Modine Manufacturing Co (MOD) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Modine Manufacturing Company conference call. My name is Carmen; I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

Now I would like to turn the call over to your host for today's call, Ms. Susan Fisher, Director of Investor Relations and Corporation Communications. Please proceed, Ms. Fisher.

Thank you, operator, and welcome everyone to Modine Manufacturing Company's third-quarter fiscal 2008 earnings call. Joining me on today's call are Modine's President and Chief Executive Officer, David Rayburn, and Modine's Executive Vice President and Chief Financial Officer, Brad Richardson.

Our format for today's call will include approximately 20 minutes of prepared remarks followed by a Q-and-A session at the end.

Before we begin, I would like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Modine's current expectations; and the Company's actual results, performance, or achievements may differ materially from those expressed or implied in these statements based on the risk factors that are outlined in the Company's filings with the SEC.

So without further delay, I would like to turn this call over to Dave Rayburn. Dave?

Good morning and thanks, Susan. Brad will be reviewing the financial details of the quarter, quantification of the additional restructuring actions, and earnings guidance. But first, I would like to discuss our business strategy, which is evolving, and the key messages from today's release.

Our business strategy is focused on thermal management, heat transfer; and technology is a key element of our strategy as we are demonstrating in our engine products group, our exciting new technology for powertrain cooling called Origami, which I will discuss later, and continued progress with our fuel cell group are just three terrific examples of technology differentiation.

Diversification model continues to be a strength. We are diversified in our products, our markets, our customers -- our largest customer is only 11% of our total sales -- and geographic diversification. And that is certainly changing as we move more rapidly into Asia.

We have had a small plant philosophy for many years, and that has served us very well. Certainly, having a competitive cost base will drive profitable growth.

As we have discussed in past calls and today, we have a number of strategic actions in process to support this strategy. Our strategy has to evolve in order to be able to meet the global challenges that we have in an ever-changing business environment.

An example of strategy change is as a small plant philosophy. We're going to manage scale. As a result of lean activities, robust quality systems, and product standardization, we're able to now leverage up our plants to a larger size called managed scale and thus have better fixed cost absorption. But these facilities will still have the strong attributes of our small plant philosophies of good, strong, employee relations focused on specific operations and processes, and very visual factories. But our strategy will continue to evolve.

So what are the key messages for today? We are very pleased with the strong profitable growth in performance and Europe, South America, and our Commercial Products Group. Our OE business in North America has significantly underperformed, and a very large frustration for myself, and a disappointment that we are addressing. We are down 27% on a year-over-year basis in volume. The truck market has been slow to recover. Marin compressions continue to be an issue within this segment.

The most important message I want to leave with you is that we are addressing these performance issues aggressively with leadership, incremental resources and skills and metrics, and additional restructuring. The Board has announced additional restructuring actions, and we anticipate closing three US plants, additional plants, as well as the Tuebingen, Germany, facility. This will yield within 18 to 24 months $20 million to $25 million worth of annual savings.

Our debt agreement has been amended, and Brad will discuss that further. We are implementing a capital allocation process which is aligned with our new organization structure, our product organization structure. And we will be working diligently on more capital management and working capital.

We have excellent technology which is driving growth. As we have discussed in previous calls, the environmental changes -- both legislated as well as oil shortages, etc. -- are driving Modine into great opportunities as thermal solutions are part of that environmentally-driven opportunities. We also are moving into new regions.

So what is our restructuring activities? We will be finishing up shortly, in the next two quarters, the initial four facilities that we announced last year which will yield a gross margin improvement of 6/10. It's very difficult to make these decisions, these incremental decisions, especially for me as a former plant manager. But we intend to close a facility in Europe, and an additional three facilities in North America.

We will be consolidating most of the manufacturing in existing floor space, although some products will move to low-cost countries and outsourced. This is all a result of past lean activities and quality systems.

To reinforce the scale concept, North American sales when completed will double on a per-plant basis from current levels. But again, maintaining those attributes that I talked about before.

A key element of our plant rationalization activities is rationalizing products. We will be rationalizing products from our sending plants, the plants that are be closing, as well as rationalizing products in those receiving plants. And we have demonstrated before that that has not had a significant volume impact; but it has a significant impact -- improvement impact in reducing complexity in our facilities.

We do have additional restructuring activity under review in Asia due to the lack of meaningful profitability. Tom Burke, our Chief Operating Officer, is driving the Modine production system. I am very excited about this new system. It is a top-down system that will accelerate the deployment of lean strategies. It will drive further asset utilization.

Last quarter, I talked about new appointments, new regional leadership in North America and in Asia. We certainly with these most recent restructuring activities stretched our North American management team; and unfortunately it was obvious in our numbers. So a lesson is learned. In regards to our incremental activities, we are going to have a dedicated restructuring team that will be focused on these closures and product transfers; while a separate team will be focused on the ongoing business and product launches.

We also engaged in a third party, the Highland Group, to help us plan and also execute these important plans. They have brought excellent skills to Modine.

Additional actions are focused on allocation of capital and product portfolio rationalization process that Brad will further discuss. We're near completion of the divestiture of the electronics business. We are evaluating noncore joint venture structures. We continue to have multiple activities and review in regards to rationalizing our overall business.

Finally, further SG&A cost containments are underway. An example would be offshoring business processes. Our new plant in Chennai, India, will have an engineering design center as part of that, and that will allow us to leverage that low-cost country to support our overall global engineering activities.

Finally, growth. By having the right cost base, we can grow this business very profitably. As we have talked in the past, we have four new plants under construction in Mexico, China, Hungary, and India. They will all be operational this next fiscal year. In fact the new China plant is shipping product this month.

We are funding new business wins in both Europe, Asia, and Northern America. An example is eight programs for EGR coolers for the 2010 engine launches in North America will add $125 million of incremental business; and that will create a scale facility in Joplin, Missouri. We are capitalizing on these new series emission laws; a number of them are listed on the slide. That will increase content like EGRs, and we expect to have incremental penetration, excellent penetration growth in Europe, leveraging our North American reputation.

As we have talked in the past, we've introduced a number of new technologies for our vehicular segment. A new offering that we announced six months ago, which we call Origami, is a new set of components and processes for our traditional radiator charger cooler and condenser business. These are patented designs and processes. It improves the performance of these products. They will work at higher operating temperatures and pressures, and they are much lighter. And all that means is differentiation.

We have active programs with a number of select customers that appreciate new technology.

We are very pleased with the progress in our Commercial Products Group, immediately and long-term. They are working very hard on expanding relationships and expanding their product portfolio. We're doing a better job of transferring the technology from our vehicular segments to this business.

Finally, fuel cells. We have talked about it in the past, I continue to be very excited. We are now entering the preproduction stage ramp-up for these stationary power units. We are going to see incremental resources deployed, both capital and people, into this segment in order to be able to support its outstanding long-term opportunity.

So with that, Brad, would you make some comments in regards to the quantification of our strategies and some further detail on our actions?

Thank you very much, Dave, and good morning to everyone. Let me, before I get started, is just recognize that the announcement that we had on December 13 where we identify the potential for potential impairments as well as the potential for additional restructuring, and we certainly recognized with that announcement that that was clearly a destabilizing event for the investors.

It was, though, something we had to do as our obligation that we had to you as the investors, as we see things in our business, of being full in our disclosure. We believe with Dave's comments, the release today, as well as the agenda that is laid out here is that we are focused on providing greater clarity as to the issues and our response to address the underlying business performance, which is primarily related to our North American OE business and our Asia business.

The agenda laid out here in front of you will provide an update of the third-quarter financials; action plans to address business performance; an update on our financing activities; earnings guidance; and finally a summary.

So if I can turn to the next slide here, titled third-quarter highlights, it does provide the highlights of our third quarter fiscal 2008 results. I would note that the results are from continuing operations and therefore exclude the electronics cooling business, which is in the final stages of being divested.

Key themes for the quarter include an overall increase in sales of $37.2 million, or 8% as Modine continues to benefit from broad geographic diversification, with strong sales outside of North America and within our Commercial Products Group, offset by the sizable 22% decline in the North American OE business due to significantly lower truck build rates.

The gross margin as a percent of sales declined to 15.5% from 17%, reflecting a mix impact as we experienced lower North American truck build rates impacting fixed cost absorption. In addition, we have experienced ongoing operating inefficiencies within this segment. The financial results also include asset impairments and a deferred tax valuation allowance, which will be covered on the next slide.

All-in, Modine lost on an after-tax basis $47.5 million compared to $16.4 million profit in the previous year's equivalent period.

Turning to the next slide, let me orientate you to this slide. The top line shows the all-in financial results from continuing operations for the quarter, including a pre-tax loss of $15.7 million; EBITDA of $7.8 million; and an earnings per share loss of $1.49 per share. Again, these results do exclude the electronics business which is shown as a discontinued operation.

The reported results include $31.5 million in impairment charges. Let me walk through those for you. First, we impaired $23.8 million in goodwill in our North American original equipment segment. Although we remain very confident in the turnaround of this business, our expectations for growth in this mature market have been tempered and we are not as optimistic on the margin levels of this business, given industrywide issues including cost pressures and customer pricing pressures. These factors obviously impact the value of the business, leading to an overall impairment of the goodwill.

A $3 million fixed asset impairments charge was also recorded in the quarter, due to a specific program in the North American original equipment segment that is not able to support the invested capital in support of this program.

A $4.7 million impairment in Europe is associated with Modine's intention to close its Tuebingen, Germany, manufacturing facility. So you can see that adjusting for the total impairment charges, the pre-tax and EBITDA are $15.8 million and $39.3 million, respectively.

Moving to the far right column, the EPS for the Company is a loss of $1.49 per share. If you adjust for the impairments and a $40.4 million deferred tax valuation allowance, the underlying EPS is approximately $0.50 per share.

I would note that the $40.4 million reflects a valuation allowance that was applied to the US deferred tax asset base, reflecting that it is more likely than not that the US deferred tax asset will not be realized, based upon the reduced outlook for the North American original equipment segment.

The table shows the performance of our business segments both in terms of sales, the change in US dollars, and the change excluding the impact of exchange translation. The table also presents the change in operating income by segment.

Briefly let me walk through the segments. 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 a moderate increase in the automotive business. The operating income of $27.8 million was an all-time record for this business and does include the $4.7 million impairment charge previously discussed. Excluding this charge, the incremental sales in Europe converted into operating income at a very healthy 28% rate.

The original equipment North Americas segment was impacted by the significant declined in the build rates for the North American truck business, with the Class A truck build rates down 50% and the medium-duty truck build rates down 30%. As you know, we have meaningful market shares in both the heavy-duty and medium-duty markets. The results also reflect manufacturing inefficiencies associated was plant consolidations, new product launches, and quite frankly inefficiencies that are created by the peak-to-trough nature of the truck market.

South America on an absolute basis performed well. This reflected the strength of the agricultural and truck markets, where we have significant market penetration. I would note we continue to be very pleased with the buyout of our partner, giving us a 100% equity in this business.

The Commercial Products segment, which consists of our specialty heating and air conditioning business, showed very meaningful 12% revenue growth and overall respectable margins, reflecting strong heating product sales in North America.

This slide provides the key profit factors for the third quarter that contributed to the variance in pre-tax earnings from last year's pre-tax earnings of $19.1 million to this quarter's loss of $15.7 million. Looking at the key operational factors, we experienced a significant decline in the North American volumes, as we have discussed, contributing to a $15.4 million drop in profitability. Partially offsetting were strong volumes outside of North America.

Also contributing favorably to the results was the positive impact of materials, as we have gained traction on pass-through of underlying commodity prices for copper, aluminum, and nickel, which have been stable to declining for the last several months.

Negatively impacting profitability -- and as Dave mentioned, disappointing to all of us -- are the continued operating inefficiencies in our North American original equipment business related to product transfers resulting from previously-announced closures. We are also launching new engine products; and again as I mentioned earlier, as you can appreciate, we are experiencing inefficiencies that come from the peak to trough demand for our products, driven by the North American truck market.

Shown in the other miscellaneous is a very positive story, as performance improvements outside of the North American OE segment offset pricing and mix issues. As previously discussed, in the last two bars we also had impairments that negatively impacted the quarterly results.

As you know, since late 2005 the Company has been buffeted with multiple macroeconomic issues, starting first with a rapid rise in commodity prices and most recently a material drop-off in the North American truck market. What we are announcing today are further actions that the Company is taking to ensure that we achieve the financial framework that we have been consistently targeting, all designed to get the Company to an 11% to 12% return on capital employed.

The plans include the closure of an additional four plants, three here in North America and our Tuebingen, Germany, facility. We expect these closures to be completed over the next 18 to 24 months. These decisions no doubt have a significant impact on our employees, who have worked extremely hard to ensure the viability of our North American and European manufacturing base. However, to be responsible to you, the investors, we believe that the program has very strong returns with the expectations that the total cash costs for this program to be approximately $30 million to $35 million, and when completed will save approximately $20 million to $25 million per year.

Included in the cash cost are expenditures for severance, equipment transfer costs, as well as productivity and scrap-related costs which occur when products are transferred. As Dave mentioned, we have retained an outside consultant to ensure that we properly plan and execute in order to minimize disruptions and overall cost.

The benefits we expect to achieve -- factory and labor savings, but also scale benefits from operating our facilities at higher levels of utilization. I would also note that the total costs of the program, we expect -- that the total costs of the program includes approximately $10 million which will be recognized in Modine's fiscal 2008 fourth quarter.

Other elements of our plan include reducing our overall capital investment into the business to $70 million to $80 million, which is below depreciation rates. Other factors include rationalizing the portfolio, of which specific dollar amounts are still under review. We also continue to focus on our target of driving the SG&A levels of the Company down to 11.5% of revenue.

So how do these actions impact the overall margins of the Company? Most of you will recall the left-hand portion of this slide from our last investor presentation, where we estimated on a normalized gross margin relative to the 18% to 20% target that we have established for the Company.

On the left-hand portion of the slide, you will see that we are estimating for fiscal 2008 a gross margin of 15%. If you assume a more normalized Class A truck market of 280,000 units, this would add about 1.1 percentage points to our margin. Getting the North American operating inefficiencies and previously-announced facility closures behind us, adds to the normalized margin, bringing our estimated normalized margin up to 17%.

The benefits of the foreclosures that we are announcing today will add an additional 1 percentage point to our margin when completed. Over the next two years, we do see some pressure on our margins from product mix, but we expect to offset those through exiting low-margin product lines -- that is, portfolio rationalization. We also see the absorption benefits as the Company continues to grow.

Therefore, with what we are announcing today, we see a relatively clear path over the next two years on driving our margins up to 18% to 20%.

Two critical elements of the plan that we are laying out today for you are capital allocation and portfolio rationalization. As Dave mentioned, our new organization structure that has been in place for just over a year now is organized around global product lines and a regional operating model. We have a structure that now aligns with strategy, thus enabling us to now look at our product lines within and across our regions and assess them relative to the framework that you see on this slide.

We are assessing our product lines strategically; that is, understanding Modine's competitive position and the overall business attractiveness. Product lines in the red area will be divested or exited. We are also looking at the product lines relative to the financial metrics, which are directly linked to the overall financial framework that we are using to run the Company.

It is the combination of strategy and the financial framework that is driving decisions on the overall $70 million to $80 million in capital that we can afford to invest in the business and decisions regarding which products will be retained and developed for growth, and those that will be exited.

All of these actions that we are taking and discussing today and the strategic thinking within the Company are designed to achieve the 11% to 12% return on capital employed goal. It is the combination of the gross margins, driving the SG&A from 12.9% today to 11.5% over the next two years, and increasing the capital turns to 2.5 to 3 that yield an 11% to 12% return on capital. The improvement in the capital turns, which is an increase from previous guidance, is a function of holding the capital investment at $70 million to $80 million, below depreciation rates, and very tight control over our working capital.

In support of these objectives, I would note that the Company's cash bonus incentive system is being changed and will compensate the eligible employees based upon performance in the areas of gross margin percent and working capital management.

I know there has been concern raised regarding the amendment process that the Company has gone through which was driven by significant non-cash charges that were not contemplated when certain of these agreements were put in place. You can see on this chart the primary credit facilities of the Company. I would note that under the $200 million revolving credit facility, we had drawn at the end of the third quarter approximately $80 million. Under the amendments, we clarified covenant definitions to permit the add-back of non-cash charges, as well as certain cash restructuring costs that we expect to incur, resulting from the manufacturing realignment program that both David and I discussed.

We also amended the interest coverage ratio, that is EBIT-to-interest, to reduce the ratio during the heavy restructuring period between now and the second quarter of our fiscal 2010. Bottom line, we believe we have attained the financial flexibility to carry out the restructuring program while still funding highly strategic programs that support our 4% to 6% organic growth target.

As you would expect me to say, however, this financial flexibility is dependent on a balanced view of the macroeconomic environment and our ability to execute and deliver on the business plans that were utilized to set the revised interest coverage ratios.

Let's turn to the guidance. We are in the last two months of our fiscal 2008, and this slide provides the final guidance for this fiscal year as well as some initial thoughts on fiscal 2009 expectations.

I would draw your attention to the yellow highlighted column. Excluding impairments, the deferred tax valuation allowance, and restructuring costs, we are expecting for the full year approximately $1.8 billion in revenues, a 15% gross margin, and $35 million of pre-tax earnings, which equates to approximately $1.10 per share, in line with our previous guidance.

The fourth quarter is typically our weakest; and we are projecting an approximate $3 million pre-tax loss.

On an all-in basis, under the column called Unadjusted, this includes all the special factors that we have been discussing today, plus $10 million in fourth-quarter restructuring costs. On an all-in basis we expect a full-year loss of $1.33 per share.

As we turn to fiscal 2009, we do expect continued strength in Europe, South America, and within the Commercial Products Group. We are seeing in our order books a gradual recovery in the North American heavy-duty truck market with builds increasing from the current annualized rate of 202,000 units to 240,000 units for our fiscal year, or 228,000 units for calendar 2008.

Fiscal 2009 will be a heavy year in terms of restructuring as we have previously discussed. We do expect the Company's effective tax rate will be much higher than historical levels until such time as the US tax jurisdiction returns to profitability.

So in summary, there is no doubt that we are extremely disappointed in the overall performance of the Company and the impact that that has had on the share price performance relative to our peers and relative to the market. Our commitment to you is to turn this around and regain your confidence in the Company and its prospects, which we believe are fundamentally solid.

In summary, we have very, very strong performance in Europe, South America, and Commercial Products. We have strong growth coming, and we are recommitting to our 4% to 6% compounded annual growth rate. We understand we have underperformance issues in North America; and those are actively being addressed. We believe we have the financial strength or the financial liquidity in place to support the funding of growth in support of the 4% to 6% compounded annual growth target.

The action plans that we're talking about today to address the underlying business performance include the manufacturing realignment -- that is, the closure of four facilities -- saving when complete $20 million to $25 million in cost. The capital allocation discipline, reducing our capital investment to $70 million to $80 million. We certainly have significant activity underway in terms of portfolio rationalization and the commitment to reduce and control the SG&A to 11.5% of sales.

So this is our plan. And at this point we would like to open it up for questions and answers.

Operator, we are ready for questions.

(OPERATOR INSTRUCTIONS) Andrew DeAngelis from KeyBanc Capital Markets.

Good morning, guys. First of all, I just wanted to dig in on your expectations relative to North America, relative to the change that has occurred. Can you talk about the mix of the inefficiencies that are currently occurring? And you know, the changes in the external environment that have prompted the changes in your expectations going forward for that segment?

Yes, let me talk about the operating side, and then I'm sure Brad will have some additional color. From the operating side, and certainly as I mentioned, we had a lessons learned in regards to the consolidation work that we went through. Some of it has gone very well; some of it candidly was -- had some frustrations with it.

Coupled with that, we have had a number of new product launches. As I mentioned, that management team was really stretched very, very heavily. So that is why we are taking the actions to put incremental resources both from an internal reprioritization, as well as bringing the Highland Group in.

So, I have a lot of confidence in the execution of these plans based on what we have learned. Some of it was very positive, but also some things that we have learned that was not so positive. Brad, any other further color on that?

Yes, Andrew, and I think, you know, I think it is clear to point out here that we do see continued growth from where we are in the North American business, as the truck market recovers, and also because of some of the engine programs that Dave mentioned in his prepared remarks.

But as we look at the overall growth rates to what we had previously thought, again, the growth rates have come down. In addition, I think there are some, what I would call -- you specifically asked about the mix issue. Certainly with some of the automotive business that we have here in North America, it is not as profitable as we had expected. So our overall margin expectations for the business have also come down.

Finally, as it relates to the margins and overall revenue in the North American business, some of our business is moving to other Modine facilities, in particular in South America, which does impact obviously the value of the Original Equipment - North America segment that is offset obviously by enhanced value in our South American business.

Okay, maybe just a couple follow-ups there, based on your response. Could you maybe first speak to the progression of the inefficiencies that you experienced within the quarter? Are they getting better as we exited the quarter? Maybe a little bit more recent update into January.

Yes, the primary issues that we have right now, that we are experienced, is actually related to product. I would say we are probably in a 75% of our variances today are related to some product launches that we have gone through. We have very aggressive activity in addressing those. Those issues are solvable, but you do have to go through a product validation process with the customers when you make process changes.

I am pleased that those variances from the product launches have been well insulated from the customer. That is very important, that our relationships continue to be very strong with the customers that those programs are involved in.

We are winding down the last two plants of the first four. It is critical on one of them that we get some product up and running which has been validated or being validated at two of our facilities. I think we have a very focused activity on that and good leadership on that.

Are we at a high-water mark in terms of the product launches within the North American region?

No, I think we have turned the corner on it, and it is getting to where that light at the end of the tunnel is certainly light and not a train.

Okay. I guess, just moving on to the actions that you announced this morning, obviously the extent of it, the times involved, running up to 24 months, kind of brings you clearly into the next prebuy that we expect to occur in '09. How do you guys kind of think about the impact the restructuring activities will have kind in the out years as the industry does through the prebuys?

I think (multiple speakers) I can't at this point get specific on the plants that are going to be impacted as we work through our finalization activities and deal with our employees and unions. But I would say that most of the activity would not be influenced by the ramp-up of the heavy truck.

But clearly, that will create some pressure internally as you guys, I would expect, ramp volumes ahead of the --?

Absolutely, Andrew. That is why I think it is a very important structural change that we have made is that we do not want to take the focus off of the everyday operating. Any further launches that we have in this period -- those were actually be two separate management teams that will be reporting to Jim Rulseh, who is responsible for the region.

I can't underestimate or reinforce the value that the Highland Group is bringing to us in regards to thinking things through in a very disciplined manner.

Okay, could you guys maybe speak a little bit more in depth in terms of the strength that you guys clearly experienced in Europe this quarter? The 28% incremental obviously being pretty notable there. In terms of maybe product mix and just general demand trends.

I will comment and then I'm sure Brad will have some additional contents. We have a strong management team in Europe. We do have some very strong programs in multiple segments. The truck market is very strong there.

Their -- I would say a large part of their performance is a result of what we've done over the last couple years in that region in regards to bringing programs on responsibly with what is called an APQP process, etc.

I would be remiss to say life is wonderful and there is no problems in Europe. As every one of our regions has, you can't enjoy the sunshine and not look deep into your organization in regards to what are the issues that need to be addressed.

And despite their very strong performance, it is time that we deal with the Tuebingen facility, as that is manufacturing product that is very old technology, copper, brass, and some high labor content product that needs to be made in other regions. So it is very important for us as we look at our business, as we look at every one of them on the very -- in the detail to ensure that we are not being misled by maybe a volume ride or other success that we have in the short term.

Yes, Andrew, I would just add, again, as we mentioned kind of in the prepared remarks, the heavy-duty market, as Dave mentioned, continues to be very, very strong. But the automotive business that we have also continues to be strong.

We have had some program launches, in particular in the area of new condenser programs that we are bringing online that have contributed to growth. You know, as we are kind of forward-looking, as we start to look to 2009, clearly, we have been quite open about the continued strength that we see in the business and in particular with the next round of emission law changes that are coming. The opportunity that the Company has to significantly increase its penetration or market share in the Europe medium- and heavy-duty truck market. And that, obviously, our confidence in that continues to grow as we continue to secure new business. That underpins the overall 4% to 6% growth that we are talking about here today.

And the new facility that we have that is coming on this next fiscal year in Hungary, which is our second facility in the northeast corner of Hungary, will help support that growth that we are going to secure an incremental penetration in that commercial vehicle market.

Have we have any other announcements in terms of incremental penetration there, in terms of products wins on the heavy side?

You know, we have not Andrew. It is really -- there will be some things as we go forward here, given that we have been in this period here -- a what I call quiet period post our December 13 -- we have not had any, as you know, any significant material press releases.

But again, we will announce as we go, and the opportunities do underpin again the 4% to 6% growth target.

Andrew, the Origami technology that I mentioned that we are very pleased with, which we will see in a launch in the '09 to 2010 time period, that will actually be initially manufactured for the European marketplace. As I said, we have a number of specific development programs going on with targeted customers.

Then just one last one for me before I get back in queue. In terms of the tax rate, Brad, both over the short-term -- I know you said it's going to be elevated here over the next year -- and then over the long term, what you expect the rate would be.

Well, I think, you know, clearly, Andrew, the heavy restructuring that we are going to have in the North American business is going to result in continued kind of losses, if you will, book losses on our US tax jurisdiction.

This program, as you pointed out earlier, is an 18 to 24 month period. So I think over the next 18 to 24 months until we can get the restructuring and all the cost associated with that behind us, we are going to have a very, very high tax rate. So I would say once you get beyond kind of the 2011 time frame, then you'll see the Company return to more of the kind of 30% tax rate that we had been enjoying.

Okay, but I guess up to 2011, it is somewhere north of 30%, and you have no quantification there?

I think it would be meaningfully north of 30%. Andrew, as you know, what has happened this year, if you exclude the deferred tax valuation, is our losses in our US tax jurisdiction and the benefit that is realized from that has approximated the expense that we have had on our earnings outside of North America. So we have enjoyed effectively a very, very low effective tax rate.

With the deferred tax valuation, that benefit that we have been recognizing effectively gets reserved. So as we go forward, we will have no benefit from the losses here in North America; but we will be paying taxes, obviously, in the foreign jurisdictions. That mathematically will give us a very, very high effective tax rate over the next couple of years.

Understand. Thanks a lot, guys.

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

Good morning. This is Keith. If we look at kind of Q4, fiscal Q4 versus Q3, was there anything in Europe other than seasonality that is going to change versus those two quarters? The guidance seems to imply either North America gets a lot worse sequentially or Europe does.

You know, Keith, this is -- the Europe profitability, and I think you have heard us say this before, is our European -- our businesses for the most part outside of North America are recorded on a one-month lag basis. Meaning the third quarter of our fiscal year has September, October, and November results.

Then, as we get into the fourth quarter for our foreign locations, you have got December, January, and February. Well, as you know, December in Europe, as well as other locations, but December in Europe, has a significant shutdown period for holidays.

So what you see is the Company -- typically, the fourth quarter is a very low profit quarter because of the shutdowns from our highly profitable European business, coupled with the shoulder period for our Commercial Products business, where the heating business is ramping down and the air-conditioning business is just in the ramp-up stage.

So those factors that cause the Company to go into this loss position, not too dissimilar to what we saw in the previous year's fourth quarter.

Okay, thanks. Then if we look at North America, it seems like production levels on the heavy-truck, medium-duty truck side of things are going to be roughly flat quarter-over-quarter. Is there anything other than some of these inefficiencies that go away in the fourth quarter?

No.

Okay, thank you.

(OPERATOR INSTRUCTIONS) [Gordon Bergreen] from [Industrial Landholding].

I would like to inquire about the dividend. Right now it is at $0.70. Does that look secure in the near term?

Let me just give you a little background on the dividend. Our stated long-term payout ratio is 35% to 45% of our net income. Clearly, the last couple of years, and with what we have announced here today, is we will be substantially above that.

We do look at our dividends, though not just on a short-term basis. We look at it on a long-term view of how we expect the Company to perform. You will have noted that the Board did declare a dividend on January 16, and every May the Board looks at the long-term view of the business, looks at the earnings potential of the business, and assesses the overall dividend level. So it will be at that time that we will reevaluate the dividend.

I would say this, that again it is looked at over a long-term, long period of time. It also, we believe, as we have said before, is that dividends are an important component of our total shareholder return. So that is all we can say at this point.

All right, that was my only question. Thank you very much.

Operator, any other questions?

(OPERATOR INSTRUCTIONS) Andrew DeAngelis from KeyBanc Capital Markets.

Hey guys, just wanted to follow up on your kind of preliminary fiscal '09 expectation of 240,000 units in the North American heavy market. Which, I mean, it looks like right here you're looking for 228,000 over calendar year '08. Actually seems a bit conservative.

I guess could you maybe talk to what is driving that assumption and maybe how it lays out over the calendar year?

We had actually had our fiscal our calendar number at about 240,000 and brought that down not too long ago to the 228,000. Actually for the last three months, the order rates have been pretty strong, over 20,000 units, I believe, on the Class A side. We actually have seen a few line rate increases at some of our customers.

But their visibility is not that long. The -- what we call line sequencing is relatively short. Actually we have had a couple shutdowns at customers with little notice. So I think there is pent-up demand in regards to the used equipment inventory is down. The new vehicles are performing well, but ton miles are down.

So that R-word or softening of the economy is certainly out there. So, I would say at this point our assumption is responsible; but we are going to monitor that very, very closely.

Okay, that's helpful. Thanks, Dave.

(OPERATOR INSTRUCTIONS)

Well, with that, I think we will wrap it up. We did spend considerable amount of time in our presentation portion of the call; and as Brad said, our intent was to provide more clarity in regards to what is going on in the business, the areas that we feel positive about and the areas that we are addressing.

Hopefully that increased clarity today will all help you all in understanding Modine. So I look forward to our year-end call. We have a lot of work to do. We know what we need to do, and we have the right team to do it. So with that, thank you.

Thank you very much.

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful week.