Modine Manufacturing Co (MOD) 2008 Q1 法說會逐字稿

Good day everyone and welcome to the Modine Manufacturing first quarter fiscal 2008 earnings call. With us today are Beth Coronelli, David Rayburn and Brad Richardson. As a reminder, today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Beth Coronelli. Please go ahead, ma'am.

Good morning everyone and thank you for your patience today on the call as we were getting the technical line set up. Welcome to today's conference call and webcast. Dave Rayburn, Modine's CEO and President, is with us today to give us some comments on the quarter and some of our current initiatives. 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. This morning's call may contain forward-looking statements such as forecasts 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 our risk factors that could cause actual results to differ from those mentioned on today's call, please see our press release and also Form 10-K from this past year.

Additionally, the slides from today's call are currently posted on the website. So if you're not able to see them through LiveMeeting, you can go ahead and also pull them up on our website through the webcast on our Investor Relations section.

With that I'm going to turn the call over to Dave.

Good morning everyone. Brad will be reviewing the financial details of the quarter and the specifics in regards to our outlook for fiscal '08. But I would first like to discuss the key takeaways from this morning's meeting's call. We are very encouraged with the impact, both internally and externally, from our actions to date in changing our business model, which I will comment further later.

I am pleased with our strong volumes in the first quarter. They are certainly stronger than we anticipated, offsetting the significant reductions in the North American truck assembly rates. We are also seeing improvement in our SG&A as a result of our recent restructuring activities. As a result we have increased our full year guidance that Brad will discuss later.

New business opportunities continue to be pursued, as they are being driven by what we call the green initiatives, emission law changes, mileage improvements, greenhouse gas reductions. We're very pleased with the win rates to date, especially with our [piston] group.

We're also continuing to make outstanding progress on a number of technical areas, including our fuel cells, especially with Bloom Energy and Ceres Power. Plant closures and new plant constructions are impacting current year results for the benefit of the long-term results.

We are still facing serious headwinds. Material costs have been significant, although we have seen some signs of stabilization, especially with nickel. Customer pricing pressures continue, but we're pushing back where appropriate. And certainly -- and the uncertainty of when and to what magnitude the North American truck market will start to recover is a question mark.

Last quarter I spent considerable time in reviewing our actions to change the business model. I will provide more update tomorrow during our shareholders meeting, which will be webcast. I plan to spend considerably extra time on our exciting technology activities.

In regards to our business model change, they are summarized under four categories. And that turns us to page 4. First organizational changes. We announced a new organization structure in November, which is five global product platforms, powertrain cooling, engine, passenger thermal management, commercial products, and fuel cells, and a regional focus for operations. We also continue to scale the support departments with global perspectives, including purchasing and information systems. As I said earlier, I'm very pleased with the impact of these changes on our business. I'm very excited.

Second, manufacturing realignment. New capacity in low-cost countries for both regional growth and source cost reduction is moving forward. Our two new plants in China are progressing. One is complete and the second is under construction. Our second plant in Northeast Hungary will break ground this month. Our new plant in Mexico is nearly under roof. And we will break ground in Chennai, India very soon for our new aluminum brazing plant. In addition we're continuing to evaluate other alternatives to support our engine products in this region.

We continue to rationalize our existing manufacturing capacity in North America. We are reducing our vehicular plant footprint by 20%, with four closings and plant consolidations. And finally, we continue to rollout our new, exciting Modine production system, which will drive standardization.

Third, rationalization of markets, customers and products. We ceased production in our Toledo, Ohio facility last month, as we chose not to pursue the next generation Liberty business, which we felt would have a dilutive impact on our financial goals. We have announced our intentions to evaluate the divestiture of our electronics business. And we also continue to review our customer relationships and our product offerings. It is all a matter of choices and leveraging our diversification model and technology. We do have a formal process in place.

And finally, technology acceleration. Technology has been a long skill set of Modine from the original Spirex radiator, multiple Serpentine products, BetaWeld processing, doughnut oil cooling and parallel flow condensers. All of these have had significant impact to our bottom line.

We have three world-class facilities globally that are unequaled. We have a unique structure in our development of product both for applications, response to customer new product, which we call our Pull system, and an advanced technology team which we call Push. We have announced a new Board committee on technology, headed by Dr. Incropera. It is not just overseeing technology, but more importantly they will support our evaluation of the commercialization of our technologies. We are aligning our intellectual property with our product roadmaps as they are defined by our five product groups just formed in November.

And finally, we announced last week the development of a new generation of air cooled product technologies for radiators, condensers, charge air coolers, and oil coolers that would be applied to multiple markets, including commercial vehicles, automotive and off-highway. We expect production of this next generation, and I would call revolutionary, products to begin on some products like condensers as early as 2009. Other components like radiators, oil coolers and full systems would follow. Meaningful volumes could be seen in the next five years with material volumes to follow. We will discuss this and other developments during our annual meeting tomorrow that I mentioned earlier.

Brad now will discuss our financial performance.

Good morning to everyone. If we look at slide 6. What I would like to point out before we go through the results is that our Electronics Cooling business has been excluded from the numbers that you're looking at. That is, it is being shown as a discontinued operations. This business did lose $0.14 a share in the previous year's quarter, and was essentially breakeven in this quarter, as we have restructured and refocused this business in support of the potential sale.

Turning to the numbers, certainly strong sales, as Dave mentioned, across most segments, with the exception of North America. And certainly the sales performance did exceed the expectations that we had set out as we started the year. Our net earnings of $12.4 million were down around 40%, partly driven by an increase in our effective tax rate from 14.4% to 29.5%. Excluding the tax rate change earnings are down around 28%.

Certainly earnings, our return on capital employed, and our margins were impacted by the cyclical downturn in the relatively high margin North American truck market. I would note, however, on a sequential basis, that is versus the fourth quarter of our fiscal 2007, we saw the gross margin improve from 13.8% to 16% in this current quarter, while the operating margin improved from a negative 1.1% to a positive 3.7%. And finally, one of our key strengths is the capitalization of the Company where we remain conservatively financed with a debt to capital ratio of about 28%.

If you turn to the next slide, this slide reconciles the change in our earnings per share from $0.65 from continuing operations to $0.39 for our first quarter fiscal 2008. So as we reconcile the change in earnings, the first bar that you see is the tax benefit. That is the absence of the tax benefit that we had in the first quarter of fiscal 2007. And this was certainly a result of some tax planning activity that we took on to utilize some net operating losses associated with our business in Brazil.

Certainly volume was positive, with the global strength -- partially offset by a decline in our North America truck build rates. Commodity prices, we are gaining traction on material pass-through, and certainly saw signs of improvement in the nickel pricing. Our overall operating performance did offset the pricing that we have with our customers, which is the model that we want as we go forward. And certainly in the area of product mix, which was a $0.16 decline in our earnings, this is again as a result of the cyclical decline in the higher margin North American truck business.

Finally, under Brazil exchange this really represented some foreign kinds currency transaction gains we had associated with our business in Brazil.

If we look at the next slide, that is a slight 8, it shows our results by segment. And certainly what we hope here is that this provides additional transparency on our overall performance of the business. What we have shown here are sales first quarter 2008 versus first quarter 2007, the change in dollar sales, and then also the change excluding the impact of foreign currency gains that we have had -- favorable foreign currency translation gains that we have had on the sales.

As noted on this slide, we have revised our segment reporting to break out South America from the Americas segment. And further, fuel cells, which used to be combined with the Electronics Cooling business and shown in the Other segment, now stands on account given the Electronics Business is shown as a discontinued operations. And again, we certainly believe that the additional break out of the segment should provide you, the users of our financial statements, with added transparency.

Briefly let me walk through each of the segments. Starting first with the Original Equipment North America segment, you can see again it impacted significantly by the decline in the build rates for the North American truck business, with the Class 8 truck build rates down around 55%, and the medium duty truck build rates down 20 to 25%. As you know, we had meaningful marketshares in both the heavy duty and medium duty truck markets. We are also impacted in this segment by nickel commodity costs as we produce high-performance engine components which utilize nickel-based stainless steel.

Finally, the results reflect temporary manufacturing inefficiencies driven by the consolidation of our Richland plant, which has been closed into our McHenry, Illinois plant.

Our Europe Original Equipment segment continued to show strength with the launch of new condenser programs, the continued strength of the heavy duty business, and moderate increases in the overall automotive business.

In Asia we had significant growth in our overall sales, with the strength of the Korean economy driving build rates up. We also had marketshare gains in our condenser and bus air-conditioning product lines. Despite the higher sales, the operating profit was in line with the prior year, due to pricing pressures from our key customer, Hyundai.

The South America segment on an absolute basis performed well. This reflected the strength of the agricultural market and truck markets where we have significant market penetration in both of these markets. You cannot compare the South America's performance against the prior year, as the prior year only includes one month of results, reflecting the acquisition of this business in the previous year's quarter.

Commercial Products, which consists of our specialty heating and air-conditioning business, continues to improve as the SAP systems implementation issues that we mentioned at year-end are now behind us. The overall profitability was impacted by the relative weakness in our higher margin Heating Products segment.

Turning to the next slide, again to set up the guidance that we will be reviewing here in just a minute, I wanted to kind of cover our key assumptions on metal pricing, given that metal pricing has been volatile and has impacted the overall performance of the Company.

Our assumptions for copper and aluminum remain in line with the expectations which we reviewed with you in May. I have given the recent strike related pressure on copper pricing. We have been in place a collar arrangement to protect us against rising copper prices. For aluminum we have locked the pricing of about 40% of our global purchases for the remainder of the year, with fixed pricing in line with our assumptions.

Nickel pricing, as you can see for the chart, have declined significantly from our May guidance, which gives us some indication that the overall material costs are beginning to stabilize.

So if we go to the next slide, let's talk about our 2008 guidance. The overall gross margin we are still expecting to be between 16 and 16.5%. The operating margin 3.1 to 3.7%. And we expect the overall pretax earnings to improve in the range of $46 million to $52 million from the $45 million that we had in our fiscal 2007.

The tax rate is in the range of 23 to 27%, which is a reduction from our previous guidance of 25 to 29%, and reflects the expected reduction in tax rates in Germany as a result of the parliamentary passage of lower corporate tax rates in that country. So net net the overall earnings per share, we are raising our guidance from -- the previous guidance was $0.80 to $1.20 per share, and we are raising that from $1.05 to $1.25 per share.

Certainly in terms of key assumptions that we have noted on this slide is we do expect that there will be a seasonal pattern in the overall fiscal 2008 results with our fiscal -- our first quarter and third quarter being the strong quarters, and our second quarter and fourth quarter being relatively low compared to quarters one and three, due to planned shutdowns with our customers.

We expect continued strength in Europe, Asia, South America in our Commercial Products business. We are assuming a gradual ramp up in the North American truck build rate. This is a question that Dave pointed out, but we are assuming in this forecast 205,000 units will be produced. The metal pricing assumptions we have already covered. And certainly assumption is that we will continue to execute on our manufacturing consolidation plan.

If we go to the next slide, and looking at our overall gross margin trend. This is a slide that we used in May. And the importance of this -- we felt it was important to actually bring it back again and just reinforce the message. Our target, we're trying to drive the Company to an 18 to 20% gross margin goal. And the factors that we feel confident that will drive us are shown on the bullet points.

We are certainly focused on profitability over growth. We have active work under way in terms of portfolio rationalization. And certainly the planned marketing of our Electronics Cooling business is an indication of the activity we have in this area. As Dave mentioned, we have significant manufacturing base realignment underway.

Our products and materials standardization is a key enabler. We have over 30 material standardization projects being worked on across the Corporation. And we're modernizing our current material pass-through agreements in order to better share the risk of commodity prices with our customers.

I would note that we have reached agreement with a major OE in Europe regarding nickel pricing. We are near conclusion on an agreement with an OE in North America going to quarterly surcharges on nickel pricing. And with one of our major truck customers in North America, we have reached an agreement whereby the underlying commodity pricing will be based on the futures market, allowing us to lock the underlying cost of the material. So good progress on modernization of our pass-through agreements. And Dave talked about our next generation technology, and certainly I mentioned the risk management that we're doing on the commodities.

If you go to the last slide, which is our intermediate-term view, certainly the return on capital employed, it is a function of our overall capital turns and the margins. Given that we are laying in a lot of fresh capital to support the new facilities that are under construction, we're not expecting a meaningful increase in our asset turns; therefore, our focus must be on margins.

As stated previously, our financial framework is for the gross margins to be in the 18 to 20% range and the SG&A at 11.5%. Yielding an operating margin of 6.5 to 8.5%, this range, coupled with capital turns at 2.5 times, will drive the return on capital employed up to the target at 11 to 12% range.

We certainly face a challenging marketplace, and the margin expansion does assume that the North American truck market will recover. But we do have plans in place that are factors that are within our control, which is changing the business model, as Dave mentioned, around reconfiguring the organization, realigning the manufacturing footprint, building advantaged product positions or exiting, and accelerating our technology innovation. So we look forward to the benefits over the next few years as we drive the improvement in our margins and associated return on capital employed, which will drive the shareholder value.

With that, why that we open it up for questions?

(OPERATOR INSTRUCTIONS) David Leiker, Robert W. Baird.

I want to start with a question -- obviously you guys had a really good quarter. I want to see if you could give us some perspective of how much better that was than what you were expecting?

Dave and I are both looking at each other. I certainly -- I think on the sales line and the performance that we had out of Europe and Asia, quite frankly, and our South American business, certainly I think it was much more positive than what we were expecting. We were expecting strength, but it certainly performed better than we expected.

Certainly the top line is very encouraging. We also have, as Brad said -- I'm very pleased with a number of the business units actually exceeding my expectations, specifically Brazil, for example. We do have our challenges. And certainly how -- and we have talked in the past how well we execute these rationalizations will have a very material impact. And so we're trying to keep our eye on the ball on those specific issues.

You took -- essentially in your guidance you added $0.20, $0.25, took the bottom end up $0.20, $0.25 or so. As you did that was there any increased expectations for Q2, 3 or 4 that were behind that, or is that all from the first quarter?

I think largely I would say that in the increase is -- it is largely from the improvement that we saw in the first quarter is what gives us confidence to raise the overall guidance.

We do have encouragement in some volume areas, as I mentioned -- as Brad mentioned where we have had a good news in the first quarter. We did reduce or assumptions in Class 8 build. We are one month offset to the calendar. So we did take that back down. But despite the volume downturn that we forecasted in our numbers, we have enough confidence in the offset, both on the top line and the operating to change the guidance.

Certainly the nickel pricing is down a little bit -- not a little, significantly from what we had previously assumed, which does affect quarter two, three, and four.

Certainly our third quarter, which is the calendar fourth and our fourth quarter which is the first calendar year quarter of next year, we have had considerable internal debate on just what those volumes are. So as soon as we get better clarity on that, we will certainly -- I will be feeling more comfortable.

Then as -- I will come at it a different way. Dave, you made a common about Q2 and Q4 that you would expect earnings to be low relative to Q1 and Q3. Are you going to be -- is it so low that you're close to breakeven in one of those quarters?

No, no. As you look at kind of the quarterly pattern of earnings, certainly our Q1 and our Q3 are comparable in terms of how the Company performs. Q2 and Q4 are also relatively comparable, they are just lower simply because of the impact of plant shutdowns from our customers.

Then the last thing here and I will let someone else jump in. If we go over the last three quarters here relative to -- your results -- bottom line results have been pretty volatile relative to expectations. Beating by a wide margin, missing by wide margin, beating by wide margin. Is there anything that can go into -- some confidence that that volatility may be behind you, or is that something that we should continue to expect here as you go through this transition in the business model?

What I would say is clearly as you look at the history of the Corporation, we actually weren't all that volatile. It is only been in the last couple of years as the commodity prices have been very, very highly volatile, and there's a lag between the time that we see the commodity prices hit the P&L and we can adjust our prices. So I think the volatility in the earnings that you are referring to, again, is a function of the commodity prices. We are seeing some stabilization in the commodities, with aluminum being fairly stable. Copper, I'm pleased to say again as I mentioned in prepared remarks, that although it is starting to increase a little bit right now, we have put in place a collar to protect us against rising copper prices. And nickel is now -- it is volatile, and it is now volatile on the downside. Again I think that the volatility of the earnings that you have struggled with clearly is a function of the overall commodities.

I would also add that volume is certainly quite volatile right now. The first quarter truck volumes were significantly below what we had in our plan. As I commented earlier, we had offsets. And in some of our businesses our visibility in regards to volumes is not as far as we would like to have. And anytime that, as you know, you are restructuring operations, as we are both building and closing, that creates some little anxiety in the manufacturing folks on how well we -- as I said before, execute is key. But that is one more equation I think over the next 9 to 12 months is very real.

(OPERATOR INSTRUCTIONS). Rob Damron, 21st Century Equities.

I wanted to ask more specifically about your Asian business. Certainly we saw a real nice topline growth this quarter, but it didn't result in improvement in operating income. You mentioned briefly there were some pricing pressure with your largest customer there. Maybe you could just give us a little bit more color on that situation and what you're doing to improve the operating margin in that segment.

There are certainly a lot of activity in regards to growth. I mentioned the two facilities in China, the one is up and operating. That was actually an expansion. We more than doubled a facility size by moving to a new location. And then the facility in Zhangzhou short term is creating some earnings impact, but we are very pleased with the progress of filling that plant up.

And also the long-term issues that we have, or opportunities we have in India, I mentioned the first plant we have under construction. And we do need a second plant for the engine products. Those two elements of our business I'm very excited about, both from the relationships that we're building, the quality of the facilities and the manufacturing strategies they have, I am very pleased.

We certainly had a challenge in Korea. We're not unlike anyone else that operates in Korea. The annual negotiations of labor is a very frustrating process. But we're making some headways I think in regards to better defining our relationships, and understanding with our union in regards to what the long-term opportunity they have with cooperation. But I don't want to oversell that. We've got a journey to make.

We've also got some further challenges in asset utilization in Korea. We certainly absolutely has to fill that asset base up. I have a lot of positives about Asia, but we've got some work to do. And we know what that work is, and we are going to continue to focus.

Just a couple of other questions. In some of these new contracts that you have been signing over the last year or so, have you made any changes with regard to the price down -- annual price down pressures that are written into these contracts? Are there any changes with that that could possibly help the operating margin going forward?

There is certainly a chemistry with every customer. And a lot of that depends on what you have to offer. And where you have technology and differentiation from brand X, the negotiations can have the better balance between us and the customer. And the area that I feel very good about is our engine products, where we do have differentiation capability. And I hope none of the customers are listening, but I really do feel that we have a little more leverage, both on productivity and absolute price.

The area that has had some challenges in the past is powertrain cooling, with the traditional front-end modules, the radiator business. And the new technology that I mentioned, I'm very excited about. We have multiple patents that have been inputted. We have more coming. This is game changing technology. That would allow the playing field to be balanced -- better balanced with those customers that value technology. And I maybe sound like I'm preaching to our organization, but we can make a significant difference for our shareholders with customers that the technologists have a seat at the table. And that is the customers that we're going to pursue. And the customers that don't have the technologist at the table then we will be purely opportunistic.

That's fair. Just one last question on the realignment of the organization and the cost associated with that. Have you quantified what the additional restructuring costs will be going forward, if any?

It is Brad. I just want to also just follow-on on Dave's response on the price down, which I think was very, very good. I would just note that as we approve our programs going forward, we have been making a lot of changes internally to the financial metrics that we're using to improve capital, and all of our capital programs must meet the 18% margin objective. And so that is what we're targeting the Company. And that is over the life of the program. So that factors in the annual price downs that we have committed to with our customers. That is -- I just wanted to mention that as just a follow-up.

I think it is specifically to your question on the restructuring costs, I would say that, one, it is built into the guidance that we have provided you already as to restructuring costs. There is probably another $1 million or so associated with the closing of our Jackson and Clinton facilities that will impact the results this year. But that is factored in to again the guidance that we have provided.

Adam Hurwich, Calcine Management.

Just a question going forward. One thing that we are hearing a lot about in the press is diesel applications in the U.S. And from one I'm hearing, these applications basically to hit environmental regulations are going to require much higher temperature performing engines. It sounds to me like one of the things you are driving at with your new products is the ability to handle these engines. If that in fact is a correct read, should we see you getting any leverage from the proliferation of diesel in the U.S.?

More on a macro basis on engine, we have a differentiating technology on a global basis. So there is leverage in Europe, for example, and in other areas where diesels already have been expanded very rapidly in the automotive side. So as dieselization happens in North American, we should see opportunities for charge air coolers, EGRs, exhaust gas recirculation coolers. The only issue that you have in the lower performing vehicles or the low end diesels, those components can be very commodity type. So we focus on the diesel side, but where the technology trades differentiation versus just scale.

And just to follow up on that, because one of the things I was referring to is, we're using new materials, new types of iron in diesel, and it seems that diesel engines in general, especially D versions, D models, are going to in fact be using these new technologies. But it sounds like in fact if they go that way, that means your opportunity would be bigger in those type of platforms.

There is no question there is more heat transfer content in a diesel engine versus gas.

Got it. Thank you very much.

And with the new emission laws that we certainly absolutely have seen in the heavy truck side, as each one of these comes about the incremental content that we have an opportunity to secure, with each step there is more content.

(OPERATOR INSTRUCTIONS). David Leiker, Robert W. Baird.

A handful of more questions here for you. Brad, on slide 7 where you went through the EPS, and I think the slides and the incremental exposure here I think that is all great. The volume number -- that was positive $0.04, can you give us some idea of how your commercial vehicles business performed? When the market was down 50, 55% what was your volumes down -- your revenue?

I would draw your attention to slide 8. And without -- I don't have the specific response to your question. We don't have the real laser break out. But I would say that if you look at that OE North America, the $44 million drop that we saw in the overall revenue, that was largely due to the decline in the North American truck market. Because our other markets like our heavy duty market, which services the ag and construction markets, remained sound. And the overall automotive market is net low, but in terms of year-over-year it is not a significant factor. I would say the majority that decline is in the truck market.

We also had a kind of a double whammy on, not only much lower industrial build than we had had forecasted, our Freightliner business has started up slower than we expected, because they have been successful in selling quite a few vehicles into Mexico and other locations that are using the older technology. And so we expect that ramp up to pick up, but that was kind of a double whammy during the first quarter.

And the truck market has how much of your North America business these days? Is it one-third of it?

You're talking about the medium duty and the heavy duty?

Yes.

It is more than one-third of the North American.

Is it more than half?

It is about -- oh, yeah, it is more than half.

You have gotten a lot of new business awards here that you have been announced lately. I know that you typically do this in November, but is there any way you can give us an update on what your book of new business is like over the next three years, just to give us all a better sense of where the revenue line can go over time?

I know everybody likes the net new business number, and we do keep -- we keep scorecards. But I think it is more important for us that we have confidence in what we have said our organic growth will be is 4 to 6%. And as we have been looking at the business wins, especially in the engine side and the powertrain cooling, I would say we are ahead of what our expectations were on wins.

The electronics business, have you done -- I don't think you have done disclosure restatement numbers yet for discontinued operations, have you?

Yes, we have. If you looked at our press release, you will see in the income from continuing operations --.

I mean for last year.

Well for the previous year's quarter we have not disclosed -- you're right -- we have not put out a release saying what the remaining quarters look like on a restated basis.

Can you disclose that to us?

I don't see any issue with doing that certainly.

What was the full year -- do you know what the full year for '07 was for discontinued ops?

What I would suggest is just that we would disclose this in our 10-Q filing. We will put a schedule in that shows the quarterly, excluding the discontinued ops.

But could you tell us what the '07 number was for the full year?

The '07 was about $0.11 per-share loss.

That means the balance of the year -- of last year had made a little bit of money. You had a charge -- that number that you have in this quarter included the impairment charge last year, right?

We had -- I think what you are remembering is actually Q2 where we had a charge, but we also recorded a favorable tax benefit associated with the way that we restructure the closure of our Taiwan operations.

Okay. And where are you in the process of selling that business?

Right now we are in the process of compiling the offering memorandum. And the phone calls are starting to be made to lineup a list of potential buyers. We're very encouraged actually with the number of both strategic and financial buyers who have requested the offering memorandum. My expectation at this point is we will go through a very robust sales process. And we're targeting to close the business -- on the sale on the business again if we get an acceptable price, close on the sale of the business in late this calendar year.

I would also add that I am very proud, and I'm pleased with the management group of that business. We have spent a lot of energy over the last year and a half of restructuring that, getting focus on specific markets. And I am pleased that that management group is focused and actually on plan.

What is the value of that on your books right now that you are carrying that at?

I would say if you look at the balance sheet --.

If you add up the assets and liabilities it is about $11.5 million? Is that --?

That is a good assumption.

Great. Your corporate expense number is coming down. Is that a sustainable level where we are at today?

Certainly, you know again as Dave mentioned in his prepared remarks, we went through a significant kind of restructuring here in Racine, as well as in Europe. We have some work going on in South Korea in our operations and also in Brazil with -- the overall objective, as we laid out, was to take $20 million out of the SG&A costs. And so we are starting to see the benefits of all of the initiatives that we have undertaken in the last 12 months.

This will be a continuous process. We've got more work to do. We are doing some offshoring in some areas that I think will bring speed as well as bottom line value. So that 11.5% goal is absolutely in the cross hairs long-term.

On Brazil, I understanding you only had one month in the numbers last year. If you did a pro forma for that in the quarter how did that business perform?

We thought you were going to ask that question. What I would simply say is the overall income on a pro forma basis is up for that business.

What about on the revenue line? I thought this was like an $80 million business or so when you bought, and it seems like is running at a much stronger pace than that.

That's correct. We are seeing --. Actually when we bought the -- while we were doing the math and we bought the first half, it was like a $46 million business. So we're very, very pleased with that management team.

We are seeing the sales up between 15 and 20%.

Is that type -- is that a sustainable number?

But certainly, and Dave may want to comment on this, that based upon the new program wins that we have in that business, and quite frankly given that business is focused primarily on the agricultural market and the truck market, which is clearly very strong as a result of what is going on with ethanol, new program wins and overall market growth we think that it is sustainable over the next at least two to three years.

We're also using that facility as an LCC storage to bring product back into both North America and Europe.

Where the math makes sense.

A couple of other ones. Brad, on slide 7 where you have the product mix, a negative $0.16, I think I have heard you attributed a lot of that to the impact of the truck business, Where I thought that would have been netted against the volume number of a positive 4.

No, so the volume is calculated, what I call a standard margin. So we look at the mix and the loss of the truck business, which is above our average margins. That is what you get the $0.16 impact.

Okay, and what kind of contribution margin are you running that through on the standard margin?

It is roughly about 25%.

One last question here. A little nitpick question. The other current asset numbers are up pretty big year-over-year. Sequentially it is up not quite as much, but what is behind that?

They are grinning, so I assume they expected that question.

(multiple speakers) late last night on this, whether or not you would ask the question. What is going on there is certainly there is some prepaid insurance. We prepaid our insurance, and then that is expensed over the balance of the year. That is not an insignificant number. But the most significant number is clearly as we're funding the operations in Asia, we have transferred quite a bit of money to Asia in support of the China facility and in support of the India facility, which has yet to roll through the capital investment side of the business.

Dennis Scannel, Rutabaga Capital.

Excellent progress. Just to drill down on the Asian segment a little bit more, are we talking about kind of some one-time plant startup costs in India and China or -- that we will again see more incremental EBIT coming out of that segment as revenues ramp in the coming quarters? Or is this more look at business coming in in March fiscal '09 and fiscal 2010 that we will really start to see improvement on the EBIT as you diversified that business away from just Hyundai?

I think your assumption there is not all that bad in terms of the expected improvement -- the timeframe, if you will, for the expected improvement. We have clearly rolling through the Asia segment our startup costs that we're incurring associated with the start of the India facility and the China facility, which probably are in the $0.5 million range for the quarter. So a couple of million dollars annualized impact on the business. I think your timeframe that you laid out is probably reasonable.

That is really all I had. Everything else was pretty much covered. Again, very nice progress.

Sir, we have no further questions at this time.

I really certainly appreciate the participation this morning. At least the count that I see, as we have a large number on the call. And I appreciate the interest. We have a lot to do, but we're getting a lot done. And I feel very, very good about the progress, the team that we have, and the accountability in the model that we have created in regards to the newest organization structure.

So we look forward to hopefully maybe at least having some of you listen tomorrow on our annual meeting. We are going to do a little more deeper dive on technology. And look forward to talking with you at the end of our second quarter. So thank you.

Thank you.

That does conclude today's presentation. We appreciate your participation, and wish you all a great day.