addition, we have been working on an overhead value analysis process, which we call OVA, to lean our support processes -- not unlike what we have done in our plants. This will result in a more cost effective overhead structure. This is a global initiative, as well.

Plus, we will have and will be implementing more outsourcing and in sourcing of various support processes.

And finally, we will be completing our North America SAP ERP rollout over the next 18 months, which will drive further cost reduction in our SG&A area.

Two, repositioning manufacturing print and improve asset utilization. The announced actions to date, this year, is we are consolidating and will complete next month the vehicular HVAC technology group to Racine from our Harrodsburg technology center. We are also expanding our manufacturing at our Harrodsburg facility to offload other North America facilities which are experiencing and will experience significant growth in the future.

We have announced the closure of our Richland, South Carolina plant and the expansion of manufacturing in our McHenry, Illinois plant to optimize asset utilization.

We have announced the closure of the Clinton, Tennessee plant. We have also announced the construction of a new plant in Nuevo Laredo, Mexico, to better serve our automotive market and the construction of a $16 million new facility in China. This will be our third, which we announced yesterday. And that facility will be supplying our global customers and our regional customers in China, as well as will give us an opportunity to bring product back to our high cost countries.

Additional actions in repositioning our manufacturing footprint are underway and will be announced in the coming months.

Three, diversification of markets and customer base. Currently a strength, but a priority. We completed our acquisition of our joint venture, as Brad mentioned, in Brazil. It is an $80 million business that will grow rapidly over the two years. As we have secured new business for local customers as well as we will be transferring business, high labor [cost] business from our North America and European facilities.

As Brad mentioned, we're launching this fall our new powertrain cooling business with our new partner, Freightliner. A very exciting program. We have multiple other engine component launches that are taking place now in support of the new emissions requirements in both vehicles in North America and Europe.

And finally, our recently announced new business with DENSO Corporation, with sales volumes to exceed $50 million per year. We are looking forward to expanding our long-served relationship with DENSO.

Four, increased low-cost country sourcing. We have announced and are implementing a new global organization structure. Previously it was regional. We have also added to the leadership of this group with skill sets from a global perspective. We are increasing our low-cost sourcing with a goal of 20% by year end and 40% long term. Our focus is not just on productive materials but it is also focused on surfaces, tools, and other purchased items.

And finally, and probably most important, we will continue to focus on technology. It is a priority and a strength. We are expanding our drive in this area with increased resources in our new product development area, which I call [poll]; the market needs are being polled for our next generation products. Our research group will also be increasing staff to push technology as we partner with our customers and universities to identify new technologies for our marketplaces, thus pushing that technology to our customers.

Our SG&A goal of 20% reduction is net of these increases to further drive technology differentiation in our marketplace. I am very confident we have the right plan and the right people to meet our stated goals of return on invested capital of 11 to 12% through the cycle.

So with that, operator, we will be glad to take some questions.

(OPERATOR INSTRUCTIONS). David Fondrie, Heartland Funds.

Brad or David, could you give us a little bit of insight -- as I look at the European operations, sales were down I guess about $12 million from first quarter to second quarter, but operating profits were down considerably more than that. If you just attribute some gross margin percentage to it, I wouldn't have expected earnings to have declined so much. Can you kind of give us any insight into that?

Yes, there's a couple of issues that come to mind, and Brad may have a few more. But certainly the pricing pressure in Europe has been pretty significant. We have settled with one of our major customers a price-down strategy that will be extended over multiple years. And that is part of that. They, not unlike North America, also have the commodity pressures. And we do have some push-back. As I mentioned, it is kind of a tense environment right now in regards to -- with some customers. We are being aggressive in that recovery, but that does take some time.

Brad, any further comment?

And David, we normally do see in Europe the second quarter is a low point for Europe, and it really is a function -- and you see that clearly in the comparison that you have made in the sales. And that is really a function of the European kind of holiday schedule -- vacation schedule, which brings the manufacturing plants down. And so as the sales come down, clearly with the lack of fixed cost absorption that you get from the lower sales, you'll see a disproportionate decline in the overall profits, and that is certainly what you see.

And then secondly, can you help us understand what the savings might be now that Taiwan is closed down?

Well, you know we don't fully disclose that. But you have seen this other segment and historically that has been running at -- roughly call it a $10 million annual pretax loss. And what I would say, David, is a majority of that is because of the Taiwan operations. Maybe that is kind of as far as I can go at this point.

(OPERATOR INSTRUCTIONS). Dave Leiker, Robert Baird.

I want to talk about this pricing issue. Are these price reductions beyond what you have normally contracted to do?

The pricing journey just continues and continues. It is not unlike -- probably every program that we take in the OE segment has some kind of productivity price-down in that contractual expectation. It is not unusual, and it is very frustrating, candidly, that in mid cycle or even before launch but after capitalization, in some cases, we have customers coming back and have thrown the net out and done a best ball and a challenge the pricing in that contractual arrangement. That does lead to quite a bit of dialogue. With our diversification model -- allows us to have some independence. But at the end of the day, there are some cases where we have had to take further price-down beyond that contractual arrangement.

The other area of pricing that has had some contentious environment is the materials recovery. Materials recovery is the norm in our business, fortunately. But there is a significant delay because of the way the math has done or the way the contracts are done. And we do have a couple of situations where they have come back, despite that contractual relationship, and say they can't afford it. And we certainly understand their financial situations. We also understand the contracts.

And that has, unfortunately, gone into, in a number of cases, extended discussions, to where we continue to hold them accountable, but it may take in some cases a couple of quarters to get all of that footsie done.

But we are resolved to manage what we can control. And what we can't, we see an obligation of our customers to participate. And hopefully with some commodity stabilization, which we are seeing, and also with this delay that is in the natural formulas that the significance of the lack of recovery to what we see in the income statement versus what we secure in pricing -- that gap will narrow. And it is certainly a priority in my office that we are going to manage these situations. But it is very contentious in some situations.

And Dave, as you know, the only way that you can get through that purchasing hardship is through the technical community, as you have preached at me many times.

I don't know that I really preach but --

You are a pretty good preacher.

Did I hear you say that this $20 million SG&A -- that you are at that on a run rate starting in the first quarter of fiscal '08?

What I said was a majority of the actions that we are taking to get the $20 million reduction will be completed by the end of March. We've got a significant amount of activity going on, quite frankly, right now regarding taking SG&A out. And so our plan is that the majority of the actions -- there are some things that Dave mentioned, that are a little longer wavelength, like the SAP projects, which has a longer wavelength implementation. But a majority of the cost will be out by the end of March, and therefore affecting favorably the year-over-year comparison starting in our fiscal 2008.

Dave, it's our priority that both externally, but more importantly, internally, that this is a year of transition. And we certainly do not want to have our organization in a state of flux over an extended period. So this all started with a significant change we made in Korea actually before the fiscal year started. We have activities, not only here in North America but in Brazil and Europe. And it is our intent to have all of that completed in North America, in Europe, and Brazil, at least funded this fiscal year, and most of it implemented with a few delays.

On the repositioning of our assets, whether that is funding closures and also expanding our global footprint, I intend to be implementing a lot of that, funding a lot of that this fiscal year. Although the value for that piece, the gross margin piece, is more in a 30 to 36 month because of the lead-time of construction and also the lead-time of shutting down.

But I want to get the financial impacts of these restructuring in this year. And so we can have the organization move on versus looking over its shoulder.

I kind of had something that Dave Fondrie was talking about, kind of coming at it a different way. You've got about a $33 million increase in revenue year-over-year. You take your normal contribution margin that you would have on that -- it looks like there is a shortfall there of something like $17 million. And obviously price and commodities are two pieces of that. But is there anything else that's driving that that's --?

Again, we try to give you as much information as you can to understand that clearly the gross margin is down. And it's a function -- we have shown the after tax impact, you can gross them up. But the two issues is the net impact of the commodity prices which, again, on an after tax basis, was about $7 million and then these customer price-downs. And we did have again, negatively affecting the overall conversion for the Corporation, was the strike activity that we had in Asia. And I think it, for the most part, those are the key factors.

The quality of the new programs that we're launching and will be launching are of equivalent quality. So we're not seeing a significant decline in the quality of the business. It is really these factors here that I mentioned.

And when do you think you would be at the point that you have what would be considered more normal contribution margins? Is that a quarter, two quarters, four quarters away?

Well, yes, I certainly think again -- I think it's a way -- it really is a function, as you know, of the commodity markets. They have stabilized. But as you know, the real run-up in like, for example, copper prices, occurred in May. And with our ten-month lag, that we have from the time that we see the increase to the time that we are able to pass it through, it would say that we are really going to only be able to pass those through kind of in the first quarter of next year timeframe. So I think we are going to still see some pressure from the commodity prices, provided that they have stabilized. We are going to be able to get those price increases. So you will start to see a more return to the normal, call it three quarters out.

And then coupled with again the benefits, the closure of Richland, that Dave mentioned, that will be closed early in the next fiscal year or late in this fiscal year, which again, will be able to take some fix costs out of the Company and improve the overall margins.

But you will see the margins start to come up because of the impact of the pass-through. But then as Dave mentioned, the overall repositioning of the manufacturing footprint, which is really designed to continue to drive the margins up, is more of a three-year journey.

So what I would like to say, David, long-winded answer here, is we are going to see some improvement here, and then it will plateau and then start to improve as we bring on these new facilities.

The real wild card, of course, is the overall marketplace and how competitive that is and how much we actually have to give back to the customer base.

As a tier one supplier, it is interesting to watch some of the dynamics that's taking place between the supply base and the OE's. And with the number of people that are in the red or in bankruptcy, there has to be a better rationale between balance, between the OE's and the supply base. And I am starting to see some rebalancing, David, in regards to leverage. It just can't continue the way it has been going.

On the taxes -- if you take out the tax -- first of all, the tax benefit in Taiwan, is that cash?

That will be cash. Of course, it was just recorded, but absolutely. That will be used to offset the cash taxes here in the United States as we go forward. So absolutely. And it will be an attempt to carry that back. So, yes.

And then if you exclude that from the numbers, the tax rate still was unusually low; what was behind that?

Yes. And what's really driving that is you look at the overall profitability of the U.S. operations, which of course have been hurt by the repositioning-related costs, so the U.S. operations, again, with the repositioning, is operating at a call it a breakeven level, while the European operations are doing very well. And the tax rate, in particular, for example, coming out of Hungary, which is a 16% rate -- the Netherlands have cut their rates and even Germany. So it is really a mix effect, and where the profit is being generated. It is being generated in Europe, which has a significantly lower tax rate versus the U.S., where there are -- again, because of the restructuring charges that are going through, there's no taxes being generated. So it is a mix effect, David.

Are you close to the point where you have to write down some deferred tax assets?

No.

Okay. And then one last thing. As you look at the volume for the commercial vehicle market next year and it looks like medium duty might get hit even harder than heavy duty, what is your game plan in terms of taking costs out of that business for that two or three-quarter period that volumes are going to --

Yes, it is interesting, Dave. We have taken a real good look, at trying to really understand all of the moving parts. And of course, how low is low in regards to the -- what that Class 8 market is going to do? And in North America, obviously, we have the ability to flex labor pretty quickly.

The good news is we have the Freightliner business starting and our content is increasing. So actually, on our current sales base, our current estimate of the net impact of Class 8 down, medium is down, new content, Freightliner is about 3% of our sales, or $50 million on a year-over-year basis. It is not as significant as I think some people have built into their models.

What kind of build declines are you using for Class 8 and medium?

Actually, I don't have it off the top of my head, but Brad, do you?

220 is what we've got next year on the Class 8's. And I don't remember on the mediums. But we do expect those to be down as well.

David, just the other point around what are we doing to control the manufacturing costs -- and as Dave mentioned in his comments, certainly, the overall facility strategy and what's coming out of that is clearly some consolidation. I would say without being able to say anything more, is that there will be additional consolidations of manufacturing facilities.

And that is not just a North America comment. We are looking at Western Europe as well. We are active, David, I think we've commented in prior quarters that I personally have a real strong interest in India. I have been over there a couple of times -- or at least once. We are talking to customers. And what we see in the economic growth in India is exciting -- both for our global customers and the regional customers. And we are strongly looking at Eastern Europe in regards to establishing a stronger footprint there for a more cost-effective base.

(OPERATOR INSTRUCTIONS). Dennis Scannel, Rutabaga Capital.

Just a couple quick follow-ups. In the text, we see I think it is $3.3 million in post-tax charges. Pre-tax would be what? $3.8 or $4 million?

About $4.5 million pre-tax.

Can you give a -- and, again, in the discussion, it looked like $2.2 million for North America. Where were the rest of the charges?

Actually, you saw the $2 million that was in SG&A, which clearly is primarily a North American -- because of the early retirement of about -- so that is mainly the $2 million.

I would say this -- a short response to your question is -- almost all of the $4.5 million is in North America. There is a little bit associated with the closure of the Taiwan facility, but a majority of it is in North America. If you look at the income statement, about $4.5 million -- $1.2 million is coming through the cost of sales. $1.9 million is coming through SG&A. And then we pointed out $1.4 million as a separate line item in the income statement. But that is again -- a majority of it, Dennis, is in North America.

And do you expect more charges going forward? It sounds like there's still more actions to be taken. But have we again had the P&L hit? Or will there be more?

Dennis, we've got quite a list of things that we are -- under evaluation. We are strong believers that when we are ready to do something and have the confidence that we pull the trigger on individual actions versus trying to do an overall comprehensive, doing it all in one quarter. But it would be our intent that we would have further announcements in the balance of this year.

And then to drill more into North America, you mentioned that all the -- within the segments within North American OE, that all segments were down in terms of operating profit. I was kind of surprised that truck would be down with volumes actually having been pretty strong in the third quarter. I'm sorry, in the, I guess calendar year third quarter. Is that because of again, just raw materials? Or is there something else going on, on the heavy duty truck side?

As you know, Dennis, the truck business today is being transitioned, but a lot of our product into the truck market is copper -- copper brass. We are transitioning that; with the '07, it will be a primarily aluminum-based product. But today a lot of the truck volume, in particular on the powertrain cooling, is copper-related. And we have seen a doubling in the price of copper this year versus the prior-year quarter.

So the business remains very, very strong, as you point out. But the copper prices and just the lag effect that it takes to pass those on through has impacted that business. If you look at a graph of copper, it bumped up to the $2.00 range. And then in the April/May timeframe is when it bumped up, almost all the way up to $4.00. So again, that's the kind of price levels that we're dealing with. And there is this lag effect between the time that we can pass through to our customers.

The other element on the OE piece in North America is the platforms that we are on in automotive segment, like Ram truck and some of those, there's more inventory and so they are taking a significant downturn.

The other piece that we've seen is we supply engine components through international that then sells to Ford for diesels. And again because of fuel costs and vehicle sales, we have a significant downturn in our engine components in North America because of those sales.

A couple other quick things. On the -- sizing the potential downturn in your truck business is very helpful, looking at your -- and you're talking about your fiscal '08 there, (multiple speakers)?

Right.

And just kind of backing in, so $50 million in revenues net, so minus about 3% of total revenues. Would I kind of figure that that would mean that your North American truck business would be down about 25%, 30%? Is that kind of the ballpark, or --?

That's probably not too bad of a number. We don't break that out. But that's not --

Which is pretty nice, recognizing that you are assuming that the build is going to be down about 40%, I mean looking at your 220 number. So I'm just saying, hats off; that sounds good.

Well, you know, it's the Freightliner, but it is also content. There's, what these '07 emissions, there's increased oil coolers, fuel coolers, EGR's. So there's a nice content increase. You know, engines now, in our Company about 35% of our total volume in powertrain cooling is about 38%. And about five, six years ago, it was probably 10 points lower than that. That is off the top of my head, but I think it's directionally correct, that our content that goes -- that is attached to the engine has increased significant because of all these emission laws. And we don't see that backing off even with the 2010 changes.

Yes, good. And then just a couple of other quick things. In Asia, excluding the strikes, both at Hyundai and your own plant, do you think you might have been breakeven or at a slight loss? Is that a fair statement?

Yes, I think that's a good way of looking at it. You know what that segment has been -- the Korean operations actually have been positive. But we do have the ongoing cost of some of our expansion in China. So the segment itself has been kind of neutral until this quarter. And then you saw the $4 million loss. And again, we are saying that is primarily attributable to the strike activities.

Great. And what would you say about the overall market? I know kind of talking last year shortly after we consolidated the business into Modine, that at least the domestic Korean market had really fallen off, particularly their truck business. Has that recovered or flat? Or is the outlook worsening because of the saber rattling and all that? Can you just kind of comment on what is going on, on the market?

Well certainly the commercial vehicle build rates have come back from that trough that we have been very candid about. And it is not back all the way up to kind of where it had been at historical levels, but it has come back. So the volumes haven't been the real issue in the quarter, again, if the strike --. I would not venture to say what's going to happen with the North Korean issue. I'm just not sure at this point.

But it is not like you are hearing from your customers there that we are going to put the breaks on because consumer confidence and business confidence is plummeting so commercial vehicles will be going down?

I don't know. Right now, as I mentioned, their build rates are back up, because they are trying to make up for a very lengthy strike. So right now the business is doing much better.

Good, good. Fingers crossed. And then, remind me what the DENSO relationship is -- I guess historically and then going forward, the incremental kind of $50 million of annual business that you think the partnership should be able to achieve.

Well, we have had a long relationship, back when it was called Nippondenso and before they built their facility in Battle Creek, and they were -- they sourced product from Modine way back then for air conditioning systems that were being retro'ed through their dealer network. We have licensed technology to DENSO. They have licensed technology to us. I have been to Japan multiple times and met Mr. Fukaya a number of times. And so we have had a nice relationship, despite they are a competitor. And it is kind of unique in the marketplace.

This new opportunity, which I can't be specific, it is up to them to state it -- I am jingling coins; I was just told not to. This new opportunity, this $50 million opportunity, I can't be specific on the vehicles or the customer; that is up to them to announce it. But it is an outgrowth of -- you know, they have had great growth. And they had incremental needs on both product and volume and engineering. And we were very pleased that we came to a tier two position, and I would like to further grow that.

Because they are the kind of folks that we can compete one day and supply the next. And in fact, we have bought product from them in the past.

Great. Can you say geographically where it is? Is this coming out of your Asian operations, or is this --?

This'll actually be built in the New Mexico facility. And that is the announcement that we had yesterday on the $20 million for that new facility.

One of the advantages we also have is with the diesel -- putting diesels into North America base, we have products like called charge air coolers, that there's not much capability in North America that we have. And so beyond this conversation on DENSO, I think there's further opportunity for us to take advantage of our product skills and capacity in North America as diesels are reintroduced in North America.

Terrific, that's great. Then one last thing to follow up on a question David was asking about tax rates. Brad, I kind of remember you guys talking about some NOLs that you were able to pull out of Brazil. And I was going back to my notes and I didn't write it down. I'm just kind of wondering -- kind of what would you estimate for taxes this year and then for next year? Can you look out that far?

If you look back at your notes, you would probably find that we had a favorable tax adjustment through some tax restructuring we did with the Brazilian acquisition, which had an impact of about $3 million in the first quarter -- a very, very favorable tax planning strategy.

I would say if you kind of strip out the Brazil and you strip out the Taiwan, our tax rate for the rest of the year should be kind of in the -- call it 26, 27% rate, which is down for the reasons I explained to David Leiker.

As we go forward next year, I would expect that the rate would start to come back up as the restructuring charges get through the U.S. operations and therefore the U.S. operations return to profitability from a tax standpoint. And therefore, the income starts getting taxed at the higher U.S. rate. So I think it is premature for me to kind of speculate, but it probably is going to go back more to historical levels.

Well, let's start earning some money in North America. That sounds great. Thanks a lot. That's it for me.

David Leiker, Robert Baird.

On the new business that you announced here in this press release, is that in your backlog numbers, or will that be added to your numbers when you release that later in a few weeks?

We are going to update that. And clearly there's lots of moving parts that would clearly be added, and we've got to obviously look at the total equation.

Dave, I would say, stay tuned. Because what we do is we subtract out what we have launched.

I understand. I'm just trying to figure out if this business (multiple speakers) in that number, if it is incremental.

You know we have tried to look at that number on a net basis, and there are lots of moving parts. So, can you stay tuned on that one?

Okay. And then as you look at the '07 trucks, can you talk about what your normal content would be on an '06 truck versus what it is on an '07 truck?

That was part of this calculation that we went through to get to the $50 million. There is no question, with some of the '06 volume that we have, which is copper, brass and old technology moving to aluminum, those system prices are significantly lower. What I have been really proud of the guys is we have been able to hold the kind of returns on that sales as a percentage the same. The engine stuff -- the increased content -- and I think back to some technical differentiation, that is pretty good business. But I don't have any absolutes for you, David.

Am I hearing you say that you have actually lower revenue on that but you have more product because the material costs are lower?

Well, sure. It's actually -- you see the same thing in automotive but it's more dramatic on some of the truck stuff, because you're going from copper brass and old designs to very efficient aluminum designs. And I tell you, we have done a lot of things in order to be able to make these systems -- even though aluminum has less heat transfer, these systems have lower cost base. And in a competitive environment, they have a lower price. Does that answer your question?

Does having more product at a lower revenue offset the volume declines you are expecting to see in the build rates?

And all of that nets out to the $50 million -- 3%. It is a pretty good spreadsheet, Dave, when you look at --

Yes, but it sounds like that is -- if you have less revenue content per vehicle, and vehicles are down, I'm trying to figure out what the offset is to get your revenues to perform better than the build.

Well, we have a penetration with the Freightliner business. They have the dominant -- not dominant share, but they have a very strong share in North America. So our share is going up nicely on a year-over-year basis.

Operator, are there any more questions?

There are no further questions. I would like to turn the call back to Ms. Wilson for concluding comments.

It's certainly -- I think we're trying to earn our checks lately. We always try to earn our checks, but we are very proud of some of the success we are having on wins. I am very excited about this new organization structure and I'm surprised we didn't have any questions on that because that will be a differentiating capability, we think, in the marketplace. And all of this repositioning -- is all a matter of execution. And our team knows that it is one thing to get approval, it is another thing to execute. And we are focused on making sure that we don't have a case study for some MBA class.

So with that, we will be talking to you next quarter.

That does conclude today's teleconference. Again, thank you for your participation. Have a good day.