Modine Manufacturing Co (MOD) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Modine Q2 2009 Earnings Conference. My name is Kim, and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Ms. Susan Fisher, Director of Investor Relations and Corporate Communications. Please proceed, ma'am.

Thank you, everyone, for joining us today for Modine's Second Quarter Fiscal 2009 Earnings Call. With me today are Modine's President and Chief Executive Officer, Tom Burke, as well as our Executive VP Corporate Strategy and Chief Financial Officer, Brad Richardson.

Tom will lead us off today with an overview on the quarter and our market outlook amid challenging business conditions. Brad will then review our financial performance, and then we'll be happy to take your questions. We'll be using slides with today's presentation. Those slides are available through both the webcast link, as well as a pdf of the slides posted on our Investor Relations section of our Company website, modine.com. If you should need to exit the call for any reason, a replay will be available beginning approximately two hours after this call concludes at toll free 888-286-8010, with a pass code of 75653515.

Before we begin, a brief reminder that our call today may contain forward-looking statements as outlined in today's earnings release as well as in our Company's filings with the Securities and Exchange Commission. And with that, it's my pleasure to turn this call over to Tom Burke. Tom?

Thank you, Susan. Clearly, the world has changed a great deal since our last quarterly earnings call. During a period of heavy restructuring and launching within Modine, our business, like most within our industry segment, has felt the full impact of the credit market crisis, which has fueled both macroeconomic and end market uncertainty.

Within this environment, our second quarter results were clearly a disappointment. Pre-tax earnings reflected a loss of nearly $17 million on net sales of $433 million. Absent the one-time items, which Brad will detail for you in a few moments, our pre-tax results for the quarter will reflect a loss of $5.3 million, compared to a loss of $3.1 million in the prior year quarter, resulting in an underlying decline of about $2 million.

Looking within our segments, first within Original Equipment North America, the results were disappointing. Due to a combination of plant closures, program launch-related operating inefficiencies, and sluggish North American Class 8 and medium truck volumes, we've seen these difficulties continue.

The Original Equipment Europe segment experienced a noticeable decline in automotive production volumes combined with a mix shift to a lower margin product on a specific customer application.

Original Equipment Asia segment results reflected a significant volume decline due to a strike-related activity in a major customer, which has since been resolved.

I would like to note two bright spots in this quarter, and that's the Commercial Products group and our Brazilian operations, where performance continues to be strong and the outlook looks positive.

On slide 5, you can see the historical and projected sales for our two largest markets, the North American Class 8 Truck and Western European Automotive markets. In the North America truck market you can see a dramatic drop since the 2007 pre-buy, driven by the '07 emission regulations. We anticipated a healthy return to the 2009 calendar year North American truck market, but with the market uncertainty and the prolonged impact of the economy, we are projecting another difficult year in 2009.

The ranges for the remaining 2008 and 2009 calendar year are from the AMRC participants. The darkened 200,000 point is our estimate for both calendar year 2008 and 2009. We are preparing ourselves to live within these projections.

In Europe, the automotive market has dropped drastically. The projections shown are based on JD Powers forecast for automotive sales in Western Europe. We're using these projections in our forecast for the balance of our 2009 fiscal year and in preparation for fiscal 2010. Again, we are preparing our operations to live within these assumptions.

Continuing with our market outlook on slide 6, with the market uncertainty and its impact on the global economy, we are adjusting our guidance downward. Our focus is to prepare for a worst case scenario to ensure we navigate the next 18 to 24 months successfully. We will be closely evaluating and aggressively managing our businesses to ensure we meet our debt coverage commitments.

I would like to talk about our outlook past the challenge of the next 18 to 24 months. We remain very positive about the future. Our new facilities in India, China, Hungary and Mexico are all proving to be prudent investments. Each is landing new, higher margin business with our core products. Our new technologies have been well received in the market. Our new exhaust gas recirculation cooler, EGR technology, is ramping nicely as we help our customers prepare for the 2010 and Euro 6 emission law changes.

Our Origami technology is meeting with an excellent response from our targeted OE customers. The Commercial Product group has introduced a high-efficiency chiller into the market has already surpassed our annual sales projections.

Simply put, our order book is strong. The product focus organizational structure we put in place is yielding the expected benefits, which is a strong product technology pipeline that we know will provide high value to our customers and higher returns to the customer and our shareholders.

On slide 7, we have a slide on focus on the fundamentals. We call it blocking and tackling. Our four-point plan is our game plan. It brings together our actions in an orchestrated manner to ensure we are effectively executing towards our goal of returning the Company to top quartile performance and shareholder return. The proactive steps which began in the fall of 2006 are continuing and, in fact, accelerating.

Last week we announced the intended sales of our Korean vehicular HVAC business. In the last month we realigned our North American corporate organizational structure with clear accountability for the leadership and delivery of results within our North American OE segment. This resulted in about a 15% management reduction in our Racine headquarters. We also announced recently the elimination of post retirement medical coverage for Medicare-eligible participants.

These are difficult decisions, but ones that we must make and continue to make to ensure that future viability of the Company, as well as to keep Modine a leader in the thermal management technology and innovation.

With that, I'd like to turn the call over to Brad, to review our financials and liquidity situation.

Thanks so much, Tom, and good morning to everyone. On slide 8 is the outline for the financial review here this morning. And so we can turn first to slide 9. As Tom pointed out, there's no doubt that Modine's second quarter was quite challenged on an absolute basis, but also relative to the comparable 2008 period. As you can note, the overall pre-tax earnings and EBITDA declined by $22 million. Negatively impacting the results was a decline in the overall gross margin as we experienced declining revenues in the higher margin European business, as well as a negative mix issue in Europe.

The operating inefficiencies in North America continued, albeit at a lower level than the first quarter of this year. The SG&A expenses were up $6.8 million, but if you exclude the impact of last year of the gain on the sale of the corporate aircraft, and the favorable impact of last year's pension freeze, SG&A expense is actually down over $2 million.

Despite the challenging income results, the overall cash flow from operations was down only about $4 million, and our net debt position was unchanged at $193 million, as we continue to tightly manage working capital, ultimately with the goal of running the Company on a free cash flow neutral basis this year.

The objective of slide 10 is to show you the underlying results of the Company excluding Unusual Items. In the current quarter, the Company was impacted by the repositioning related charges which included costs associated with plant closures announced in February of this year, as well as severance-related costs resulting from the downsizing here at the corporate headquarters in Racine.

In the prior year second quarter, we experienced special factors as indicated on the slide, with the most significant being, once again, the gain on the sale of the corporate aircraft, and the favorable impact of the freeze in Modine US defined benefit plan. Absent the unusual items, you can see that the pretax results for the quarter would be a loss of $5.3 million, compared to a loss of $3.1 million in the prior year quarter.

EBITDA of $16.9 million on an adjusted basis compares to $19.1 million in the previous quarter. Net-net, the underlying results are down about $2 million.

Turning to slide 11, the left side of the table shows change in sales by segment on an absolute basis and without the benefit of foreign exchange. Most notable is the decline in sales in Asia, due to labor strikes at a key customer, and Europe, due to decreasing volumes in the automotive segment. We continue to enjoy sales growth in South America, and further, the sales strength in Commercial Products segment reflects the impact of new product introductions here in North America and in the UK, leading to market share growth.

From a segment operating income standpoint, I would draw your attention to the far right column, which shows the change in profitability excluding the impact of exchange in other unusual items. The change in Asia profitability was related directly to the volume decline.

For Europe, the $8.8 million drop reflected the impact of volume declines and an adverse mix as we are phasing out a high margin EGR product.

The North American relative improvement was still disappointing as the business continued to run in an absolute loss position and experienced operating performance issues due to plant closures and launch-related inefficiencies.

On the positive side, the performance and the profit conversion on the incremental sales in South America and in Commercial Products set the standard for the rest of our businesses.

Turning our attention to slide 12, as we've indicated previously, none of us are satisfied with the performance of the Company over the last two years, and the current decline in the end markets, particularly in Europe, has heightened the need to take significant action for the ultimate turnaround of the Company. We started the restructuring efforts in 2006, and established the four-point plan long before the credit-driven economic downturn.

Over the 2006 to 2008 period, we closed four original equipment plants here in North America, while opening new facilities in Mexico and emerging markets. At the same time, we completed the divestment of our electronics cooling business and completed two workforce reduction programs, taking approximately 100 positions out of the Racine headquarters in 2006, and approximately 15% of the management staff last month. We have also frozen the US defined benefit plan and eliminated the post-retirement medical benefits for our US Medicare-eligible population, reducing our OPEB liability by approximately $15 million.

As it relates to capital allocation, we have put in a clear process and framework for allocation of capital to advantage product lines with a financial hurdle rate consistent with our gross margin and return on capital employed framework.

We have also made a tough decision in the fuel cell area, choosing to license our technology versus investing approximately $85 million in capital to support a program that did not meet Modine's financial hurdle rates.

We have accomplished a lot and have a number of actions in progress including the closure of four plants that were announced in February. When closed, we expect to reduce our cost structure by approximately $16 million to $20 million, which is down approximately $4 million from our previous estimates. In addition, last week we announced our intention to divest our Korean vehicular HVAC business.

In response to the current environment, though, we must once again look at further actions to ensure the Company weathers the significant contraction in the global economy. Actions under consideration include additional plant closures, the evaluation of our vehicular HVAC assembly businesses outside of Korea, and additional SG&A related actions.

We have a very good track record of follow-through on the critical elements of the four-point plan which are designed to return the Company to profitability and achieve Modine's long-term return on capital employed framework of 11% to 12%. At the same time, as Tom mentioned, we are very excited about the new program wins and market share capture opportunities on which the Company continues to execute.

Turning to slide 13, today, and as Tom mentioned, in light of the significant change in the world economic outlook, we are reducing Modine's guidance for fiscal 2009 reflecting the impact of an assumed stagnant North American truck market, where Modine has a significant market share, and the sharp drop-off in automotive production in Europe. The sales volume impact coupled with the strength of the US dollar has contributed to an approximate $200 million drop in top line revenue.

The significantly lower revenue is converting at the gross profit line on the downside at about a 20% rate versus the previous guidance, resulting in the new projection of a loss, a pre-tax loss in a range of $5 million to $25 million. I would note that the guidance does include approximately $17 million in restructuring actions, and $12 million in the one-time licensing payment from Bloom Energy.

Let me close off this slide with a big qualifier. There is a high degree of uncertainty on how steep the markets are going to decline resulting in a wide range of variability around how the Company is going to perform for the rest of the fiscal year.

On slide 14, in light of the projected loss position, we wanted to provide you with an update on Modine's liquidity situation. Under the three primary debt instruments of the Company, that is, the $175 million revolving credit facility and two private placement notes, Modine is required to maintain a debt-to-EBITDA of less than 3, and an EBIT-to-interest coverage ratio of greater than $1.75 adjusting to $2.25 at the end of Modine's fourth quarter. As you can see, Modine is in full compliance with its covenants at the end of the second quarter.

At this point, given the income impact of the Bloom Energy payment primarily impacting the third quarter, we would expect to remain in compliance at the end of the third quarter.

Given the guidance discussed, though, on the previous slide, we would anticipate needing to work with the bank group and note holders to execute amendments or waivers to the EBIT-to-interest coverage ratio yet this fiscal year.

Through preliminary discussions we have had with the bank group, we do expect our creditors will work with us. In the event that we are unable to reach agreement, we have developed a series of actions that could be executed on to ensure that the Company remains in compliance. Obviously, these actions are quite strategic in nature or we would have already executed on these alternatives.

With that, I'll turn it back to Tom for a wrap-up.

Thank you, Brad. And, as Brad said, we are preparing for the challenging period that we anticipate in fiscal '09 and '10. Modine leadership team has and will continue to be aggressive in executing on our four-point plan. Again, repeating those, the manufacturing realignment that is achieving greater scale, expanding our low cost country footprint, we're well on our way. Portfolio rationalization. We're clearly defining our advantage products and fixing our problem product segments is well in place. SG&A expense reduction, which is focused on lean administrative processes and affordable structure targets that we'll drive to is in place.

And, finally, the capital allocation discipline, which is using our precious capital wisely and making sure we make the smart bets going forward again is in place.

Our approach of blocking and tackling is having an impact. The focus on our under-performing North American business is intense. I'm encouraged with the initial results of the team, but we have a significant challenge that must and will be overcome. Our decision on Korea, while difficult, is the right long-term decision for the Company, so we can focus our resources and capital on advantage products and to provide higher value to customers and higher returns to our Company and our shareholders.

We have a 92-year heritage as a leading thermal management technology company and are fully intent on managing our Company through these near-term challenges, as we have in the past, to ensure a bright future. And with that, Brad and I will be happy to take your questions. Thank you.

(Operator Instructions) Your first question comes from the line of Andrew DeAngelis of KeyBanc Capital Markets. Please proceed

Good morning, guys. I guess first question here, just wanted to get, I guess, your thoughts on the specific actions that you're taking to frame the Company within your revised market outlook, in addition to the restructuring actions you already have in place.

Well, Andrew, at a high level we have clearly a clear list of levers and actions that we have in place and ready to take on that we have high confidence in, and we're prepared to do what it takes to move that forward. And getting the assumptions right and paying attention to those is clearly going to be where our focus needs to be. And, again, we have that in place. The actions that Brad highlighted in a couple of his points moving forward under the four-point plan are clearly the actions we need to make sure we remain focused on.

But do you need to take any major additional restructuring moves, specifically within Europe, to address your current market outlook?

Andrew, I mean, certainly, just to build on Tom's point, what we identified clearly is additional things that are under evaluation, clearly are additional closures, plant closures, and that could involve Europe. As you know, we have one plant being closed in Europe, and there is potential for an additional closure in Europe. So, that's certainly, as Tom mentioned, is part of what we're looking at in light of the downturn that we're seeing.

We also, on the portfolio side, as I mentioned, we've announced the exit of the vehicular HVAC assembly business in Korea, and we are looking at our other businesses that are dedicated to that form of product and market. And then the SG&A side, clearly that's something that we've got to really continue to focus on and are focused on to control that element of our business globally.

Okay. I guess strategically within Europe, are you guys happy with your current footprint, I guess the way it lays out your cost intensiveness? Obviously, the market conditions weigh in on how tactically that's implemented, but I'm just wondering if something similar to what you guys have done in North America to scale the operations a little bit more perhaps needs to be done in Europe?

Clearly, we're taking a first step with the first plants in Germany of the four plants that we have, and our mix is rich in Western Europe. One of the things that we really leveraged is running at very high utilization rates in our plants. So, we get every bit of absorption that we can through the operations has been successful.

The Hungarian plant that we're launching right now in Gyongyos is really going to help that. Okay, so that's a first step. Again, that investment that's fueling up with charge air cooler business and other heat exchanger component to feed back into Western Europe to help us secure Euro 6 truck market share is also a key play in that.

So, yes, we have a rich mix that I would say is high cross-country. We're effectively improving that with the Hungarian footprint, and we will take whatever further actions going from there to make sure we have a competitive focus, that we can hit the cost targets and yield those margins.

And, additionally, this hasn't been announced as widely, but we are expanding our Austrian footprint as well with the condenser business, where we have a very advantage position both from a technical standpoint and manufacturing scale in Austria. And we looked at the options of how to move that forward with new business opportunities. We'll be expanding that operation with actually a new facility to allow us to become even more scale efficient and more effective in delivering product into that advantage product segment. So, we have the right look at it, Andrew. And, again, we're moving with the right steps, but will accelerate again if we find that's necessary.

Great. And I guess just staying with Europe, could you give me some color on the production environment that you guys have seen there in recent weeks, how far it's gone down and how far, given the market outlook that you've given us today, how far it further needs to go to hit, I guess, the run rates?

Well, you saw in the slide, you saw the JD Powers projection of how we're going to -- how they're projecting, which is going to I think a $13.7 type million market as far as sales in Western Europe.

Right.

(Inaudible) on that. There's a lot of variation within OE customers in Europe. Some are holding in better than others, some are losing it. So, you see anything from a 10% to a 15% reduction at some of the premium car suppliers, and maybe some of the mid segment suppliers are holding in with normalized volumes at this point.

So, I think it's going to be a mix situation, depending on how long this prolonged economic impact stays on within Europe. But, clearly, we are focused to get underneath it, to use my term, and make sure we have an equation and an operating position that can live within our projection.

But I guess my question was, do the production rates that you're currently expecting in Europe fit to that, I guess, 12.4 number that you see for production Europe next year? I mean, have we gotten all the way down there? How much further do we need to go to get that 12.4 number versus where we're currently at?

We have not gotten to that 12.4 number yet, okay. I would say we're running more at the 13.7, 13.5 kind of range right now with probably an average 10% drop at the mix right now. But we are prepared to go lower, and we are prepared. Obviously, taking costs out of Europe is always challenging. Because we've been running over rates, our plants have been running at six-plus days usually for the last couple of years, so we can actually come down in volume and stay within our five-day window to match customer needs in a lot of cases. Where we can't, we'll be looking at short work weeks. Clearly, the temporary employees that we have at each of our plants, which is also a tool we've used to manage the upward volume.

So, I think we have the levers in place to be able to match up well to the demand that we see in front of us. And if it should drop further, we're going to anticipate that and make the changes accordingly.

Okay. Just one more question from me before I hop back in. The pricing actions that you guys announced within your North American replacement oriented business, I believe that press release came out last month, month and a half or so. Just wondering how that is going in terms of implementation? And then maybe just some color on what you expect commodity costs for you guys to do going forward?

Andrew, I mean, I would say that as it relates to the pricing action, we certainly didn't see much of that in the second quarter, because that was clearly late in the second quarter, so there's not much of an impact in the second quarter. I would say this, that the pricing action, because clearly we're in front of the major customers here in North America right now, literally as we speak, and the pricing action is going to start to affect the business and is incorporated in our guidance in the third, but more significantly in the fourth quarter. And I think overall, I think there has been a respectable response to what we're proposing to the customers. So, I think that's kind of a status report as to where we stand on pricing.

Okay. And then I guess on the commodities --

Yes, the commodities, certainly that's a great tailwind for the Company. You've seen copper come off significantly and aluminum and nickel. As you know, there is a lag effect just on the way up, and there's a lag effect on the way down simply because right now we are still taking delivery of copper that was priced in the late summer time frame when copper was still up over $3 and aluminum was up over $1.20. So, again, I think the tailwind from the commodities and the favorable benefit will start to impact the Company in our fourth quarter, so the first calendar quarter of the year.

And to the extent that you've implemented pricing actions with your OEs that contemplate higher levels for commodities, do you anticipate, I guess, being able to hold that pricing somewhat given the gross margin degradation that you saw on the way up, to some extent?

Absolutely. I mean, our intent, and we have no choice, right, given the condition of the Company, but to ensure that we enforce the contacts that we have. And fortunately, with just the timing of the adjustments of those and the way they're calculated, again, that should give us decent tailwind as we go into fiscal 2010.

Now, is that going to offset again the discussion you were having with Tom on the volumes? That's certainly going to be a challenge, but that is a positive in terms of commodity prices and how that works through in terms of price adjustments back to the customers.

Okay. Thanks for the color.

Okay, very good.

Your next question comes from the line of David Leiker of Robert W. Baird. Please proceed, sir.

Good morning.

Good morning, David.

Can you give us some sort of perspective on the currency side, what the impact is on operating income or EPS line for you guys?

Well, you're talking about in the quarter?

Yeah, in the quarter, and then just on a general basis going forward given the significant move in the dollar?

Yes. I mean, the currency in the quarter was about a $13 million favorable impact on the top line. And, again, that's primarily out of Europe and South America. In fact, out of Asia it went the other way, so net $13 million. And on the contribution in the quarter was a favorable $1.3 million.

As we look at the guidance, I mean, again you've seen the overall reduction in revenues of $200 million versus the previous guidance. About $80 million of that $200 million drop is our assumption that the dollar will stay strong, stay in the relative trading range that it is right now.

So, you can see that again the strength of the dollar, David, has made a significant impact, about $80 million on that change in guidance. So, the balance of the $200 million drop-off then would be market related both here in North America as it relates to the Class 8 truck market, and in Europe as it relates to automotive volumes.

And then could we imply that that's an $8 million negative impact on profit as well?

It's in that range.

But is that the operating income line or gross profit? Where are you entering that number?

Pre-tax.

Pre-tax?

Yes.

Okay. Given what's going on in these end markets, your South American business is rapidly becoming a major profit contributor. Just give us some perspective of what's happening there. Those markets seem to be weakening. They've got negative currency moves down there as well. Just give us a better understanding of what's happening in that market as relates to you guys.

I'll go through the operating side and let Brad talk about currency. But, clearly, the Brazilian market remains strong. You know we have a leading market share position both in our target markets of Commercial Vehicle and Off-Highway. The forecasts through the end of our fiscal year are on target. We just had a forecast review with the team this week, and the order books remain strong as well.

There is some softening around the edges, if you will, with Argentina that we're seeing some impact with ag sales going into Argentina with certain OEM customers. But, again, with that offset versus other growth, we're seeing no impact to our forecast as initially estimated. So, it appears that Brazilian market remains strong, yet we do see some adjacent issues maybe in Argentina, but yet no net impact to the business because of the growth in Brazil.

Yes, David, I mean, just in -- we did continue to see quarter-over-quarter revenue growth out of South America. The real strength, again it's weakened lately, but in the quarter had a $5.8 million favorable currency effect. So, even absent that, you can see that there was real underlying growth.

It has, as you know, and in the factor analysis that we showed is the position of the real has caused losses on a US dollar-denominated loan down there, which has adversely impacted the profit by a little over $3 million in the quarter. So, this currency is not only affecting, potentially affecting the outlook for the export market there, but also has had an impact on the specific income as it relates to that specific debt instrument.

And the accounting for that is showing up in the segment profit or the corporate?

Corporate.

Corporate.

It's down in the Other Income.

Okay. And then remind me here, please. Your end market there is focused on the OE or after market?

Well, we have both. I mean, on the Commercial and Off-Highway side, it clearly is an OE perspective. And then we have an after-market (inaudible), but it's 70% OE okay focus, which is Commercial Truck and Off Highway.

Okay. Just a clarification here on South Korea. In terms of the extent that you look at exiting, selling that business, how much of it would you end up retaining? My sense is most of what you're looking at disposing here would be the bulk of your Korean business, correct?

That's correct.

Would you retain anything at all?

There is some power train cooling business and very little bit of engine products business that again fits right within our core product lines that we would look to somehow structure to be able to retain that.

Would that include the outfits that are in China? If I remember correctly --

You're talking about the JV, the JMCC, that's an asset that's under evaluation at this point. The sale itself does not include the joint venture in China.

It does not, okay. The fuel cell business, the accounting for that is going to be what? You've got $12 million of license revenue at no expenses, is that correct?

That's correct.

And you said the bulk of that will show up in Q3?

That's correct.

And is this the solution to trying to find a way to fund the growth in that business? Is that how we should look at this?

I think -- I'll say and then Tom, we're both trying to chime in here. Again, this is a difficult decision, but as we looked, clearly we had some -- the fact that we got a $12 million payment says that our intellectual property and our knowhow is quite valuable. But when we looked at actually commercializing this business, the amount of capital that was going to be required to commercialize, it certainly didn't meet our hurdle rates, and therefore we entered into an arrangement with Bloom Energy to license our technology and receive this one-time payment, which I think again speaks very highly to the IP technology of the Company. We continue, though, to be active in the fuel cell space and continue to support the customers in that space. In this case, the commercialization did not meet our financial hurdle rate, so we chose a license strategy.

And this fits right inside of our capital allocation discipline of our four-point plan, David, and we look very, very closely at this and clearly there is a real appeal because of the alternative energy space, but we did not see a business equation that would satisfy our hurdle rates going forward. So, we as a team focused on the next right thing to do was capture all the value possible from the IP we've established.

Are there any residual payments that can come out of this that are tied to performance on their part, or is this the end of the revenue stream from that for you?

It's essentially the end of the revenue stream other than the fact that we have agreed to provide Bloom Energy hot boxes for their calendar 2009 requirements. But in terms of overall profit contribution from that, it will not be significant.

What do you retain in terms of rights to the technology that you can use to sell to other people, or is this an exclusive license agreement with them?

We retain full rights and access -- we own it -- to the intellectual property. We will not be licensing that to others, but we have the ability to have full right access and use that technology with other customers.

No prohibition on you licensing the technology or supplying other people?

No, we can supply other people; we cannot license it to other people.

Okay. Understand, thank you. And then the last thing here. Well, you made a comment on the tax rate. Is there any -- I realize this is a very difficult moving target to attack, but what would you suggest that we use as kind of a base number going forward on your taxes?

I only wish I had you here right now, David, I could walk you through the tax calculation. It is very, very difficult. I mean, I think for the rest of the calendar year, I think you're still looking at 100% effective tax rate. And in the intermediate term, when the North American business returns to profitability, then we're back down to the historic 30% to 35% range. But I would use over 100% for at least the remainder of this calendar year.

But a particular quarter, where you're in a loss position, we should use taxes that are --

In a normal quarter, you should still use, even in a loss position, you should use over 100%. The tax accounting for the post retirement medical change is very unusual, and that resulted in an actual tax benefit being recorded in this quarter that was an unusual treatment.

Okay. All right. Thank you.

You have a follow-up question from the line of Andrew DeAngelis of KeyBanc Capital Markets. Please proceed.

Hi, guys. Just wanted possibly a comment on your backlog, where it stands right now versus the year-ago period?

Well, we don't report officially the backlog or new business number, Andrew, but I'll give you kind of a qualitative assessment. We have a very healthy backlog. We're very satisfied with the discipline of the last 18 months of hurdle rates and profitability targets we put in place, and focusing on our targeted markets with our advantage products. So, again the Commercial Vehicle and Off-Highway business continues to look very strong.

Our new plants, China, India, Hungary, some reference to I made before, but the China and India plant are just launching with literally dozens of product launches in the next 12 to 18 months, with products that -- again we're very happy with the quality of that business that's coming forward.

The technologies that I mentioned briefly, again, from engine products, EGR for the EPA 010 and Euro 6 markets are showing very good business wins going forward. Again, targeted profit levels are above. And even the newer technology that's coming out, we've introduced the Origami technology.

We were recently at the German truck show and had an opportunity to really target critical customers with that technology to demonstrate the opportunity and a lot of excitement that hasn't yielded necessarily orders yet, but a lot of excitement about what the value that brings to them, and we think even more confidence to fill that backlog.

So, the outlook past this window, that's what makes this even, let's say kind of a dichotomy of battling through the challenging times, but seeing what's waiting for us both in orders and launches we'll be going through during that period of time. And bids that we're going through right now that are very exciting, we clearly have what we call a battle worth fighting for. And that's our focus, to attain that.

Great. And then just one last one from me. Your working capital, it looked like your inventories came down sequentially. I was just wondering if you guys are under producing yourselves right now and how much longer you anticipate that would be the case, and the kind of under-absorption that results from that right now?

Yes. I think the inventory levels, though, if you look at it, the turns actually aren't where we want them to be. We're pleased about the work that we've done on DSO and on the payables. But the inventory turns, you just look at them in the quarter, we were turning in fiscal 2008 at 13 times, and fiscal 2007 at 13 times. We turned 11 times in the second quarter. And clearly what's happening is operationally there are a couple of things happening.

One was strike-related banks that we had in Korea which caused us to carry actually more inventory than we would expect. And clearly the closure activity here in North America, they're inventory buffers. And third is clearly in light of some volatility in customer schedules. But the organization, this is something that Tom and I are very, very focused on, is to bring the turns back up to where we have been operating in the 13 range and by the end of the fiscal quarter. So, there is more room on inventory.

Okay. Okay. Thanks for that color.

Yes.

There are no further questions in the queue.

Well, we'd like to thank everybody for participating and we will be focused on the plans we laid out here, and look forward to next quarter's call to give you an update on where the Company stands. Thank you very much.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.